Schroders is among the first asset managers to confirm its real estate investment trusts will be affected by the same coronavirus uncertainty that last week prompted a raft of open-ended UK property funds to suspend.
The £165.8m Schroder European Real Estate Investment Trust confirmed on Monday that the independent valuation of its properties, scheduled for the end of the month, would include a statement highlighting “material valuation uncertainty”.
Schroders appears to be the only REIT or property investment trust asset manager to have filed an update to markets, although its regulatory filing stated that the approach would be applied industry-wide. The £467.8m Schroder Real Estate Investment Trust had released a similar update on Friday.
REITs and property trusts will continue to trade
Schroders’ regulatory filings confirm closed-ended funds are not immune to the valuation uncertainties that prompted open-ended funds in direct property to suspend as coronavirus uncertainty made holdings difficult to value.
Approximately £15bn in open-ended UK property funds are currently suspended.
Association of Investment Companies communications director Annabel Brodie-Smith says investment companies will still be able to trade as long as the stock exchange remains open, but warns that discounts will be based on the last NAV valuation “which may have been a while ago”.
For example, the Schroder European REIT is currently trading at a 45.4% discount, but its NAV in euros of 137.6 cents per share, was calculated for 31 December 2019, well before the coronavirus sell-off took hold towards the end of February.
Closed-ended fund valued less regularly than open-ended counterparts
But while Schroders has issued an update to markets, it could taken over a month for most property investment trusts or REITs to update markets about their NAVs, according to Winterflood Investment Trusts research analyst Emma Bird.
Unlike open-ended funds, whereby holdings are typically valued monthly, REITs and property investment trusts tend to be valued quarterly.
Bird says most of these investment trusts will have a valuation set for 31 March, but investors won’t necessarily be updated about this until late April or early May. “A few funds have published updates commenting on the current situation but I wouldn’t expect them to publish valuations any sooner than normal,” she says.
For example, the Schroder European REIT did not update markets about its NAV as of 31 December until early March.
There is more to REITs than their discounts
British Property Federation director of policy Ion Fletcher says discounts are a useful indicator, but are not the most important or only metric used by investors.
“Some things might have greater weight than others depending on their risk appetite and kind of general characteristics. Discount to NAV is an indication of how the market feels about the value of the company,” Fletcher says.
“If there’s a big discount to NAV, it may mean the market doesn’t believe the company is worth as much as the assets that they own or perhaps they don’t quite believe the valuations provided in the accounts.”
Income, sustainable income and occupancy rates are among the other metrics that are important to REIT and property fund investors, he says.
The key factors hampering independent valuations
Willis Towers Watson head of real assets Paul Jayasingha says uncertainty valuing properties is across the board, given market evidence partially informs the valuation approach set out by the Royal Institute of Chartered Surveyors (RICS).
“Given the speed and impact which the coronavirus has taken hold there is likely to be severe lack of comparable transactions in the current market environment,” Jayasingha says.
The lack of site visits will hamper valuers’ abilities too, but to a lesser degree than the impact of the likely material drop in transactions, he adds. “If transactions were still taking place then then valuers would still be able to use this information from comparable transactions even if they could not conduct site visits.”
Retail, leisure and hospitality are likely to bear the brunt of coronavirus in its early stages, says Fletcher, but that could spread to offices, service providers and more the longer the situation continues.
In the AIC UK Commercial Property sector the Supermarket Income REIT was trading at a 3.7% discount at close of play Friday, while BMO Commercial Property, which holds 42.4% of its portfolio in retail, is trading at a 66.4% discount, according to AIC data.
The Local Shopping REIT is trading at a 1.6% premium but is in the process of being wound down.
