How will Covid-19 impact Asian real estate?

Singapore

COVID-19 will likely impact the property market. Some of it might be cyclical and therefore temporary, while others might be structural and permanent, such as the accelerated shift to online retailing. This in turn lowers the demand for retail properties but would encourage retailers to increase capex on their logistics, delivery and storage capabilities.

What is interesting is that these structural changes are inter-related. A widespread adoption of working from home (WFH) could result in a preference for bigger apartments in the suburban/outlying areas and lower the demand for smaller apartments in the city centre and office property.

The office workspace will likely be impacted as new social distancing requirements in the office could potentially reverse the decades-long trend of densification, where offices absorb less space per employee.

Although it is possible for the working environment to return to status quo before the pandemic, we believe there are a few clear trends emerging in the office property sector.

First, more corporates will likely implement WFH arrangements for employees. Flexible WFH arrangements have benefits for employees, firms and even the environment due to lower levels of commuting and many workers have reported a preference for this flexibility.

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However, the office remains a place for collaboration, socialisation and training. The future office ecosystem will likely be a mix of office and home and as cities recover and more employees return to the office. Work spaces will likely be re-configured in view of social distancing regulations.

Although social distancing will require greater space per employee, companies are likely to offset this by implementing some degree of WFH on a permanent basis, rotating employees and not by taking up more space.

Next, there is also a trend towards decentralisation - the move away from prime business districts - due to the proliferation of cloud computing support and workforce separation.

This could potentially narrow the gap in rents between prime and decentralised office space.

In the retail sector, mainland China stands out in this region. Over the medium to long term, we anticipate a continued shift of mainland Chinese spending from overseas to the domestic market due to travel restrictions, as seen by the strong pickup of discretionary consumption during the October Golden Week holiday.

The government's reforms on duty-free tariffs will likely encourage local spending in mainland China, as the price difference of imported luxury items has dropped substantially over the past two to three years.

The retail sector in Singapore and Hong Kong has been impacted as both cities are heavily reliant on tourism. A continued shift towards e-commerce, lower discretionary spending and store closures have hurt the sector's near-term prospects. Suburban malls may prove to be more resilient than malls in prime areas in the near term due to the former's closer proximity to homes and the much lower reliance on the tourist dollar.

One bright spot might be industrial properties. Industrial properties are poised to benefit from higher e-commerce penetration and supply chain shifts, particularly data centres, warehouses and logistics assets. Many markets saw at least a 20-30 per cent increase in mobile app usage during the outbreak, with notable rises in digital entertainment (like video streaming), online gaming and online shopping.

Ongoing digital transformations such as 5G connections, which are expected to generate 2.6 times more traffic than average 4G connections, are also key demand drivers for data usage. In the decade ahead, the global data universe is likely to be more than 10 times as large as it is now.

Existing data centres will need to be expanded and new ones built to cope with the growing demand.

We expect the global cloud infrastructure market to grow at about 25 per cent CAGR from 2019 to 2023, with Asia delivering notably higher growth - at about 30 per cent - given that Asia is still at an early stage of cloud services and data centre development with relatively low enterprise IT spending and cloud adoption rate.

Favourable government policies, particularly in major economies such as mainland China, for intelligent infrastructure should help sustain rapid data centre growth over the coming years.

Existing data centres will need to be expanded and new ones built to cope with increasing demand. Favourable government policies for intelligent infrastructure should help sustain rapid data centre growth over the coming years.

In mainland China, demand for data centres is currently concentrated in first-tier cities, where the scarcity of land and electricity resources poses high barriers to entry.

Although the sizeable fiscal stimulus response and record low interest rates in Asia-Pacific will provide some relief to private residential property owners, fundamentals might be impacted after the expiry of government support measures such as loan deferrals and wage subsidies.

In Singapore, low mortgage rates are currently anchoring residential property prices, but home prices in Singapore might soften over the next 12 months when government fiscal measures such as the Jobs Support Scheme and loan deferrals start to taper off.

Hong Kong's private residential market remains well supported by limited near-term supply, declining mortgage rates, and robust end-user demand. Many recent launches have been well received by eager buyers, with over two times over-subscription. As the local economy gradually recovers, we expect Hong Kong home prices to rise by up to 5 per cent from now until June 2021.

In mainland China, government policies have effectively capped property prices to mid-single-digit rises a year, in particular the adoption of various policies to control the pricing of new primary launches.

The government will likely continue to impose price controls to curb speculative activities at least over the medium term to prevent a housing bubble caused by the substantial liquidity injected to shore up the economy.

Specific regions in mainland China, however, may enjoy higher growth driven purely by local household income growth.

Covid-19 will likely impact society, businesses and the global economic order in many ways.

Structural changes are likely to follow and in the property sector, functionality and usage flexibility will likely be some of the key drivers in the world post-Covid-19.