Unprecedented times but Southeast Asia shows signs of re-opening in office and retail
Ongoing caution but signs of opening up
The COVID-19 pandemic and unparalleled protective measures taken by governments to stem its spread have severely impacted economic activity. With countries at different stages in the fight against the coronavirus and having taken slightly different approaches to combat the outbreak, the path to recovery will inevitably differ.
The COVID-19 epidemic has had a profound impact on people’s everyday lives—from their social interactions to how they work—and also resulted in an unprecedented shock for businesses. Unsurprisingly, this has had knock-on effects for the real estate market as the heightened level of uncertainty saw many industry participants hitting pause while they assess the situation—leading to a slowdown in leasing and investment activity. However, with lockdown measures starting to be eased
in many markets, businesses are now turning their focus to re-entry strategies and how they can return to operations that are more normal—albeit with the appropriate safety measures in place.
COVID-19 curtails office sector
Softer leasing conditions prevailed in 1Q and were exacerbated by the COVID-19 outbreak. Many tenants opted to renew or delay expansionary activity in response to uncertainty caused by the outbreak and the practical challenges it poses to site inspections and fit-out work.
In Singapore, leasing activity slowed down in 1Q20 as the COVID-19 outbreak heightened economic uncertainty, travel restrictions have led to some disruptions to leasing negotiations as some companies’ senior management teams delayed flying to Singapore to view spaces.
In Thailand, net absorption totalled 25,000 sqm in 1Q20, with most of the demand coming from occupiers moving into the newly-completed Mitrtown Office Tower. Across the wider market, we saw limited occupier movement, largely owing to tight vacancy.
New office supplies were limited in most major markets in the first quarter with total completions down nearly 20% y-o-y. The combination of new supply and softer leasing conditions resulted in regional vacancy edging higher—led by markets such as Philippines and Indonesia. In Malaysia, demand for office space is expected to face significant headwinds from the Movement Control Order as a result of the COVID-19 outbreak, low-oil price environment, economic slowdown, and political uncertainty following change in the country's leadership.
Against a backdrop of rising occupier caution, rental growth slowed across much of the region during 1Q20. The heightened level of uncertainty saw an increasing number of tenants approaching landlords for discussions on rents. In Vietnam, the landlords of large vacant buildings, many of which are newly completed, may need to re-consider leasing strategies to attract tenants. In the next 12 months, average rents will likely grow at a slower pace.
The current outbreak has led to enhanced emphasis on managing costs and business continuity plans. The office sector in the next few months will be very much focused on preparing for re-entry in a safe and phased manner, taking into consideration current rates of infection and local authorities’ guidelines.
Employees’ health and wellness will be a key priority. We can expect corporates to implement more telecommuting support and safe distancing measures in their offices and a demand in workplace design services as a result.
In the short-term, we predict that most corporates will take a measured approach in making adjustments to their real estate footprints. They are unlikely to take on more space to keep costs down.
Looking further towards the medium and long-term, we do not expect a major shift in the demand for office. Business leaders and employees understand the important benefits of having a physical office. The office will remain essential to employers’ occupational strategies even as the way people view and use offices evolves.
Retail market pressures rise
A drop in retail sales and footfall in malls as a result of travel restrictions and tightened safe distancing measures have dampened retailer sentiment and leasing activity. Under pressure from operating costs and reduced hours, many retailers have approached landlords for rental relief.
Although challenges are likely to prevail at least in the short term, there have been some encouraging signs emerging as countries like Thailand and Vietnam are starting to re-open some of their malls on their road to recovery. Governments in other markets are also now starting to plan to reopen business—albeit in a gradual manner and mostly for essential services and products.
Some developers are also supporting their retail tenants to keep their business afloat by providing online ordering and delivery services at their end, taking away the burden of operational costs incurred with using the services.
The ‘new’ operating environment will require landlords and retailers to proactively adjust strategies to meet potential changes in consumer patterns and business practices, including leveraging technologies to enable cashless transactions and online deliveries. For example, many restaurants are now feeling the pinch from COVID-19 and, while many remain open, they are increasingly moving towards a delivery or take-away model, working with food delivery apps like Grab, Deliveroo and Food Panda.
The current crisis will inevitably create disruption and challenges for the industry in the short term. However, the resumption of work and life is an encouraging visual for the rest of the region, based on what we are now seeing from Mainland China. Corporations are already getting fully back to offices, after phased re-entries and an uncompromising focus on the health and wellbeing of employees, while nearly all retail premises have also re-opened.
Although there has been much written about the expectation of fundamental shifts in demand and usage of real estate, we believe the impact and changes are vastly overstated in the medium-to-long-term. Rather, COVID-19 is likely to act as a catalyst in the acceleration of vital megatrends that were already in play.
For more insights, check out our Q1 2020 APAC Property Digest