Crash reveals vulnerable real estate stocks as virus spreads

Global stock markets suffered their biggest ever fall since the height of the global financial crisis in 2008 on Monday, as oil price wars plus coronavirus fears combined to lethal effect.

Real estate stocks were dragged down in the spiralling sell-off, as investors feared that the spread of Covid-19 – which the World Health Organisation (WHO) has warned is close to pandemic status – could cause a global recession.

The US market’s 11-year bull run took a hit as the S&P 500 closed 7.6% lower at the end of the day, with the Dow Jones Industrial Average ending Monday down by 7.8%. During trading, circuit breakers kicked in to halt the slide – a mechanism introduced after the October 1987 Black Monday crash as a way to provide traders with time for reflection.

In Europe, the Stoxx Europe 600 index, which represents large, mid and small capitalisation companies across 17 European countries, slid 6.6%, losing over 20% on its recent peak of February 19, meeting the definition of bear market.

The UK’s FTSE 100 also entered bear territory as it closed 7.7% lower, while Japanese and Australian stocks too ended the day some 20% below their recent highs.

Stock shocks
While the biggest casualties were oil firms after a price war between Russia and Saudi Arabia slashed crude prices by over 30%, other vulnerable segments were quickly exposed by the markets.

The hotel and travel sectors, similarly threatened by the spread of coronavirus, took further hits. Nasdaq-listed Mariott International’s shares had already declined 11.5% in February as the markets started to price in the potential effects of the virus, and dropped another 5% on Monday morning. However, this latter decline was virtually reversed by trading on Tuesday. Similar patterns played out for hotel groups including Hilton and Hyatt, which in the main recouped Monday’s losses the following day.

The impact was worse for firms limited to tourism for revenues, with cruise ship operator Royal Caribbean Cruises' share price tanking on Monday from $65 (€57) to $48, and continuing its decline on Tuesday.

Retail weaknesses
Retail and retail real estate firms also continued their long-term declines, with Unibail-Rodamco-Westfield shares shedding €10 on Monday to close at €89.88. Tuesday’s shifting markets only mitigated the falls in part. Troubled UK REIT Intu slid by a few points, but on the whole continued its recent trend – whereby a £5 (€5.72) share price is ‘the new normal’ – compared to a 52-week high of £114.

There were notable exceptions in the retail sector - Clorox in the US, a maker of disinfecting fluid, saw its stock rise nearly 1%, while discount retailers, which tend to display resilience in a recession, remained steady.

Omotayo Okusanya, a REIT analyst at Mizuho Securities USA, told The Real Deal that storage and data centre firms were doing better in the short term, and should the issue prevail long term, real estate investors would be likely to focus on long-lease properties, like health care or triple-net assets.

However, industrial REITs, which have attracted many investors leaving the retail real estate space, could be vulnerable to the supply-chain shifts provoked by the virus, Okusanya warned.

Elsewhere, German listed residential specialists such as Deutsche Wohnen and Vonovia saw their shares experience sharp shocks which partially recovered, continuing their uncertain trajectory in the wake of the Berlin rent freeze debate.

At time of writing, the Johns Hopkins University Covid-19 counter had recorded 116,152 coronavirus cases worldwide, with Italy still Europe’s hardest hit at 9,172 cases. Since Tuesday morning, the entire country has been quarantined under new measures to tackle the virus, with enforced closures for restaurants and bars during the evenings, and shopping centres now obliged to shutter at weekends until Easter.

The government is also evaluating a 'total shut down', which would also affect workplaces and public transport for as much as two weeks, to reduce transmission risks.

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