How will government policies and office landlord measures ease the financial burden on businesses and office occupiers in China?
The impact of the COVID-19 Novel Coronavirus outbreak on businesses in China has been significant, and it is inevitable that this will have a knock-on effect on the region’s office market. In this article we look at some of the areas in which we expect that impact to be felt the hardest, and how long-lasting we expect the effects to be.
The impact on SMEs
With temporary labour movement restrictions due to the COVID-19 outbreak, businesses in China are currently struggling to maintain normal business activity levels. Some businesses, and especially small and medium sized enterprises (SMEs), are facing business continuity issues on many levels.
A survey run by Tsinghua and Peking universities showed around 85% of SMEs can only survive for three months with no revenue before becoming insolvent.
SMEs in China: How long they can remain viable with no revenue (January 2020)
Source: capitalweek.cn, sina.com.cn, Cushman & Wakefield Research
According to the same survey, 63% of SMEs surveyed cited their current financial pressures stemmed from labour costs and social security contributions, while 14% said pressure was due to loan repayments and, significantly, another 14% stated current financial stress was down to rental payments.
SMEs in China: Average proportion of expenses (January 2020)
Source: capitalweek.cn, sina.com.cn, Cushman & Wakefield Research
Government and landlord support
The issues faced by companies doing business in China because of the COVID-19 outbreak have not been lost on either the government or on landlords in China.
We’ve already seen the authorities acting fast in trying to stabilise the economy in general and to enact policies to safeguard businesses.
For landlords we’ve also seen signs of support around challenges, such as rental payment issues. Many understand that the business viability of their tenants is key to the stable occupancy of their office property assets, and in turn, long term rental income.
Even though many office markets around China have experienced rental growth dips over the last quarter, due to current office market supply/demand dynamics, many quality office landlords around the country have stepped up to the plate to offer rental and management fee concessions.
Greater China Core Grade A Office Market Data (Q4 2019)
Source: Cushman & Wakefield Research
Co-working and short-term leases
In China’s office market, short-term leasing activity and the co-working sector will likely be hardest hit. This is due to significantly reduced desire for staff to congregate and interact face-to-face in one location, and the fact that the leasing or licensing arrangements make it simpler for occupiers to reduce or cancel their space commitments.
Nevertheless, we do not anticipate this will undermine the significance of the flexible workplace as an occupier strategy over the longer term, and it is exactly this flexibility that will prove attractive when making new leasing decisions.
The long-term impact
There are certainly areas for optimism. It is worth noting in the longer-term the COVID-19 outbreak may drive new demand for space from expansion by healthcare, eCommerce and logistics related companies. Companies in all three industry sectors have recently seen, and will continue to see, greater business volume as the need for medicines and medical equipment, online shopping and food delivery and goods and product storage and goods and product distribution services continues to remain high in China.
Ahead, we expect landlords and tenants to place greater emphasis on wellbeing and smarter workplaces, with factors, such as intelligent building management, wellness and safety management key to enhanced office property competitiveness. The addition of these features will augment trust both between landlord and tenant, and between tenant and employee. In turn, this amplified trust will help the landlord better attract and retain tenants, and the tenants better attract and retain top talent.
Moving on from the COVID-19 outbreak, we also expect to see landlords in China form even closer relationships with their tenants through a greater understanding of the nature of their businesses.
For example, many quality office landlords are likely to build a stronger landlord/tenant relationship platform that allows the landlord to better understand the background and needs of every single tenant in the office building.
Secondly, through this platform, a symbiotic relationship between the landlord and tenant could be enhanced by the landlord’s company leveraging its relationship with other tenants and its own subsidiary company network (if it has this type of network) to satisfy the business needs of its office tenants.
Thirdly, quality office landlords in China are likely to work that much harder by going the extra mile in terms of tenant services offered. One example of these new services could be to tenants in the form of business advice services, such as business registration services, tax advice, assistance in applications for any business subsidies and service support when trying to apply for bank loans.
If suitably applied, these measures will help greatly in boosting office building tenant retention rates in China going forward.
For more on the evolving COVID-19 situation across Asia Pacific, check out our latest report.
