Coronavirus: future lessons from APAC investors’ perspective

The world learned the hard way in 2019, as the US-China trade flare-up resulted in collateral damage for manufacturers with substantial production linkages within China, says Toh Shaowei, head of real estate research and strategy, Asia Pacific. He explains:

“With severe disruptions in the availability of intermediate production components and not helped by the long (uncertain) period of factory closures, many producers will see this episode as the validation that is needed to diversify their exposure to China. Are we implying that investors steer clear of the industrial property sector in China? That is not totally the case, but this virus pandemic does highlight the certainty that low-end manufacturing will start to exit China. And in place, real estate investors should be looking at logistics that cater to the e-commerce story, and high-end manufacturing and production facilities that continue to be a long-term ambition of China’s “Made in China 2025” plan.”

The second learning point is related to the previous one. The trade war in 2019 had investors really excited about the prospects of the industrial real estate markets in Southeast Asia (SEA), particularly Vietnam, Indonesia and Malaysia.

Toh Shaowei added:

“We do not think that this has changed with the COVID-19 issue, but we do want to caveat that manufacturing in SEA is highly dependent on China. The complexity of China’s embeddedness in the regional supply chains should not be underestimated. This virus outbreak has already exposed the weakness of many emerging SEA markets struggling with the potential value chain disruptions. Even if the industrial sector in SEA benefits significantly from spillover effects, intermediate production goods in many instances still rely heavily on China’s exports. In the near term, there will not be a total hollowing out from China, as the displacement will take years to be effective for many players looking at SEA’s industrial sector.”

The notion of mobility and flexible working is being truly tested during this COVID-19 crisis. As countries seek to limit human-to-human contagion, many companies have activated business contingency plans and home-based working is becoming a daily routine for many workers. In other instances, employees are dispatched to alternative work locations where they can perform the same functions with the aid of technology.

Toh Shaowei added:

“Before this epidemic, working from home or mobile working was arguably more a concept that was “good to have” but never really implemented in a big way, at least in most of APAC. When this COVID-19 outbreak is behind us, we believe many office tenants will review their fixed real estate space requirements, especially if this involuntary experiment with mobile working has resulted in comparable levels of efficiency. It does not mean that companies will cut down on their office footprint drastically, but it is likely that there might be a stronger inclination towards shared workspaces, which frees up the long-term lease commitments of many office tenants.

“Corporate demand for co-working or flexible working spaces should get a boost, as it becomes increasingly clear that technology can enable the optimization of office occupancy costs without sacrificing productivity. This is not all good news for office landlords, but it does suggest that adopting active leasing strategies to capitalize on the workspace of the future may bear fruit for pre-emptive office space owners.

“There has already been a general reluctance and aversion towards investing in to sectors and markets that rely heavily on tourism and human flow. The GFC and SARS outbreak exposed many hotel and retail investments to huge fluctuations in capital values and income, as the tourist tap seemingly turned off overnight. We can list Japan hospitality as a prime example, where even the recent allure of the tourism story in Japan could not motivate most conservative investors.

“Indeed, some sectors are susceptible to even the mildest of disruption in the movement of people across borders, and that could be caused by geopolitical factors, not necessarily a virus outbreak. We expect that investment return requirements in the hotel and selective prime retail segments may be adjusted upwards. However, from a bottom-up perspective, we remain positive on assets that embody strong locational attributes and are more resilient.”

james.wallace@realassemedia.com