why the coronavirus (covid-19) outbreak could have a ... · source: oxford economics, cbre...

CBRE RESEARCH | ASI A PACIFIC SPECI AL REPORT

WHY THE CORONAVIRUS

(COVID-19) OUTBREAK

COULD HAVE A LASTING

IMPACT ON ASIA PACIFIC

REAL ESTATE

2

CBRE RESEARCH | ASIA PACIFIC SPECIAL REPORT © 2020 CBRE, INC.

The coronavirus (COVID-19) outbreak has cast a shadow over the Asia Pacific economy in the opening months of 2020 and poses a downside risk to global growth.

The short-term impacts are significant and continue to

evolve along with the development of the disease. The

suspension of manufacturing in China is causing

considerable disruption to supply chains. Public health

concerns and travel restrictions nationally and

internationally have seriously impacted consumption

activity and prompted consumers to avoid crowds and

stick to daily necessities. Regional and global tourism

and air travel have been hit hard.

In the real estate sector, some office occupiers,

especially those in Greater China, have postponed

major leasing decisions, brick-and-mortar retailers

across Asia Pacific are feeling the strain, and general

logistics operators are struggling to deliver goods to

customers due to shortage of labor. Many investors have

moved into wait-and-see mode.

While the large number of unknowns about COVID-19

make it difficult to predict when it will be contained, the

consensus appears to be that the outbreak is likely to be

under control by the end of H1 2020. However, as the

impact continues to grow in terms of scope and

magnitude, attention is now turning to the long-term

consequences for the real estate sector.

This Special Report by CBRE explains how the outbreak

has impacted the Asia Pacific real estate sector thus far

and identifies several potentially long-term trends that

could become a permanent feature of the regional

property landscape.

In the office sector, these include the accelerated

adoption of flexible working, the re-evaluation of

Business Continuity Planning (BCP) and workplace

wellness measures. The increasing use of omnichannel

strategy and pick-up points are likely to affect the retail

sector, while the logistics sector is set to expedite the

integration of automation in logistics operations. On the

investment front, a lower interest rate environment will

ensure prime core assets remain ideal defensive plays,

while the evolution of consumer behaviour and adoption

of new technology such as the cloud will drive sustained

demand for alternative sectors such as data centres and

cold storage.

THE SHORT-TERM IMPACT

INTRODUCTION

WHY THE CORONAVIRUS (COVID-19) OUTBREAK

COULD HAVE A LASTING IMPACT

ON ASIA PACIFIC REAL ESTATE

THE SHORT-TERM

IMPACT


4


Economy – growth set to dip in H1 2020

China accounted for 16.8% of global GDP in 2019,

compared to just 6.9% in 2003, when the SARS outbreak

occurred1. The significant slowdown in economic activity

on the mainland, where GDP growth forecasts for H1

2020 have been downgraded to 4 – 5% y-o-y2

following

the outbreak, is already spreading to other regional

markets, many of which are bracing for a moderate

short-term impact. CBRE has revised down its 2020 Asia

Pacific GDP growth forecast from 4.2% to just under 4%3

in 2020.

Consumption has been hit hard, with discretionary

spending in Greater China falling sharply as people

stay home and avoid crowded locations, particularly

shopping malls. While the entertainment, F&B and

fashion categories have been most affected by the

slowdown in household retail spending, retailers with

established omnichannel platforms have helped to offset

some of the impact.

With Chinese visitors accounting for at least 33% of

tourist shopping expenditure in top Asia Pacific

destinations such as Singapore, Korea, Japan and

Australia, the imposition of travel restrictions and reduced

flight capacity will cause a significant decline in inbound

demand across the region. In Hong Kong SAR, the

impact on retail sales could be even higher given that

over 75% of the city’s tourist arrivals originate from

Mainland China.

Falling visitor arrivals will also severely impact the

hospitality sector. In Singapore and Hong Kong SAR,

hotel revenue per available room (RevPAR) and

occupancy are already under downward pressure.

Elsewhere, several upscale hotels in Ho Chi Minh City

reported an occupancy rate as low as 30% in February

2020, despite the first two months of the year traditionally

being a busy period.

-4%

-2%

0%

2%

4%

6%

8%

Mainland

China

India Australia Korea New Zealand Singapore Japan Hong Kong

SAR

Asia Pacifc

As of Jan 2020 As of Feb 2020

Figure 1: Asia Pacific 2020 GDP Growth Forecast

Source: Oxford Economics, CBRE Research, February 2020.

1 Oxford Economics, CBRE Research, February 2020.

2 Oxford Economics, February 2020.

3CBRE Research, February 2020.


ECONOMY




5


The other major disruption has been to global supply

chains linked with China. Industrial manufacturing in

China will take some time to return to normal due to the

slower return of workers resulting from mandatory

quarantine measures in major cities; the need to source

personal protection equipment (PPE); and disruption to

the supply of raw materials resulting from the suspension

of inter and intra-city transport.

Data from Oxford Economics show that the global

electronics and electrical equipment sectors are

particularly reliant on China, with over 10% of total non-

Chinese sectoral output originating from the mainland4.

This is having a severe knock-on effect on global

markets, with automotive, electronics and

pharmaceuticals companies all issuing warnings about a

potential halt in production. In Korea, the domestic

automotive industry has had to halt production for more

than a week, while the country’s exports and domestic

earnings are suffering as intermediate goods cannot be

imported from China. Elsewhere, heavy construction

equipment maker JCB has reportedly cut production and

working hours at its UK factories after more than 25% of

its component suppliers in China were closed because of

the outbreak5.

4 How global supply chains will feel coronavirus’ chill, Oxford Economics, February 2020.

5 Financial Times [link], February 13, 2020.


ECONOMY (CONTINUED)




https://www.ft.com/content/ef3b2caa-4e73-11ea-95a0-43d18ec715f5

6


Office – delays to new commitments offset by

postponement of new project completions

Asia Pacific office occupiers were in a cautious mood at

the beginning of the year due to growing concern over

the late-cycle economy. This view has hardened since the

outbreak, with the negative impact on leasing demand

mostly felt in Greater China, where some occupiers have

postponed major leasing decisions amid widespread

disruption to business operations. However, leasing

activity is likely to pick up as early as Q2 2020, should

the outbreak be contained.

