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Asia Pacific Commercial Real Estate Markets Set for Severe but Short-Lived Blow From COVID-19 Outbreak

Hena Park • 21/02/2020
  • China CRE markets to be hardest hit with negative impacts expected to ripple through all sectors with retail, leisure and hotel to bear the brunt
  • Declines in visitor numbers from China to impact tourism and retail markets across Asia Pacific
  • Expectations are for economic impact to be constrained to 1H 2020
  • Longer term fundamentals for the Asia Pacific CRE space remain intact

China’s commercial real estate markets will be the most disrupted in Asia Pacific by the COVID-19 outbreak, although, in the short-term, tourism and retail markets across the region will feel a serious impact from reduced visitor numbers from the mainland, according to Cushman & Wakefield’s Potential Impacts of the COVID-19 Pandemic on Commercial Real Estate in Asia-Pacific report.

Expectations are that the economic impact from the COVID-19 outbreak will be limited to the first half of 2020 and the longer-term fundamentals for Asia Pacific commercial real estate markets are considered to remain intact.

In mainland China, in the short-term the retail and hospitality sectors will be hardest hit, but office demand will also be restrained. Rising vacancy is likely to bring rental rates under pressure until business confidence and activity is restored. Industrial is more of a mixed bag, with export-oriented facilities seeing greater time and costs for entry-exit inspection as well as product quarantines.

Beyond the short-term hit on tourism and retail, impacts for countries across the region will be more nuanced, reflecting their individual economic ties to China.

James Shepherd, Head of Research, Asia Pacific, stated: “In China the impact of the COVID-19 outbreak is clearly visible, and the cost of containment via mitigation measures is slowing economic activity and productivity nationwide. Across Asia Pacific, tourism and retail markets are at risk of serious damage in the short-term, with inbound tourists and students from mainland China facing travel restrictions. We can expect to see investment activity in the retail and hospitality sectors to slow across the region until the outbreak eases. However, longer-term we do not see major restructuring given the recent reweighting of international real estate investment capital to Asia Pacific markets.”

The COVID-19 outbreak is a blow to South Korea’s economy, with disruption to supply chains, reduced export activity and weakened consumer sentiment creating near-term impact on growth prospects. As a result, expectations for GDP growth for 2020 have been downgraded from 2.0% to 1.8% (Oxford Economics).

The bricks-and-mortar retail market has been hit hard, with reduced footfall at malls as people refrain from going out and growing alternative consumption through online channels. Consequently, concerns are mounting over vacancy in the offline retail sector. As well, some department stores and large discount stores, visited by confirmed carriers of the coronavirus, have been mandated to close temporarily. Duty-free stores in particular are expected to see a sharp drop in sales, due to a significant decline in footfall of visitors from China, who account for a large portion of duty-free sales

Hospitality and tourism industries are also under direct fire. Hotel reservations are plummeting due to guest cancellations and a general unwillingness to venture out. Currently, the cancellation rate at major hotels in Seoul is reportedly close to 15%. But a bigger concern is the sharp drop in future reservations. In particular, Jeju Island, which has seen a number of confirmed cases of the coronavirus, has been hit with a series of domestic tourist cancellations, with reservations by Koreans in Seogwipo plunging 30% y-o-y in the February-March period.

In terms of the investment market, REITs, considered a leading safe asset, could be negatively impacted if portfolio properties are mandated to undergo quarantine. The Korean stock market is also reacting in line with other global markets to COVID-19.

The Korea Economic Research Institute has forecast that if COVID-19 proliferates in the same way as the MERS epidemic in 2015, then the number of foreigners visiting Korea will drop by 1.65 million and tourism revenue will lose 4.6 trillion won.

Job seekers in at-risk industries are declining significantly: by 45,500 in wholesale and retail services, 15,800 in lodging services and 15,000 in restaurants and bars. However, If COVID-19 remains in circulation for nine months, as in the SARS epidemic, and tourism revenue drops more than 17.2% then then the number of job-seekers in the tourism industry is estimated to reach 55,600.

Philip Jin, Head of Research, Cushman & Wakefield Korea, add: “Concerns are mounting for offline retailers in the face of reduced footfall, as well as the office market.”

Key takeaways from Potential Impacts of the COVID-19 Pandemic on Commercial Real Estate in Asia Pacific:

  • Economists are reaching a consensus that global GDP growth will fall by approximately 0.2-0.3 percentage points in 2020, with the greater impact on China ranging from approximately 0.4 percentage points to 1 percentage point.
  • Domestic consumption in China, through retail and travel, is expected to be hardest hit.
  • Wider Asia Pacific effects are likely to be seen through reduced regional tourism flows and supply chain disruption from mainland Chinese suppliers.
  • The Chinese government’s strong response in addressing the spread of COVID-19, its recent RMB 1.7 trillion (approx. US$242.8 billion) injection into the economy and other possible future measures supports mid to long term market confidence.
  • China domestic retail expenditure, especially on travel, luxury retail, leisure and restaurants, will weaken in the short term, but e-commerce may receive a boost.
  • Potential CRE impacts include:
  • Reduced leasing and investment transaction activity in China for at least Q1 2020, although we expect property investment activity to recover in the medium-term;
  • Immediate negative impact on short-term leasing and co-working activity;
  • Prompt action by corporates is demonstrating strengthened business continuity planning (BCP) since SARS, the success of which may accelerate a move to more flexible working arrangements over the longer term;
  • Lower outbound tourist numbers will negatively impact tourist expenditure and hotel occupancy across much of Asia Pacific;
  • Hampered industrial production due to shutdowns and quarantine in mainland China and supply of components to global markets; and
  • Potential benefits to logistics sector on the back of increased e-commerce.

Click HERE to view the full report.