Since the first reported case in late December, more than 75,000 people have tested positive for coronavirus worldwide, with the death toll now topping 2,000. The outbreak is starting have a significant impact on the economy and real estate market.
The outbreak of coronavirus is expected to see China’s GDP fall by two percentage points in the first three months of this year, is largely anticipated to place further downward pressure on retail rents, will further hamper economic recovery in Hong Kong – which is already suffering on the back of widespread socio-political unrest – and will, according to JLL, lead to a sharp decrease in Asia Pacific investment figures in Q1.
Agents active in the region have been comparing the COVID-19 virus to the outbreak of SARS, an epidemic that had a harsh but relatively short-lived impact on the market. Provided it is contained swiftly, most believe the same will apply this time.
Retail has so far been one of the hardest-hit sectors by the outbreak, with big-name corporates such as Starbucks and Apple closing thousands of stores in China. While many domestic landlords have curtailed opening times at malls across the country, they have also taken measures to enable retailers to stay in operation, with temporary rent cuts of anywhere between 30-100%.
Tenants in Wanda-owned malls will not have to pay rents or management fees until 25 February, for example, while Poly and China Resources exempted their retail tenants from rent payments for the whole of January, and Powerlong and Seazen cut rents in half.
Jason Leow, president of listed Singaporean real estate company CapitaLand, said it had drawn up a “comprehensive support package” for the most affected occupiers of its 3,500 stores, which included immediate relief to operating costs and marketing initiatives to boost retail sales.
The moves may help keep occupancy levels stable across China’s malls but JLL says it will put further pressure on rents in an already difficult operating environment.
“Despite the perceived temporary nature of the outbreak, it may prompt earlier closures of weaker trades or outlets,” it says in its note on the virus. “In turn, more owners are likely to be forced to compete for tenants, exacerbating the rental down trend.”
Savills says landlords would rather discount rents to fill assets than drop prices of properties to facilitate sales.
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“Looking beyond the virus, lower taxes in the mainland, a weaker renminbi, lingering issues surrounding the social unrest (which remain unresolved) and more competition for mainland tourists from other destinations are reasons to think that the sector has a tough time ahead of it and that previous highs will not be reached,” says the agent.
“The virus may also accelerate the switch to online with negative implications for physical stores, although Hongkongers will always regard shopping and shopping malls as a major pastime and online may never make quite the same inroads it has elsewhere in China.”
The office sector is also expected to see a short-term negative impact as a result of the outbreak.
CBRE expects leasing activity to be slower in Q1 2020, with many occupiers delaying decisions involving large-scale capital expenditure. However, it believes that if the virus can be largely contained within the Hubei province its impact on the national leasing market is likely to recover as quickly as late Q2 2020.
The outbreak, while tragic, is expected to help accelerate the transformation of China’s real estate market into a more digitally connected and flexible sector in the long term.
JLL says the infectious nature of the virus will remind occupiers and enterprises of the importance of personal and community hygiene and will lead them to build provisions for such into their leasing agreements and could lead to an uptick in the adoption of proptech solutions such as robotics that can detect, sanitise and clean buildings.
Whether coronavirus has as contained an impact on the Asian real estate market as SARS remains to be seen, but the outbreak offers a timely reminder of how global events can hurt real estate, and the importance of reacting speedily to offset as much potential damage as possible.
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