Occupiers already engaged in office fit-out projects face

delays to construction and are requesting extensions to

fit-out periods. Some may have to delay plans for new

office moves, with budgeted CapEx originally earmarked

for Greater China now allocated elsewhere. Occupiers

engaging in renewals are aiming to achieve flexibility in

space requirements for future headcount adjustments

rather than rushing to secure space now.

CBRE believes that the impact on other Asia Pacific office

markets will be minimal, as demand is domestic driven

(rather than by Chinese firms) or supported by low

vacancy and a lack of new supply. The office sector is

therefore likely to be the first to recover after the

outbreak. Regional net absorption will hold firm in full-

year 2020, although expectations have been slightly

revised down to flat growth from an upper 5% boundary

in our earlier forecast.

Figure 2: Net Absorption in Major Markets Impacted by SARS in 2003

Source: CBRE Research, February 2020.

(500)

0

500

1,000

1,500

2,000

Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004

Net A

bsorption (‘000 sq. ft. N

FA

)

Beijing Shanghai Guangzhou Shenzhen Taipei Hong Kong SAR Singapore

SARS Peak

Revisions to rental growth forecasts are mainly confined

to some Chinese markets and Hong Kong. Rental

revisions in China are not expected to be significant as

some landlords, especially State-owned Enterprises

(SoEs), prefer to grant longer rent-free periods and rental

holidays to existing tenants rather than acquiesce to lower

base rents. Non-SoE landlords are observed to be

holding rents steady for existing tenants. In addition,

around 10% of forecasted new supply in 2020 will be

postponed due to construction delays, alleviating some

oversupply pressure on these markets. Rents in Hong

Kong will come under greater downward pressure but the

full-year decline is likely to be frontloaded in H1 2020

and will also partly be attributable to ongoing market

weakness witnessed since last year.


OFFICE




7


Retail – consumption slows but omni-channel

retailers display resilience

COVID-19 has had the strongest impact on the retail

sector. Thousands of retail stores and malls in China

have temporarily closed, with a survey by the China

Chain Store & Franchise Association (CCFA) finding that

around 40% of its members were open for business in

early February6. Although 70% of malls in tier I cities

have now re-opened, the resumption of business in tier II

cities will be slower. The widespread closures are set to

curtail full-year retail sales growth from 8% in 2019 to

about 6%7, with the first two months of the year usually

accounting for around 16% of annual retail sales8

due to

the Chinese New Year holidays.

Numerous markets in Asia Pacific9

have imposed travel

restrictions on visitors from mainland China, with some

also prohibiting arrivals from Taiwan, Hong Kong SAR,

Macau SAR and Korea. The fall in mainland Chinese

visitors has impacted retailers and shopping centres in

key regional markets catering to these visitors.

Rents are coming under strong downward pressure.

Major retail landlords in Mainland China and Hong

Kong SAR such as Wanda, China Resources, Seazen,

Swire Properties and SHKP have announced temporary

rental cuts to alleviate pressure on tenants. Elsewhere, a

landlord in Seoul has reportedly agreed to provide a

short term rental reduction and relief scheme for its

tenants, with other landlords in Korea may follow suit. In

Singapore, Mapletree Commercial Trust has offered

rental rebates for selected tenants at VivoCity, while Jewel

Changi Airport has provided rental rebates to its F&B

occupiers. CBRE Research expects this trend to continue

until the situation improves. Apart from rental rebates,

landlords may also consider mutually beneficial schemes

such as purchasing goods or cash coupons from tenants

for later promotional use.

Figure 3: Mainland Chinese Visitors as a % of Total Tourist Arrivals and Spending

Source: CEIC, Hong Kong - Tourism Board, Japan – Tourism Agency, Taiwan - Tourism Bureau, Ministry of Transportation and Communications, Korea - Korea Tourism Organization,

Australia - Australian Bureau of Statistics, Tourism Research Australia, Singapore - Singapore Tourism Board, Thailand - Ministry of Tourism and Sport, Vietnam - Vietnam National

Administration of Tourism, Malaysia - Tourism Malaysia, CBRE Research, February 2020.

6 China Chain Store & Franchise Association, February 2020.

7Oxford Economics, February 2020.

8National Bureau of Statistics of China, CBRE Research, February 2020.

9 Markets which have implemented travel restrictions on people who have visited mainland China include Hong Kong SAR, Macau SAR, Japan, Korea,

Singapore, Australia, New Zealand, India, Indonesia and Vietnam, as of February 27 2020.

Taiwan and the Philippines have restricted visitors from mainland China, Hong Kong SAR and Macau SAR, as of February 27 2020.

Mainland China, Hong Kong SAR, Taiwan, Singapore, Japan, India, Vietnam and Thailand have restricted visitors from Korea as of February 27 2020.


RETAIL




0%

20%

40%

60%

80%

100%

Hong Kong SAR Korea Vietnam Japan Thailand Taiwan Singapore Australia Malaysia

Contribution by Mainland Chinese tourists

(2018/ 2019)

% of Total Tourist Arrivals

% of Total Tourist Shopping/Spending

8


Rents in Greater China and Singapore – which are

already suffering from weaker fundamentals – are

coming under pressure. Prime streets catering to the

tourist trade will be hit the hardest, with CBRE revising

down its 2020 rental growth forecast for these markets by

20 to 500 bps. Around 20% of new supply due for

completion in China this year will be postponed, with

additional delays expected should developers continue to

find it challenging to secure tenants over the remainder

of the year.

While many traditional brick-and-mortar retailers are

struggling to ride out this period and are seeking

temporary rental reductions, those with omni-channel

platforms, especially in the grocery and fresh food related

categories, have reported a surge in sales. JD.com

registered a 400-500% y-o-y increase in fresh food sales

during Chinese New Year10

. The growth of online

shopping and on-demand food delivery therefore

appears to be cushioning the overall negative impact on

private consumption.

