The growing number of infections and widespread reports of a possible second wave of the coronavirus pandemic in Israel are clearly reflected in share prices in the income-producing real estate sector, which lost 5-10% just in the first couple of stock market sessions this week.
These falls, which weigh on the market as a whole, indicate investors' fears of another blow to the assets of the local income-producing real estate companies, chiefly to shopping malls and office buildings, should the government decide on new restrictions on people's movements.
This follows the severe blow that these assets sustained earlier this year when the government imposed a lockdown, leaving malls and offices almost entirely empty for over a month from mid-March. Since then, the level of activity in those assets in both the near and distant future has continued to look in doubt.
The major income-producing real estate companies in Tel Aviv, which last year provided dream returns to investors, have fallen by 30-40% this year, among them the market leaders (by market cap): Azrieli Group Ltd. (TASE: AZRG), Amot Investments Ltd. (TASE:AMOT) and Melisron Ltd. (TASE: MLSR).
The best returns among the leading companies are those of Big Shopping Centers (2004) Ltd. (TASE:BIG). The type of assets it holds (open commercial centers) enabled it to restore activity faster than its competitors. Big's share price has fallen by "only" 25% since the beginning of the year. At the other extreme is Gazit-Globe Ltd. (NYSE: GZT; TASE: GLOB), controlled and managed by Chaim Katzman, whose share price has plunged by more than 50% in this period, against a background of fears of the effect of the pandemic on its commercial real estate activity around the world, particularly in hard-hit Brazil.
Azrieli still leads on market cap
In less than six months, the sharp declines have wiped no less than NIS 34 billion, or about one third, off the value of the ten leading income-producing real estate companies on the Tel Aviv Stock Exchange. About 30% of the loss (nearly NIS 11 billion) is in Azrieli Group, controlled by Dana Azrieli, while a further 40% (about NIS 13 billion) is in Melisron, Amot, Airport City, and Mivne.
With a current market cap of some NIS 20 billion, Azrieli is still a long way ahead of its nearest competitor in the real estate sector, and it remains one of the ten largest companies on the Tel Aviv Stock Exchange. It is followed by Amot (controlled by the Alony Hetz group), and Melisron (controlled by Liora Ofer), which have market caps of nearly NIS 6.5 billion each.
The aggregate market cap of the ten leading income-producing real estate companies in Tel Aviv, which deal in developing and maintaining shopping malls, commercial centers, and office buildings, is now less than NIS 60 billion, which compares with more than NIS 90 billion at the start of the year.
Nadav Berkovich, real estate analyst at IBI, says, "In 2019, it looked as though all the macro conditions were ripe for continued rises in real estate stocks, with low interest rates, a growing economy, high occupancy rates, and strong private consumption, but the coronavirus event changed all that.
"Real estate stock prices are now at historical lows as far as their multiples are concerned, but there is a reason for that, namely the dramatic change in the macro environment. Even if we assume that the peak of the coronavirus pandemic is behind us and that there will be no second wave, the fears preying on investors' minds as they look ahead are connected to the damage to the economy, recession, and a decline in private consumption. These are long-term processes, and we are only at the start of them. Real estate is a mirror of the economy, and if the economy is headed for slowdown, this will be reflected in the companies' activity.
"In some cases, the market is pricing in a 20-30% fall in NOI, something that hasn't happened in previous crises. It's impossible to know whether we will really reach such a decline, but the market is already there."
Is there anything positive to be said about stocks in this sector?
Berkovich: "Current prices probably already price in a large part of the damage. But it must be remembered that because we are only starting to see the consequences of the crisis, stocks in the sector are in for a challenging year."
Published by Globes, Israel business news - en.globes.co.il - on June 24, 2020
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