Coronavirus Considerations: Five Themes for Investors
The outbreak of the coronavirus and its rapid spread has been concerning. As people, parents, and members of various communities, the emergence of this unpredictable situation has forced many of us to realign our priorities in the first two months of 2020 and re-examine how we will face the remainder of the year.
The situation remains fluid and continues to change every day. And the response of health authorities, governments, and financial institutions are united globally in their goal of protecting and treating their populations, containing the spread of coronavirus, and ensuring the stability and health of businesses.
While we as individuals and businesses remain focused on the health and well-being of our families, friends and environments, there are clear implications for us as a real estate community.
For our clients to better address the situation, we have compiled an initial assessment of the impact on real estate strategies. Specifically, there are five considerations investors should be monitoring as this situation continues to unfold.
Macro Moderation: There will be an economic contraction; no one can refute this reality. The big question is how significant the impact will be on epicenter economies such as China and how deep will the knock-on effect on both regional and global markets run. Projections vary across the market, and assessments at this stage would likely become quickly outdated. However, consumption receives the broadest hit due to the radius of the outbreak and various containment and mobility measures implemented. We expect investment and exports to feel some short-term pain too. The second order impact on businesses and the economy are not apparent yet and may show up in late 2020 or even 2021. Given that China’s economy has grown almost ten-fold in two decades and fully integrated into the global economy, there will be some spill over on tourism and supply chains.
Embrace Structural Maturity: On all measures, Asia Pacific investment volumes in 1H 2020 will moderate year-on-year as investors re-examine investment strategies, while the coronavirus situation receives greater clarity. However, using SARS as a benchmark, we expect investment volumes to bounce back as risks recede in 2H20. We think capital values are likely to hold up, and yields could compress if rents and occupancies are affected in the short term amid low-interest rates. Vendors with holding power will remain firm clinging onto the temporary nature of the outbreak.
Stay Selective: Unexpected changes to markets prompt investors to re-examine capital deployments, be they in equities, fixed income, or real estate. Understandably, during this period, investors will naturally remain selective. However, we expect pent up demand for China investment to be released into the market as more clarity around containment comes. Before this scenario, investors in China had already been picking assets more carefully, demanding lower entry prices on purchases, and taking longer to decide. Irrespective of time frames, we anticipate investors will play the long-game on China, viewing the fundamentals as favourable, especially in the Tier 1 cities.
Performance Divergence: Look for divergence plays to become a short-term theme. Moderating operating performance in retail and hospitality assets could potentially provide office and logistics assets with a temporary push as investors deploy funds into asset classes less vulnerable to the coronavirus disruption. The divergence in performance may also direct investors into markets including Australia and Japan due to uncertainty in Greater China in the short-term.
Mainstreaming Alternative Considerations: An era of heightened scrutiny on asset specification will become a new normal for investors. We believe that investors will place a higher premium on assets that are built to an assuring standard with first-class ventilation and filtering system in place. As occupiers will increasingly seek such provisions to provide a safe and healthy workplace for employees, investors will need to widen their allocation strategies to take these considerations into account. A further knock-on effect could potentially come in the form of the more rapid adoption of proptech. Regionally, landlords, governments, and occupiers may look to support the development and adoption of a range of products/solutions, which could enhance workplace safety. Wide-scale adoption will undoubtedly be contingent on broad investor support.
The preceding five observations are representative of the current environment, but indicative of the expanding depth of the Asia Pacific real estate market and the role played by investors in its maturity. We also recognize the genuine human impact that the coronavirus outbreak is currently having on those directly or indirectly affected, which will remain the primary focus of all participants. Read our report for more here https://co.jll/JbY650yl7jP