10 Food Navigator-Asia.com [link], February 12 2020


RETAIL (CONTINUED)




https://www.foodnavigator-asia.com/Article/2020/02/12/JD-reports-surge-in-fresh-food-orders-in-China-during-Chinese-New-Year-and-coronavirus-outbreak?utm_source=copyright&utm_medium=OnSite&utm_campaign=copyright

9


Industrial & logistics – industrial production

temporarily operating well below capacity

Industrial manufacturing activity in China has been

disrupted due to the extension of the Chinese New Year

break, interruption of inter-city transport systems and the

slower return of workers resulting from mandatory

quarantine measures in major cities. Factories are

required to meet new public health protection standards

before resuming work, while the production of medical

supplies and necessities has been prioritised. Industrial

production is therefore not expected to return to full

capacity until mid-March at the earliest.

The disruption will have a knock-on effect on

neighbouring countries, with 40% of intermediate

goods in Asian supply chains originating from China11

.

For example, Hyundai has suspended production lines

in Korea due to the lack of parts from China12

. Capital

Economics has stated that Vietnam, Malaysia and

Cambodia are the most vulnerable markets as over 6%

of the gross value-added of their economies come

from China.

Business to Consumer (B2C) logistics in markets

impacted by the outbreak has also been affected, albeit

to a lesser extent. A surge in online shopping in most

Asia Pacific markets, especially for groceries and food,

has led to a surge in demand for last- mile logistics.

However, many providers across the region have

struggled to cope with this spike in demand, a situation

exacerbated by a shortage of labour. Deliveries have

therefore been affected. A gradual increase in demand

has also been observed in comparatively under-served e-

commerce markets such as Hong Kong SAR, where

providers have struggled to cope with the surge in online

orders and on-demand food delivery.

The outbreak is set to accelerate the upgrading of the

supply chain to support omnichannel retail, which will

support further growth in logistics space demand.

CBRE retains its forecast of mild rental growth this year,

despite slower overall leasing activity resulting from

the disruption.

Figure 4: Disruption to Global Supply Chains

Source: Capital Economics, February 2020.

Imported manufacturing inputs from China as % of total imported manufacturing inputs

11 Bloomberg [link], February 5, 2020.

12 Bangkok Post [link], February 7, 2020.

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Philip

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gapore


INDUSTRIAL & LOGISTICS




https://www.bloomberg.com/graphics/2020-global-economic-impact-of-wuhan-novel-coronavirus/

https://www.bangkokpost.com/world/1852714/coronavirus-effects-shut-worlds-biggest-car-factory

10


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USD

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Commercial Real Estate Transaction Volume (2002-2004)

Investment – investor demand weakens

temporarily

There will be a short-term slowdown in purchasing activity

across the region, with many investors postponing

investment decisions and moving into wait-and-see

mode. Mainland China and Hong Kong SAR will

experience a sharp decline in deal flow in Q1 2020 due

to reduced business activity. Australia and Singapore will

also be relatively quiet as landlords opt to postpone sales

due to potential cross-border investors being unable to

perform site visits. The impact on Japan and Korea will

be relatively mild thanks to continued solid investment

demand from domestic investors.

Despite the current circumstances, there is still ample

capital in the region seeking medium to long-term real

estate investment opportunities. Asia Pacific-focused

private equity real estate funds raised USD 38 billion in

2018-2019, an amount well in excess of the USD 5

billion raised in 2002-2003, indicating a significantly

larger investment pool. Relief measures such as

supportive monetary policy and anticipated interest rate

cuts across the region are lending support to pricing.

Purchasing is likely to improve once the outbreak has

been contained, supported by pent-up investment

demand. CBRE’s 2020 Investor Intentions Survey found

that investors retain a solid appetite for real estate, with

cross-border investors expected to shift their focus to

Australia and Japan given the low cost of financing,

while turning more cautious towards Greater China in

the short term.

Assets providing steady income streams will be the focus,

while interest in logistics assets will strengthen alongside

solid e-commerce industry growth. Demand for retail and

hotel assets will suffer due to falling rental income and a

slowdown in regional tourism arrivals, respectively. This

will exert downward pressure on capital values.

Opportunistic investment in China debt will continue

apace, with highly leveraged Chinese developers set to

come under even greater pressure due to the halt in

business activity and slowdown in residential sales.

Figure 5: Investment Activity in China and Hong Kong SAR Improved After the SARS Outbreak

was Contained

Source: RCA, National Bureau of statistics of China, Hong Kong Land Registry, CBRE Research, February 2020.

SARS OUTBREAK


INVESTMENT




THE LONG-TERM

IMPACT


12


Greater Adoption of Flexible Working

CBRE believes the outbreak will create further

opportunities for office occupiers to test the feasibility of

flexible working or agile working in many markets. In

recent weeks, the government and private sector in

Singapore, Hong Kong SAR, Macau SAR, Mainland

China, Japan and Korea have ordered or encouraged

employees to work from home in order to limit social

contact to slow the spread of COVID-19.

Some companies – particularly those whose staff require

only a computer and internet connection to perform their

duties – have found this experiment to be relatively

successful. While concerns remain over productivity and

collaboration among employees working from home,

CBRE believes this large scale trial may encourage

companies to be more willing to accelerate the adoption

of flexible and home working polices in future.

Adjustment of Space Utilisation Metrics

Space utilisation in agile workplaces will be re-evaluated

due to the need to maintain comfortable density (as

opposed to high density) to limit the transmission of

diseases. At the same time, the workforce will become

more mobile along with the greater adoption of flexible

working after the outbreak. Occupiers will need to

balance space efficiency with employee health and

safety considerations, which may lead to slower growth

in space requirements.

Stronger Demand for Buildings with Sustainability

and Wellness Features

Occupiers will place a stronger emphasis on building

specifications as they strengthen their commitment to

employee health and wellness. Properties with

sustainability and wellness features, particularly those

related to indoor air quality, ventilation systems, water

drainage systems and other indoor environmental

features to improve employee comfort, will attract

stronger demand in the long term. This could potentially

hasten the development of more LEED and WELL-certified

buildings. As of February 2020, there were about 700

certified and registered WELL commercial projects

providing a total of 219 million sq. ft. of space in Asia

Pacific, of which over 40% are in China.

Reviews of Business Continuity Planning

The outbreak will force companies to reassess Business

Continuity Planning (BCP), particularly the need to

maintain back up locations for critical business functions

and essential employees. Some companies may consider

the formation of alternate teams of employees (e.g. Team

A & Team B) to be deployed on different schedules and

at different locations during future outbreaks. Occupiers

will also need to ensure adequate supply of protective

equipment such as disposable gloves and masks. On the

landlord side, improvements to building hardware will

need to be made, such as the installation of medical

grade air purifiers.

