The impact of the COVID-19 outbreak is an evolving consideration for landlords and tenants alike. In many ways it has created decision paralysis both within the Commercial Real Estate market and across most other industries, with concerned parties focused instead on staff safety, contingency planning, and safeguarding revenue in the face of stalling supply chains.
In other ways, the virus has accentuated some of the major trends that we’ve already been seeing throughout the Asia Pacific market. China has increasingly looked vulnerable as Asia Pacific’s supply chain hub, first because of the US/China trade war and now because of COVID-19. Southeast Asia’s constituent countries are still dependent on the dynamics of the China market. And Singapore is increasingly seen as a resilient, well-prepared market ready to take advantage of mixed fortunes elsewhere in the region.
In this article I want to share my insight on how the Singapore market currently stands for occupiers, both in terms of its internal dynamics, the impact of the COVID-19 virus, as well as in the wider context of regional trends.
Outlook for APAC Commercial Real Estate
Despite some of the current shocks that Asia Pacific is experiencing, the outlook for Asia Pacific Commercial Real Estate is by and large a positive one. We’re still seeing some of the highest GDP growth rates in the world, including China (5-6%), India (4-5%), and the Philippines (6+%), with much of that growth led by the ever-expanding megacities throughout the region.
As always, the outlook for occupiers is largely based on liquidity in specific markets through Asia Pacific. For some that trend is positive. In Hong Kong, for example, we’re seeing a reversal after years of remarkable rental escalation, due in no small part to the demonstrations which have raged since 2019. In Tokyo, on the other hand, rental rates are being squeezed by lack of new supply, with new office space not scheduled to come online until 2022.
That supply imbalance remains a major challenge for the region, with trends from environmental issues to protests to changing economic priorities leaving some cities starved of new supply, whilst others see towers left unoccupied. For savvy occupiers, this situation does create opportunity for savings, as well as significant risk.
The COVID-19 Factor
Into this environment we’ve seen COVID-19 have an impact. With whole areas of the economy - including tourism, travel, and events – grinding to a temporary halt, there’s real concern over how ongoing supply chain and business-as-usual disruption is going to play out in the coming weeks and months. This business-critical concern means that any consideration from occupiers around moving or upgrading office space has been put on hold.
How long can we expect this to last? Well we’re already seeing China show signs of coming back online, even as the number of new cases continue to rise. As we mentioned before, where China leads so too will Southeast Asia follow, and we can therefore expect positivity in the region so long as China continues to move back towards normal economic functionality.
For Singapore many global corporates are attracted to by the nation’s infrastructure, talent base and business-friendly robust legal and tax systems. Now the rapid response, active communication and economic iniatives put in place by the government will further enhance the views of Singapore. The virus may result in a short pause but there is no stopping these firms from setting up operations in this region when the virus impact subsides.
The Singapore Outlook
Singapore finds itself in an interesting situation. It’s well known that vacancy is currently tight, with only 2.3% vacancy across the office sector. Having said that, demand has also been tempered of late, especially given the COVID-19 situation as previously discussed. We can therefore see somewhat of a holding pattern, which could well last through until 2021/22 when new supply is due to hit the market.
Between now and then we’re expecting an equal balance of rental rate increases in some sections, offset by landlords to becoming more accommodating in the face of waning demand. These competing forces are further paving the way for corporates to manage their space needs in a co-working / serviced office / “managed operator” models. Where short term needs and priority for Capital Lite solutions take priority.
The markets will always provide significant attention to the short term, but it is the long term that continues where real opportunities stand out in Singapore. Occupiers who are well placed to deal with the immediate challenges and yet lay plans for their long term accommodation needs, may be the ultimate winners.
For more information on how global trends are impacting the Singapore and Southeast Asian leasing markets, feel free to get in touch.