Article

How will the real estate sector change and respond to the COVID-19 outbreak?

March 03, 2020

The COVID-19 outbreak has been dominating headlines for weeks now.  While we, as individuals and businesses, remained focused on the health and well-being of our families, friends and environment, there are clear near-to-medium term implications for the real estate community that this outbreak brings to the forefront.

Assessing the near-term economic impact: Given the experience of the SARS epidemic in 2003, it is natural to draw lessons from that event and infer from these lessons for what may lie ahead when the dust settles.

A key observation about SARS and its aftermath is the short-lived but considerable economic impact it levied on mainland China and Hong Kong. Invariably, economic activities took a hard hit in the second quarter of 2003. Yet, the Chinese and Hong Kong economies promptly embarked on the pre-SARS growth trajectory in the third quarter as soon as the outbreak was contained. This highlights the potential of a sharp economic recovery as soon as the current outbreak is contained in the not-too-long future, notwithstanding the much more heavy-handed outbreak control measures.

Increased headwinds on commercial real estate: For commercial real estate, economic and political uncertainty have been presenting headwinds. Office rents began to fall and are forecasted to persist in some key markets pre the outbreak. This current event is likely to add to risks, at least in the short term, as businesses delay real estate decisions and enhance emphasis on managing costs and business continuity plans. Looking back at 2003, Hong Kong office rents surged considerably from historic lows after SARS, alongside with an economic recovery. A repeat is unlikely in our view as office rents just started to come off historic highs after a prolonged upcycle.

Similarly, in mainland China, uncertainty will cause occupiers to be more cautious and adopt more conservative leasing strategies. However, once the outbreak is fully contained, office demand is expected to rebound.

Among the property segments, retail is perhaps the most immediately and visibly impacted.  With high social tensions being an unfavourable backdrop in Hong Kong, coupling with the unfortunate timing of this outbreak during the Chinese New Year, it is another heavy blow to the frail retail sector. Even though the outbreak may be temporary, it may prompt closures of weaker trades or outlets. In turn, more owners are likely to be forced to compete for tenants more aggressively, exacerbating the rental down trend.

Increased tech application in real estate: Beyond the above immediate impact, the outbreak will likely bring forth the application of technology in real estate. More scrutiny on asset specification and quality stand out as a key takeaway. The infectious nature of the outbreak is a reminder of the importance of high standards of personal and community hygiene. This has to be extended to the provision of real estate too. For example, it is imperative that buildings are built to an assuring standard with good ventilation and filtering system in place. Occupiers will increasingly seek such provisions with a view to providing a safe and healthy workplace for employees. Greater focus on business continuity planning (work-from home in particular) will gain traction. This may prompt:

(1) more businesses to engage tech support, hence related service providers are in demand;

(2) increased demand for data storage and data centre providers.

The quicker adoption of proptech is also a possible implication. Landlords, governments and occupiers may look to support the development and adoption of a range of products/ solutions, which could enhance workplace safety, such as:

Robotics: Demand may rise for robotics applications that can detect, sanitize, clean, and conduct deliveries in public spaces such as office buildings, shopping malls and medical facilities.

Internet of Things (IoT): Building managers can implement IoT strategies to enhance sanitation and health-related monitoring procedures in public spaces, such as the use of sensors to perform infrared scans, pinpoint crisis locations and send alerts.

Big data: Demand for enhanced analytics to track and monitor high risk public incidents may rise. The outbreak may push governments to prioritize accurate information collection in densely populated areas such as high-rise buildings, major transportation nodes and shopping malls.

Unmanned vehicles/aerial vehicles (UVs/UAVs): These tools could be a long-term solution for logistics and supply chains dealing with physical quarantines and/or labor shortages.

Healthcare: There will be a renewed focus on the need for higher quality facilities and services across the region, especially in mainland China. Healthcare spending in mainland China alone has soared from less than CNY 500 billion in 2000 to over CNY 5 trillion in 2017. This momentum is likely to maintain as the government commits to improve access and as the society becomes more vigilant about disease prevention and healthcare awareness.

This article was originally published on the South China Morning Post on 3rd March, 2020.

Gavin Morgan
Chief Operating Officer, Greater China