Greater Importance of Property and Facility

Management

Property management will become more prominent. At

the individual tenant level, greater sensitivity towards

hygiene will require more frequent and rigorous

sanitisation of the office environment, particularly of

shared areas such as canteens and bathrooms along with

hardware such as phones and keyboards. Hygiene

concerns will require office managers to ensure high

standards of cleanliness are maintained while

communicating this to employees.

Asset managers – particularly of properties that include

shared amenities such as cafes, retail and agile space –

will need to augment existing hygiene policies to reassure

tenants and employees. Features such as temperature

checks at entry doors or thermal imaging systems –

introduced by many buildings since the outbreak – may

become standard procedure during flu season. Regular

cleaning and disinfection in public areas, better control of

people flows and the provision of isolation zones will

become more important. Office landlords may also

consider providing medical updates and communications

via tenant engagement platforms and social media – an

approach successfully deployed by some of the retail

landlords in recent weeks - to keep building occupants

informed of the latest developments during future

outbreaks. The complexity of facilities management in an

office building is likely to eventually resemble that in a

small shopping mall.

THE LONG-TERM IMPACT

OFFICE




13


Growing Popularity of Online Groceries

With brick-and-mortar stores in Greater China and

Singapore having been forced to curtail their business

hours or close completely, shoppers have gone online for

daily necessities. This had led to a boost in online grocery

and fresh food sales – a trend that is set to hasten the

growth of this format and support the expansion of

omnichannel supermarkets such as Freshippo and

7Fresh. While a continuation of this trend will provide

solid support to e-commerce growth, it will create

additional headwinds for traditional brick-and-mortar

outlets that do not have an omnichannel presence.

Brick-and-Mortar Stores to Support Last Leg

Delivery

Relatively under-served e-commerce markets such as

Hong Kong have also seen a jump in online sales, which

may signify the beginning of a long-term fundamental

shift to an online economy. E-commerce platform

HKTVmall reported a 64.7% y-o-y surge in average daily

orders in January, while average daily gross merchandise

value (GMV) on order intake for the same month rose

49.6% y-o-y to HKD 10.9 million13

. HKTVmall is also

reportedly working with its merchant partners to set up

pick-up points in their stores – a trend that could simplify

the last leg of the supply chain should it gain traction in

the long-term.

Social Commerce Set to Gain Momentum

The shift to e-commerce will place even greater pressure

on retailers and landlords to offer unique and engaging

shopping experiences – either via interactive formats or

omnichannel strategies - to attract shoppers and sustain

sales growth in the long term. Live-streaming – an

increasingly popular format combining entertainment and

e-commerce – can help retailers foster a “see now, buy

now” culture enabling them to quickly inform consumers

about their products and create a sense of urgency to

purchase. Intime Department Store in China has

partnered with hundreds of Key Opinion Leaders (KOL) to

host livestreaming sales events during the outbreak14

.

Ultimately retailers will need to develop their ability to sell

their products and provide their services without a

physical store. As well as online grocers and fresh food,

other industries such as medical doctors and educational

centres have been forced to operate online during the

outbreak, to varying degrees of success.

Property Management to Be A Key Focus

CBRE expects the outbreak to strengthen the importance

of property management in shopping malls and retail

stores in the coming years. Hygiene and other measures

to ensure facilities are safe and clean for employees and

customers will be top of mind. Permanent measures may

include providing hand sanitiser at entrances and more

regular cleaning of goods or locations frequently touched

or used by shoppers.

13Hong Kong Television Network Limited [link], February 10, 2020.

14 Xinhuanet [link], February 12, 2020.


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https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0210/2020021000007.pdf

http://www.xinhuanet.com/fashion/2020-02/12/c_1125562601.htm

14


Relocation and Diversification of Production

Bases to Accelerate

Rising labour costs in China and the U.S.-China trade

conflict have already prompted many global

manufacturers to diversify supply chains to other markets

in Asia such as Vietnam, Thailand, Indonesia, India,

Bangladesh and the Philippines. CBRE believes the

outbreak and the significant disruption it has caused to

the supply chain will prompt more manufacturers to

consider this long-term shift as companies look to reduce

reliance upon a single market and avoid

overconcentrating production in one location. However,

the complete exodus of manufacturing capacity from

China is unlikely given the sophistication of the industry,

the maturity of the supply chain and the huge domestic

consumption market.

E-commerce Demand to Drive Additional

Warehouse Requirements

CBRE had already identified e-commerce as the main

tailwind propelling the logistics sector in 202015

.

However, with the outbreak prompting a jump in online

sales and expediting the structural shift towards

omnichannel retailing, additional warehousing space in

and around major metropolitan areas will be needed to

meet the surge in last-mile delivery.

Cold Storage Demand to Surge

Niche industrial and logistics assets will also benefit in the

long-term, with growing consumption and omnichannel

distribution of groceries and fresh food set to accelerate

occupier demand for cold storage facilities in the

coming years.

Automation to Transform Warehouses and

Distribution Centres

The adoption of new technologies in the logistics space

is likely to receive added impetus. Delivery companies

have sought to work around quarantine regulations by

using Automated Guided Vehicles (AGVs) to provide

contactless delivery. JD.com has reportedly delivered

goods using drones in Hebei province during

the outbreak16

.

While return on investment remains a major

consideration, more logistics providers may consider

automating some of their operations to reduce reliance

on human employees and protect against disruption

caused by future outbreaks. This will transform the way

operators configure and build their warehouses and

distribution centres. For those logistics facilities that do

continue to host large numbers of human employees,

hygiene and sanitation will need to be improved.

15 CBRE Asia Pacific Real Estate Market Outlook 2020

16 Nikkei Asian Review [link], February 12, 2020.


INDUSTRIAL & LOGISTICS




https://asia.nikkei.com/Spotlight/Coronavirus/JD.com-makes-drone-deliveries-as-coronavirus-cuts-off-usual-modes

15


Core Assets to Remain Defensive Plays

Interest rates are expected to stay lower for longer as

central banks reintroduce accommodative monetary

policy – a trend that will support real estate pricing.

