The Impact of COVID-19 on the Price Performance of Real Estate Investment Trusts (REITs) in Mexico

Abstract

Real Estate Investment Trusts (REITs) are companies that own or finance income-producing real estate in a range of property sectors. REITs were created in México in 2011, they have become instruments for small and large investors to attract funds to the stock market in order to invest in real estate, such as office buildings, shopping malls, industrial warehouses and hotels, among other properties, in order to produce rental income. In just nine years of operations, the fifteen public-listed REITs in the Mexican stock market account for more than two thousand properties, with an area of 25 million square meters and 20 thousand hotel rooms, with accumulated assets of $25 billion US dollars and account for one-fifth of GDP of the country´s real estate sector. However, the pandemic effects have affected REITs revenue, particularly properties like office buildings, shopping malls and hotels. In Mexico, the first confirmed infection case of COVID-19 occurred on 27 February 2020. The increase of infected people and the presence of the first fatalities due to the virus, forced the Mexican government to establish voluntary confinement to contain the spread of the virus on 20 March 2020. In April, the suspension of non-essential activities in the country began for a 3-month period. The Mexican economy was severely affected by confinement, activity suspensions, global economic recession, and dropping oil prices. In April and May alone, 12 million jobs were lost in the formal and informal sectors and the activities that performed the worst in this period were tourism services, that decreased in April 70.4% and in May 72.1%, construction fell 38.4% and 35.9%, manufacturing had a loss of 35.6% in both months. The retail and wholesale trade sectors, transport and recreational services fell by around 30% in all cases and foreign trade declined 35.8% in April and 52.0% in May. These measures also had an important effect on the prices of the REITs Certificates. The REITs index fell 36.7%, between 28 February and 23 March 2020, just three weeks after the first contagion was announced, while the Certificate prices of most REITs had also an unfavorable performance in the same period, with declines of between 8% and 42%. On the last day of June 2020, four REITs performed negatively with percentages greater than 30% and the REITs Index was below 19.5% compared to December 2019. Properties generating higher people concentrations (shopping malls, stadiums, theaters, concert halls and hotels) will be the most affected in this crisis and will be forced to implement innovative schemes to operate in order to generate earnings in the future. The article studies the impact of COVID-19 in the price of REITs Certificates, as the effect in the value of the REITs Index in the Mexican Stock Market. The price of the different REITs stocks and Index are compared to their price at the end of 2019 and an estimate of the future impact in the results of operations of the corresponding REITs. An analysis of the geography of COVID-19 in Mexico is performed, considering how the different sectors where the REITs properties are geographically located in order to look for a possible evidence of COVID-19 effect.