- The outbreak comes at a time when Asia’s office markets have already weakened and retail rents have declined – especially in Hong Kong. The virus-induced hit to growth is likely to accelerate the decentralisation trend in the office sector
As the coronavirus outbreak enters a new phase, with infections spreading more rapidly across Asia and Europe, and the data showing the disease's dampening effect on economic activity, the commercial property industry is grappling with the fallout.
While Beijing's ability to contain the spread of Covid-19 is still in doubt, and the epidemic's impact on the Chinese economy is shrouded in uncertainty, the outbreak comes at a time when Asia's property markets have already weakened, and corporate real estate is being transformed by technology and workplace flexibility.
In the final quarter of last year, net absorption of office space in the Asia-Pacific fell 18 per cent year on year to a five-year low, mainly because of a dramatic decline in leasing activity in Beijing and Shanghai, data from CBRE shows. In the retail sector, rents fell 3.6 per cent year on year, with the regional average pulled down by a 19 per cent fall in Hong Kong. Even in the more resilient logistics sector, demand and rental growth slowed as occupiers turned more cautious.
In financial markets, the consensus view is that the virus will be contained fairly quickly, and that its economic impact on China and the broader region will be transitory. Yet, even if demand recovers swiftly, the supply side is more problematic. China's deep integration into global supply chains increases the scope for a prolonged disruption to economic activity, with just-in-time logistics particularly vulnerable.
Unlike markets, which focus solely on the short term, real estate investors and occupiers need to anticipate longer-term trends and structural changes to the industry.
Although the epidemic is likely to continue to generate huge uncertainty in Asia's property markets, it is already accentuating a number of forces shaping the industry, notably in the retail sector which, as CBRE noted in a report early this month, "will suffer the strongest impact from the outbreak".
Can anything stop the coronavirus from popping the US stock bubble?
Even before the disease grabbed the headlines, retail rents in Asia were under pressure, with more than half the markets tracked by CBRE posting a decline last year. Moreover, leasing demand has weakened as retailers review their strategies, resulting in store closures and market exits.
The disruption caused by the virus is giving new impetus to the shift from traditional bricks-and-mortar sales to purely online or omnichannel retail. While Asia is ahead of the curve " online sales account for nearly one fifth of all retail sales in the region, compared with 10 per cent globally " "legacy laggards" such as store chains that are struggling to adapt to the rise of e-commerce will find it more difficult to compensate for losses from physical stores due to logistical bottlenecks.
In mainland China, where online retail accounts for about one-third of retail sales, an equally important challenge for occupiers will be to start planning for the resumption of normal activity. As consultant Bain & Company noted in a brief earlier this month, "when pent-up demand is released, unprepared companies can struggle to retain existing shoppers or form a lasting bond with new customers".
In the office sector, the epidemic underscores the importance of flexible working arrangements. Although WeWork's near demise last year has put the co-working business model under greater scrutiny, the coronavirus outbreak is accentuating the role of flexibility and agility in occupiers' real estate strategies.
As JLL noted in an article last week, many companies dealing with the outbreak are encouraging staff to work remotely, notably in Hong Kong, where such policies extend measures put in place to cope with the recent protests. The virus is forcing occupiers to rethink work culture more seriously. "We're just starting to see the first implications of working from home on a large scale," JLL's Ben Hamley said.
Just as importantly, the virus-induced hit to growth is likely to accelerate the decentralisation trend in Asia's office sector. Although increased economic uncertainty in the region has forced many tenants to delay decisions regarding their real estate requirements, leasing activity is now likely to be driven even more by cost savings, increasing the appeal of decentralisation as an occupier strategy.
Coronavirus 'misinformation' in Canada? China's embassy shares the blame
Finally, in the logistics sector, although warehousing demand by manufacturers will suffer due to quarantines and supply chain disruptions, the epidemic shows the pressing need for higher standards of personal and community hygiene, fuelling demand for high-specification modern warehouse facilities.
Property advisers anticipate a stronger focus on niche segments of logistics real estate, particularly cold chain facilities for pharmaceutical products. JLL noted that this "presents an exciting opportunity for investors", but rightly emphasised the importance of a more discerning approach to acquisitions this year.
As I argued previously, the outbreak has brought the disconnect between Asia's buoyant property investment market and a deteriorating occupational market into sharp relief. Selectivity, and a stronger focus on underlying fundamentals, will be critical to investment decisions this year.
As the coronavirus crisis deepens, occupiers and investors will need to reassess their real estate strategies to compete more effectively in an increasingly uncertain economic and industrial landscape.
Nicholas Spiro is a partner at Lauressa Advisory
Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.