Although yields for prime core assets remain low, well-

located high quality assets will be able to withstand short-

term market weakness. The lower interest rate

environment will ensure the yield spread remains

attractive. Prime core assets are set to remain ideal

defensive plays.

Cold Storage and Data Centres Enter the

Mainstream

Cold storage is seeing robust demand on the back of the

surge in online grocery and fresh food sales. A recent

report published by CBRE found that while there exist

several barriers to investment in the sector, build-to-suit

or forming partnerships with cold storage developers and

operators are viable entry routes for investors17

. Cold

storage-focused real estate funds may also emerge

in future.

Data centres – already the subject of strong investor

interest18

amid the growing importance of Big Data,

Industry 4.0, Internet of Things (IoT) and the mainstream

adoption of cloud-based services – are likely to take on a

more prominent role, should companies decide to allow

employees to work from home more regularly. This would

drive cloud storage demand and data usage, boosting

data centre fundamentals.

Older Logistics Facilities Offer Redevelopment

Opportunities

The increasing use of automation in logistics facilities will

make it more difficult for older properties to secure

tenants and accelerate their drift towards obsolescence.

This could lead to redevelopment opportunities for

older assets.

Retail is here to stay

While retail is set to experience severe short-term

headwinds, CBRE believes the sector remains an

attractive long-term investment opportunity. The ongoing

transformation of shopping centres into experience

centres will require strong operational expertise. This will

create more opportunities for investors possessing solid

retail experience as competition for retail asset will be

less intense.

Integration of Sustainability into Investment

Strategy

With more occupiers placing greater importance on

employee health and wellness, properties with LEED and

WELL certification will attract stronger demand. Investors

will increasingly focus on high quality properties with

these attributes or incorporate sustainability and wellness

criteria in their value-added strategy to ensure their

properties align with this long-term trend.

17Asia Pacific Cold Storage: An Investor’s Guide, CBRE Research, July 2019

18CBRE’s 2020 Investor Intentions Survey found that data centres were the most popular alternative sector. 30% of respondents stated they are actively

pursuing investment opportunities in this sector compared to19% in 2019.


INVESTMENT




16


Figure 6: Common Long-Term Impacts Across Different Sectors

Greater importance of

property management

Dispersion of locations for

work and production due to

risk diversification

Further growth of online

retail and last-mile logistics

Stronger demand for cold

storage amid online grocery

boom

Preference for buildings with

wellness and sustainability

features

Long-Term Impacts

High impactLow impact Medium impact

Office RetailIndustrial &

Logistics Investment






17


MARKET SHORT-TERM ECONOMIC IMPACTS

Mainland

China

• Growth will slow in H1 2020 but rebound in H2 2020. CBRE’s full-year GDP forecast has been

revised down from 6.1% to 5.6%.

• The People’s Bank of China (PBoC) injected RMB 1.2 trillion worth of liquidity into the market via

reverse repo operations on February 3 and lowered the 1-year Loan Prime Rate (LPR) by 10 bps

and 5-year LPR by 5 bps on February 20. The China Securities Regulatory Commission (CSRC)

issued a circular forbidding short selling in the A share stock market.

• Additional measures in the pipeline include tax reductions and exemptions for impacted

industries; further interest rate cuts; and specific policy support for Wuhan and Hubei.

Hong Kong

SAR

• GDP growth is expected to stay negative in H1 2020 due mainly to the residual impact from

2019 sociopolitical unrest and the coronavirus outbreak.

• Retail, food and beverage, trade and tourism are under the greatest pressure. Should the

outbreak be prolonged, the overall unemployment rate will climb noticeably in Q2 2020,

particularly in these industries.

• Some IPOs scheduled by Mainland Chinese firms in H1 2020 may be postponed to later in

the year.

Taiwan • The overall impact on the economy is expected to be short-lived.

• In addition to a possible decline in commodity exports, exports of services are expected to drop

due mainly to the slump in tourism.

• Taiwan’s Directorate General of Budget, Accounting and Statistics recently revised its GDP

forecast for 2020 down by 0.35 percentage points to 2.37% y-o-y.

Singapore • Although Singapore's manufacturing sector exhibited some early signs of recovery in Q4 2019,

this is likely to be curtailed, especially with mainland China being one of the country’s largest

global trade partner (13.4% of total trade). However, Singapore is well diversified with many

trade partners and therefore the impact will be cushioned.

• The Ministry of Trade & Industry has revised its 2020 GDP growth forecast to between -0.5%

to 1.5%.

Japan • The February consensus forecast for Q1 2020 GDP is 0.3% y-o-y (annualised basis), which is

21bps below January’s consensus.

• Some economists are forecasting negative growth for Q1 2020, which would mean two

consecutive quarters of negative growth following Q4 2019, which was down 6.3% q-o-q. The

decline in Q4 2019 was mainly due to recoil from front-loaded demand in Q3 2019 before the

consumption tax hike, as well as weather-related factors including typhoons and a warm winter.

• The decline in inbound demand from Chinese tourists has already resulted in a double-digit

sales decline in Japanese department stores during the Lunar New Year holiday. Pressure on the

retail sector is expected to increase as domestic consumption sentiment will further dampened by

the rising number of infected cases in addition to the most recent consumption tax hike in

October 2019.

• Delays to factory production in China have negatively affected Japanese manufacturers’

supply chains.

APPENDIX 1

ECONOMYSUMMARY OF SHORT-TERM IMPACTS ON KEY MARKETS




18


MARKET SHORT-TERM ECONOMIC IMPACTS

Korea • The economic impact of the coronavirus outbreak has been felt far quicker than that during MERS

five years ago.

• Korea's growth rate will drop due to sluggish exports overlapping with the shrinking domestic

demand caused by fewer tourists. The Bank of Korea (BoK) recently announced it would lower its

2020 GDP growth forecast by 20bps to 2.1% due to signs that COVID-19 is weighing on growth

in H1 2020.

• The electronics and semiconductor sectors have been hit hard as China is the largest importer of

Korean semiconductors.

India • The overall impact will be limited unless the outbreak lasts longer than anticipated. CBRE expects

the Indian economy to record growth of 5.6% in the present year and a notch higher next year.

• The major economic headwinds are the crisis in the shadow banking sector as well as a dip in

both consumption demand and private sector investment.

