Updated: Feb 8
The Covid-19 pandemic is altering the global economy. Asia, the first part of the world that was affected by the Coronavirus, has come through similar cries before and risen stronger from them. We have reason to assume that it will be able to do so again. Can Asia's nations and businesses play a significant role in shaping the next standard in a post-pandemic world? The pandemic of COVID-19 had a profound effect on the real estate market. Today, the industry wonders if and how the demand will bounce back. What are the investment prospects of real estate in Asia that we can foresee during and after this virus outbreak? Is it a reasonable time to purchase or sell a property?
Covid-19 has substantially diminished economic growth prospects. It is a contagious disease that spreads rapidly through continents and because a majority of companies are forced to shut down due to enforced containment measures. Following the uncertainties compounded like the Movement Control Order in Malaysia, individual countries were in a full locked-down; thus, in terms of transaction volume and value, the Malaysian property market is anticipated to contract in the next few months. Home prices are expected to fall accordingly, signaling an incentive for the housing sector to purchase or invest. That said, perhaps it’s an excellent time to enter the Asian property market.
After a decade-long economic recovery cycle, with the COVID-19 pandemic dragging the local and global economies into recession, this is the ideal opportunity for investors to search for assets with reconstruction potential. With shops closed and discretionary spending diverted online in real estate, the already beleaguered retail sector has been the hardest hit. However, as the logistics industry has been the biggest beneficiary because of the shift in consumer habits, perhaps there is a silver lining in all of this madness.
As real estate firms pursue ways to emerge from the downturn of Covid-19, they will understand that greater use of technology and new ways of thinking will be needed to transition back to normality. I believe it will be a balancing act for proprietary companies between their immediate revenue needs and long-term opportunities. There will be a significant technological change in real estate once the demand increases again.
Office leasing was generally subdued across the Asia Pacific region during the first half, with only select markets reporting price rises per quarter. In the light of rising vacancies and weaker leasing demand, office rentals in Hong Kong's Central District recorded the most critical decline (-9.3%). Significant decreases in office rental prices were also recorded in Beijing (-4.1%), Melbourne (-3.9%), Sydney (-3.5%), and Singapore (-3.3%). Osaka and Seoul's CBD office markets bucked the trend and outperformed in the second quarter, with rents increasing from 1% to 2%.
Falling Rentals and Closure of Shopping Malls
As retail shopping mall tenants fully close their stores or leave the market, shopping mall landlords can aim to attract new shopping mall tenants with lower rents in the short term to fill vacant space in hopes of eventually normalizing lease rates. As mixed-use developments, older shopping centers can be destroyed and redeveloped, presuming that local governments encourage regeneration over blight. Shutts advises clients in federal and state courts on conflicts and civil cases concerning distressed properties, insolvencies, bankruptcies, and assignments that support creditors.
They are favored through recessionary times by investors. Only Japan has a large number of for-rent, institutionally owned properties. Super-low treasury yields mean that the poor outcomes associated with residential assets will now be more likely to consider buyers.
The impact on the real estate sector is inevitable
As of 11 March 2020, the China property sector has pulled back in the region of -11%. In January and February, China's residential property developers announced substantial decreases in contract sales but saw sales begin to recover in March. Investors' impression is that while the rest of the world is now facing higher risks around the spread of the virus, the worst of the fallout has now passed in China. China also continues to introduce more significant national and local policy stimulus initiatives, including targeted property policies: deferred payments for land prices, relaxation of conditions for pre-sales approval, or incentives for new home purchases. As Chinese people still need a place to live, this has helped slowly lure buyers back into the market.
Residential units sold in tier-1/tier-2/lower-tier cities saw -45%/-44%/-29% in the first week of March. As offices reopen, revenues are improving. Sales are also showing profitable growth every week. Land sales have now recovered to 80% of those in the top 100 cities as of the same time in 2019 2. In this climate, smaller developers and developers with low balance sheets struggle to raise money, but our attention remains on more prominent, better quality names.
China's real estate industry is expected to see consolidation intensify in 2020 as operating conditions become more competitive for smaller players. Although the bulk of our Chinese exposure is through the USD Bond offshore market, we are optimistic that if the COVID-19 situation lasts for longer than anticipated, these companies will be able to service their debt and collect new rounds of money. Those developers who are low on near-term cash are likely to turn to equity capital increases or asset sales to tide them through this challenging time. Still, the risk of default is increased, making it all necessary to have an aggressive security selection approach.
China mall operators record rising foot traffic on the retail side as stores reopen steadily, but some sites still see 30-50% of the number of visitors they registered a year ago. Few shops and malls are still working under lower opening hours, but we expect most operations to return to normal over the next month or so as customers return to work after weeks of isolation.
For office accommodation, the near-term outlook is mixed. Despite the increase of workers working from home, Class A office tenants usually operate under their leases. However, there are signs of a rise in office space subdivision at substantially reduced rates, which could be a precursor that the move from home to work would be prolonged. Additionally, the emphasis on recent open-office designs, whereby employers tried to decrease the average allocation of office space per employee to reduce leasing expenses, would change as employers focus on adequate distancing steps and other precautionary measures to minimize potential risks of contagion-induced workforce disturbances. Shutts advises landlords and tenants on office space contracts, guiding parties on their existing lease rights, renegotiation or termination of current leases, negotiation of new leases and subleases, and, in the event of litigation, compliance of contractual rights.
Hakim Saya is a boutique consulting firm based in San Francisco, California. We support cross border relations between the USA and Asia (outside of China), and we assist domestic and international companies in getting Access To Capital. We are proud members of the global community, helping to support and grow local and international companies by providing unique and creative solutions to our clients. We utilize our national and international network of direct lenders to offer financing options that meet our client’s specific needs.
Learn more about us at https://www.hakimsaya.com/