The gloom around the commercial property sector in Asia-Pacific is being tempered by expectations that the downturn, caused by the coronavirus, will be relatively short lived, according to a report released last week by Cushman and Wakefield.
“In general, the Covid-19 outbreak is being viewed as a severe but temporary challenge, and vendors will be reluctant to dispose of properties now unless absolutely necessary. We expect that Asia-Pacific transaction volumes will decrease sharply for the initial part of 2020 as property owners hunker down and weather the storm,” said James Shepherd, regional head of research at the property services company.
In Hong Kong, transaction volumes have fallen but price discounts are unlikely in the near term.
“We have seen little evidence in recent weeks of significant price discounting … the expectation is that Covid-19 will follow a similar trajectory as Sars in 2003 with the impact limited to the first half of 2020,” said Reed Hatcher, the company’s head of research for Hong Kong.
Average rents in Causeway Bay, one of Hong Kong’s major shopping districts, fell 14.9 per cent in the second half of 2019, prior to the Covid-19 outbreak as months of violent street protests took a toll.
Citing luxury import tax cuts in China, last year’s social unrest and bans on parallel trading, Tommy Wu, lead economist for Hong Kong at Oxford Economics, said retailing in Hong Kong may have suffered a permanent blow.
“Even without Covid 19, we would still see a break from the past,” Wu said. “Retail (in Hong Kong) is undergoing a structural shift, from a focus on well-heeled mainland Chinese tourists, to maybe something more niche.”
Oxford Economics has cut its 2020 GDP forecasts across the Asia-Pacific. It slashed its estimate for Hong Kong the most, from just over minus 1 per cent to close to minus 3 per cent. China’s expected GDP growth rate has been cut by between 0.4 and 1 per cent.
Tourism in Asia-Pacific is suffering the worst impact. In 2018, there were 150 million outbound Chinese tourists, who accounted for 40 to 50 per cent of inbound arrivals in South Korea, Japan, Vietnam and Thailand. IHS Markit estimated that spending by China’s tourists totalled US$277.3 billion in that year.
The number of Chinese tourists to destinations in Southeast Asia will drop by 30 to 40 per cent and cause revenue losses of US$7 billion, according to an estimate by Economist Intelligence Unit.
In China, renters of prime office real estate may enjoy near-term discounts, with supply way outstripping demand. Cushman and Wakefield reported that total premium, or grade-A, office supply in 2019 was about five million square metres, with total demand at just 2.6 million square metres. Prime office vacancy has risen and more supply is expected, placing further pressure on landlords.
“Countries with the strongest trade links or where supply chains and sourcing activities are most weighted to China will face the greatest short-term challenges, assuming the [coronavirus] outbreak de-escalates from this point onwards,” said Shepherd. “The logistics sector had already been attracting significant interest from the real estate investment community, and the impact of the Covid-19 outbreak will reinforce the investment case for logistics property across Asia-Pacific.”
In India, despite a cut to forecast GDP growth in 2020 of 0.5 per cent, there is optimism for the commercial real estate sector.
“Private equity investment in office and logistics was also quite robust, and we expect a strong performance from both segments in 2020,” said Rohan Sharma, Cushman and Wakefield director for research India.
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