• A slowdown in China and a serious disruption to supply chain linkages could impact sectors such

as electronics, engineering goods, pharmaceuticals and chemicals. China is India’s largest

trading partner and an impact on imports could lift costs if traders look for alternate sources.

Australia • The outbreak is set to impact the Australian economy due to China being Australia’s biggest

export market as well as a key source of tourism arrivals.

• Chinese constitute 30% of overseas students in the country, which will be detrimental to the

income of universities and providers of student accommodation.

• Direct inbound flights from China have been banned until March 29 and restrictions exist on

international travelers who have recently visited China. Coupled with recent bushfires, the retail

and hospitality sector will experience a challenging year in 2020.

• The government has introduced a AUD 76 million recovery package to assist the tourism industry

New Zealand • After what was expected to be improving GDP growth in 2020, New Zealand’s economy will be

adversely impacted, mainly through the export and supply chain channels.

• At a sectoral level, while China only accounts for 11% of tourists, in certain accommodation and

F&B markets its influence is significant and the banning of flights from China is having a sizable

impact. The impact is also severe in the foreign education sector.

Vietnam • Exports may decrease by as much as 20% in Q1 2020, equivalent to a 44bps decrease in

quarterly GDP, according to The Ministry of Planning and Investment (MPI). The MPI says GDP

may decrease to 6.27% in 2020.

• Many local manufacturers have temporarily ceased production since January as spare parts and

raw materials for cellphones, computers, appliances, vehicles, apparel and footwear are heavily

dependent on imports from China.

• Vietnam is also overly-dependent on China as an export destination for major agricultural

products such as rice, fruit and rubber.

Thailand • With exports and tourism being Thailand’s top contributor to GDP, the outbreak will have a

significant impact on growth and sentiment.

• Chinese tourists accounted for almost a third of Thailand’s tourist arrivals in 2019. This heavy

reliance on one market has shown its downside as many resort destinations have seen a

significant drop in tourist numbers.

• GDP growth in 2020 has been revised down by many financial institutes to under 2% from the

previous forecast of 2.5%-3.5% earlier this year.

APPENDIX 1

ECONOMY (CONTINUED)

SUMMARY OF SHORT-TERM IMPACTS ON KEY MARKETS




19


APPENDIX 2

OFFICESUMMARY OF SHORT-TERM IMPACTS ON KEY MARKETS




MARKET IMPACT

LATEST 2020 GRADE A

RENTAL FORECAST

(AS OF FEBRUARY 2020)

CBRE VIEW

Mainland

China

Medium Beijing: -1.3%

Shanghai: -4.0%

Guangzhou: 0%

Shenzhen: -4.5%

• The outbreak has significantly curtailed business

operations. Leasing activity is expected to slow in Q1

2020, with many occupiers – especially those in

severely impacted industries such as catering, retail

and transportation – likely to delay decisions involving

large scale CapEx.

• The degree of impact on individual cities will vary

based on the severity of infections.

• Provided the virus can be largely contained within

Hubei province, its impact on the national office

leasing market – except for Wuhan – will be short-

lived. Leasing activity is likely to recover as early as late

Q2 2020, supported by the accelerated opening up of

the financial sector to foreign participation.

Hong Kong

SAR

Medium -10.0% • New demand from Mainland Chinese firms will

contract further until the outbreak is curtailed. Vacancy,

which is as low as 3.4% in the Central submarket,

coupled with underlying shadow space will take longer

to backfill. However, limited new supply in 2020 will

provide some comfort to landlords.

• The rental decline will likely accelerate in H1 2020,

resulting in a frontloaded full-year decline of at least

10%. Decentralised areas will be more resilient.

Taiwan Low 2.3% • CBRE retains its forecast for rental growth and net

absorption this year on the back of stable leasing

demand for quality offices. In addition, the absence of

new supply will ensure vacancy remains at historical

lows during 2020.

• Selected multinationals may delay leasing decisions in

the short term.

Singapore Low 0% • There were significant declines in Grade A (Core CBD)

rents during the SARS and H1N1 outbreaks. These

however can be attributed to poor financial timing as

they occurred after the dotcom bubble (SARS) and

GFC (H1N1).

• The market is expected to remain resilient, with the

outbreak having only a limited impact. Low vacancy

will keep office rents stable in 2020.

• The impact is likely to kick in after the effects of the

outbreak weigh on the output levels of the

manufacturing and services sectors, which could

possibly impact short-term growth.

20


APPENDIX 2

OFFICE (CONTINUED)





MARKET IMPACT

LATEST 2020 GRADE A

RENTAL FORECAST


CBRE VIEW

Japan Low Tokyo: -0.1% • The impact will be limited as major office markets

remain upbeat. There continues to be strong

demand among tenants to move to larger and new

premises or improve their office environment.

Korea Low Seoul CBD: 0.6% • Deals in progress are proceeding as planned at the

moment.

• Office leasing demand is expected to weaken as the

situation escalates. The suspension of site visits will

lengthen the decision process. Some occupiers

previously considering relocation will likely consider

postponing their plans or extending their leases in

their existing building.

• Cost is now a top priority and more occupiers are

considering cheaper buildings first.

India Low Gurgaon (Core): 1.0%

Mumbai BKC: 1.7%

Bangalore ORR: 4.5%

• Office leasing demand has been unaffected. Robust

leasing continues to be supported by an

improvement in domestic economic sentiment and

sustained appetite among U.S. and other EU based

corporates for outsourcing their business operations

to India.

Australia Low Sydney: 1.7%

Melbourne: 2.3%

• Any impact on the office sector will be minimal.

While some decisions might be put on the

backburner, tenants won’t think too much about the

impacts of a virus - which should be temporary -

when making an occupancy decision that will last for

5-10 years.

New

Zealand

Low Auckland: -0.3% • A direct impact on demand could occur in the

education sector which is a significant player in the

market for Secondary CBD office space.

• Anecdotal reports are emerging of supply chain

impacts on the office market resulting from delays in

the production and shipping of goods from China

for fit-outs.

Vietnam Low Hanoi: 1.0%

HCMC: 1.4%

• There will be a limited impact as leasing demand

from Chinese occupiers is still very modest.

