How the coronavirus crisis is testing Asia’s commercial property industry
- 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
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.
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”.
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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”.
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.
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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 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