• A spillover effect may emerge as office occupiers

adopt a cautious approach towards expansion,

relocation and expenses should their business be

affected by the outbreak.

Thailand Low Bangkok: 3% • The impact from the outbreak will be minimal.

Demand is more dependent on the Thai economy,

which has caused many tenants to delay expansions

or relocations.

21


APPENDIX 3

RETAIL SUMMARY OF SHORT-TERM IMPACTS ON KEY MARKETS




MARKET IMPACT

LATEST 2020 RETAIL

RENTAL FORECAST


CBRE VIEW

Mainland

China

High Beijing: 0.1%

Shanghai: 0%

Guangzhou: 0.2%

Shenzhen: -0.2%

• Large-scale closures of shops and shopping malls

will pull down retail sales growth to around 6.0%.

• Around 20% of new projects due for completion

this year have been delayed, with further

postponements possible.

Hong Kong

SAR

High -20.0% • Street shop vacancy is set to climb further but

shopping mall occupancy will be less affected.

• The rental decline will likely be frontloaded to H1

2020 and will be less apparent in the second half

of the year due to the lower base of comparison.

While shopping mall performance should be

relatively resilient, CBRE has revised down its

2020 core submarket street shop rental forecast

to a 20% decline.

Taiwan Medium 0% • Restaurants are expected to be hard hit in the short

term as more consumers avoid public places and

dining out.

• Several shopping malls reported a drop of 30%+ in

footfall in the second week of February. However,

selected retailers with omnichannel capabilities, such

as beauty brands and grocery retailers, have

reportedly posted double-digit y-o-y growth in sales

revenue since the outbreak.

Singapore High -2.0% • Prime retail rental forecasts have been downgraded

to -2.0% from the previous -1.0% in 2020. The

tourism-reliant Fringe and Orchard submarkets are

likely to be the most affected, while the performance

of the suburban market is expected to remain

resilient supported by solid domestic spending.

• The Budget included measures to alleviate the strain

on retail and F&B by providing a 15% rebate on

property tax.

• Retailers that trade goods made in China could

come under pressure as their inventories will steadily

diminish due to supply chain disruption.

Japan Medium Tokyo(Ginza): -0.4% • While CBRE has been forecasting a moderate

drop in Tokyo high-street rents for 2020, the risk is

to further downside given the likely drop in

inbound tourists and exacerbated weakness in

domestic consumption.

22


APPENDIX 3

RETAIL (CONTINUED)





MARKET IMPACT

LATEST 2020 RETAIL

RENTAL FORECAST


CBRE VIEW

Korea Medium Seoul: N/A • Retail has suffered the strongest impact. Sales will be

hit in the short-term and a few openings have been

delayed or even cancelled, including Louis Vuitton’s

new pop-up store.

• Major large retailers are likely to suffer in Q1 2020,

with many hypermarts temporarily closed after visits

by COVID-19 sufferers.

• One landlord recently agreed to a short-term rental

reduction and relief scheme for a tenant upon

request. Further cases are likely to be witnessed in

the coming weeks.

India Low N/A • There has been no material impact thus far. Both

physical retail and online retail continue to witness

growth in key retail markets as more global retail

brands enter and expand.


Melbourne: 0.4%

• The outbreak will adversely impact revenue in the

hotel and retail sectors, diminishing returns in 2020.

• Luxury brands and F&B will be significantly impacted,

especially up-scale Asian. Some of these tenants

will likely ask for rental abatements (reduced rents

over a certain period) which will reduce landlords’

bottom lines.

New

Zealand

Low Auckland: -2.1% • The outbreak will affect the hotel and retail industries

and weigh on performance this year. Luxury retail

and F&B will be hardest hit.

Vietnam Medium Hanoi: -1 to -2%

HCMC: -1 to -2%

• Sales will be hit in the short term, with F&B and

entertainment most vulnerable.

• Retailers are generally in wait-and-see mode, which

has led to a significant fall in site visit and enquiries.

This will increase challenges around pre-leasing

for new malls.

• Some retailers are asking landlords to cut rents by

up to 50% or even waive rents for the duration of

the outbreak.

Thailand Medium Bangkok: 0 -1% • While overall rents might not drop, the rental model

could change to a gross profit format especially

in an environment where shopping mall footfall

is declining.

• Same-store-sales among major retailers in Bangkok

were falling even before the outbreak due to the

growth of food delivery services and worsening

pollution.

• The Consumer Confidence Index in January 2020

fell to its lowest point in 70 months but this was

largely due to the economic slowdown.

23


APPENDIX 4

INDUSTRIAL & LOGISTICS SUMMARY OF SHORT-TERM IMPACTS ON KEY MARKETS




MARKET IMPACT

LATEST 2020

LOGISTICS

RENTAL FORECAST


CBRE VIEW

Mainland

China

High Beijing: 3.5%

Shanghai: 3.0%

Guangzhou: 3.0%

Shenzhen: 3.0%

• Given Wuhan’s status as a national strategic

transportation and manufacturing hub, there may be

disruption to supply chains – a situation that could

worsen if the virus is not prevented from spreading to

other major urban hubs.

• The impact on logistics leasing demand in logistics

sector has been relatively limited.

Hong Kong

SAR

Low -5.0% • Third-Party Logistics (3PL) firms that focus on general

trade and retailers are suffering the most. Some

retailers may have downsizing requirements.

• New and expansionary demand is expected to be

limited. On a more positive note, medical product

suppliers and e-commerce portals may require

temporary space should the outbreak last for an

extended period.

• Despite the uncertainty, low vacancy and limited new

supply will prevent rents from freefalling. A low single

digit decline is expected to result from more

surrender cases and downsizing requirements.

Taiwan Medium N/A • Disruption to supply chains will affect mainland

China-based Taiwanese manufacturers with

integrated supply chains across the region. This

may also prompt some Taiwanese manufacturers

to accelerate reshoring to Taiwan and/or

other countries.

• Demand for logistics facilities will likely increase as

e-commerce prospers.

Singapore Medium 0.0% • Exports, especially electronics, are experiencing

downward pressure. However, the pharmaceuticals

sector could benefit and support GDP.

• Weaker Chinese demand for imports and some

factory shutdowns will be detrimental to Singapore

given its position in the regional supply chain as an

exporter of intermediate goods to China.

• Factory rents are likely to see a further erosion within

a range of 3.0% to 4.5% y-o-y while warehouse

rents are expected to remain flat due to the limited

supply pipeline.

24


APPENDIX 4

INDUSTRIAL & LOGISTICS (CONTINUED)





MARKET IMPACT

LATEST 2020

LOGISTICS

RENTAL FORECAST


CBRE VIEW

Japan Medium Greater Tokyo: 0.7% • The main impact is the disruption to the supply chain.

• There is likely to be greater online consumption, and

higher interest for logistics, where there may be further

cap rate compression.

Korea Medium Greater Seoul: 0% • Korea has been impacted by supply chain disruption.

However, online commerce has benefitted, which

could drive additional demand for logistics and

warehousing facilities.

• A major fresh food delivery companies’ sales have

doubled y-o-y.

India Low N/A • The outbreak is unlikely to have a major impact, with

the logistics sector witnessing robust growth due to

supply side incentives and promotion from the

government and demand from local and global 3PLs,

e-commerce firms.

• Manufacturing could be affected, as China is India’s

largest trading partner. A serious disruption of supply

chain linkages might force traders to look for alternate

markets for sourcing both raw materials as well as

finished products which will impact costs.


Melbourne: 2.0%

• Any impact will be at the margins and is unlikely to

impact occupier decisions.

New

Zealand

Low Auckland: 2.6% • There is some impact emerging mainly in the food

manufacturing sector and in the supply chain around it.

• With exports to China being negatively impacted by

the outbreak there is increasing demand for cold

storage, with New Zealand’s cold storage network

reportedly at capacity. Flow on impacts around

production cut backs are starting to appear.

Vietnam High N/A • Supply chain disruption is happening as imported

manufacturing inputs from China account for 35% of

total imported manufacturing inputs in Vietnam.

• The outbreak has further contributed to weakening

interest in local industrial sector from occupiers in

Greater China. Enquiries had already dropped

significantly after the U.S. and China signed the

Phase-One trade agreement and Vietnam tightened

regulations to prevent tax evasion.

Thailand Low 0% • Supply chains for many manufacturing plants has been

impacted as raw materials needed for the production

are from China.

25


APPENDIX 5

INVESTMENTSUMMARY OF SHORT-TERM IMPACTS ON KEY MARKETS




MARKET IMPACT CBRE VIEW

Mainland

China

High • Real estate investment is expected to slow significantly in the short term as business

activity declines and non-essential meetings and travel are cancelled.

• Highly-leveraged developers and landlords could come under significant pressure.

Real estate debt will remain an attractive investment option.

• Investors will strengthen their focus on gateway cities and assets providing steady

income streams.

Hong Kong

SAR

High • Transaction volume will likely see a noticeable drop in Q1 2020. Should the

outbreak last in Q2, investment demand will remain limited for another few months.

• Investment demand will weaken temporarily but the limited future supply across most

property sectors remains unchanged.

• Property prices are not expected to experience a sharp decline on the back of lower

financial costs but yield will need to move out to offset climbing economic risks.

Taiwan Low • Reshoring by Taiwanese manufacturers will create investment demand for industrial

properties and industrial sites.

• Domestic investors are showing new interest in logistics facilities in view of robust e-

commerce growth.

Singapore Medium • Investment is expected to moderate due to the outbreak and the limited stock for sale.

• Singaporean investors will remain active in overseas markets.

Japan Low • There may be an increase in enquiries from cross-border investors given the reduced

business activity in China and Hong Kong.

• An increase in the number of COVID-19 cases is unlikely to impact domestic

investors’ appetite, nor would it negatively affect their mid-to long term appetite for

overseas investment.

Korea Low • The outbreak has yet to affect inbound and outbound investment flows. Investors

continue to seek assets and negotiate deals. In some cases, the transaction process

may be lengthened due to travel restrictions in some countries.

• Hypermarkets and entertainment-related retail properties may suffer from a short-term

reduction in rental income, leading to a decrease in investment sentiment. The

disposal of hypermarkets by public REITs may be impacted.

India Low • Demand remains stable and foreign investors continue to search for opportunities.

Several Asian investors and developers have been seeking commercial and residential

development opportunities for the past couple of years.

Australia Medium • There may be an impact on real estate transactions until COVID-19 is contained,

with some investors preferring to defer sales until travel restrictions are lifted and

confidence returns to normal.

New Zealand Medium • The lower propensity for travel by Asian investor appears to be an emerging

constraint in marketing to this investor group. Property sectors where this investor

typology is a major source of demand may see some impact as a result.

Vietnam Medium • There have been fewer enquiries from cross-border investors in the first two months of

2020, especially those from China, Japan and Korea, due to travel restrictions.

Thailand Low • The impact will be minimal because Thailand is mostly driven by domestic capital.

However, travel restrictions could cause some delays to activity by overseas investors.

ABOUT THIS REPORT

Henry Chin, Ph.D.

Head of Research,

APAC/EMEA

[email protected]

Ada Choi, CFA

Head of Occupier Research,

Asia Pacific

Head of Research,

Greater China

[email protected]

Jonathan Hills

Senior Director,

Asia Pacific

[email protected]

Richard Barkham, Ph.D., MRICS

Global Chief Economist &

Head of Americas Research

[email protected]

Neil Blake, Ph.D.

Global Head of Forecasting and Analytics

EMEA Chief Economist

[email protected]

Henry Chin, Ph.D.

Head of Research, APAC/EMEA

[email protected]

Spencer Levy

Chairman Americas Research & Senior

Economic Advisor

[email protected]

CBRE RESEARCH

This report was prepared by the CBRE Asia Pacific Research Team, which forms part of CBRE Research – a network of preeminent researchers who collaborate to provide

real estate market research and econometric forecasting to real estate investors and occupiers around the globe.

All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections,

has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no

guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information

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solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content,

nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorized

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© 2020 CBRE, Inc.

GLOBAL RESEARCH LEADERSHIP

Cynthia Chan

Office Specialist,

Asia Pacific

[email protected]

Liz Hung

Retail & Logistics Specialist,

Asia Pacific

[email protected]

Leo Chung, CFA

Capital Markets Specialist,

Asia Pacific

[email protected]

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