The rapid spread of the virus – which had led to more than 70,000 cases and 1,800 deaths, as of press time – has spawned worldwide travel restrictions in and out of the country. Hong Kong-headquartered airline operator Cathay Pacific Group cancelled more than half its flights amid the outbreak, while at least 14 countries, including Australia, the US, Vietnam and South Korea, have imposed restrictions on travelers to or from China.
“The coronavirus epidemic only became a nationwide crisis in the weeks leading up to Chinese New Year and does not, despite the government’s best efforts, seem to be under control yet,” says James Macdonald, head of Savills research, China. “The potential impact this will have on the economy and property market therefore is hard to quantify.”
According to a CBRE report published in February, the outbreak is expected to peak sometime between mid-February and mid-year.
The outbreak has already had a negative short-term impact on the Chinese real estate market, with the country’s retail sector initially hit hardest due to the travel restrictions and temporary store closures. Although retailers with “omni-channel capabilities will be more resilient” in this situation, brick-and-mortar malls and stores are expected to suffer, the CBRE report stated.
The performance in the hotel sector has also been “significantly worsened by the outbreak of novel coronavirus,” according to a report by data provider STR. The report notes hotel occupancy in mainland China declined 75 percent between January 14 and 26. Hotel room rates also slumped to as low as HK$70 ($9; €8.26) in Hong Kong, normally one of the most expensive cities in the world, as reported by the South China Morning Post.
Apart from retail and hotels, the office sector in China is also seeing negative impacts due to the outbreak. This is especially the case for occupiers from the food and beverage, retail and transportation industries, according to the CBRE report. The report says that leasing activities will be slow in the first quarter, but the slowdown is anticipated to be “short-lived” and the market is “likely to recover as early as late Q2.”
Landlords offer tenant relief
Although the brunt of the coronavirus impact has been felt in China, other Asian markets have been hit by the epidemic’s ripple effects.
Real estate sectors relying on tourism, again starting with retail and hotels, are going to face challenges as travel restrictions are imposed on Chinese tourists, the largest group of foreign tourists in Hong Kong, Malaysia, the Philippines, Singapore and Thailand, according to a report by JLL. The decline in Chinese tourists has already impacted hotels in Singapore and could also hurt prime retail in Japan, the Singapore Tourism Board and the report noted.
Overall, Asia-Pacific investment volumes in the first half of 2020 are expected to drop significantly as investors re-assess investment pipelines, but are expected to normalize in the second half after the outbreak has been contained, according to the report.
Although investors are still taking a “wait-and-see” attitude when it comes to making new investments, landlords and asset managers are taking proactive measures with existing holdings affected by the epidemic. Many major retail landlords in the country have offered rental cuts to ease the pressure on tenants, according to the CBRE report.
“The virus has taken us by surprise,” says David Kim, chief executive of the private funds group at Singapore-based ARA, which owns assets across Asia. “We’re trying to stay ahead of the curve and tell our investors we’re doing everything we can.” The firm is also offering a rent-free period to retail tenants in order to offset lower footfall, which has dropped by 70-80 percent alongside other malls in the country.
Meanwhile, Singaporean developer and fund manager CapitaLand has closed all four of its malls in Wuhan and both of its malls in Xi’an as required by the local governments. At its hotel properties, the firm is waiving cancellation fees and offering other assistance to guests impacted by coronavirus-related travel restrictions.
Both CapitaLand and ARA are also projecting increased capital expenditures in some of their properties. These have arisen from the need to conduct temperature checks, intensify disinfecting and cleaning operations, and supply hand sanitizers and face masks to the buildings’ users.
Double-negative for Hong Kong
Collin Lau, founder of Hong Kong-based alternative real estate investment firm Bei Capital, tells PERE that although coronavirus will have short-term impacts on China, it will inflict a double-whammy and extended damage to the already weakening investment sentiment in Hong Kong.
Lau expects the Chinese government to launch relief measures, such as a supportive monetary policy and interest rate cuts, to support the country’s property pricing once the epidemic has been contained. With Hong Kong, however, “it will take much longer for the city’s economy to recover from the damage with the more isolated and depressed sentiment in the city,” Lau explains.
The CBRE report supports Lau’s assertion, indicating the epidemic will impede an economic rebound in Hong Kong, which “entered a technical recession in Q3 2019” on the back of protests that have been ongoing since June last year. Even before the outbreak, the city recorded commercial real estate investment volumes of HK$4.83 billion ($621 million; €558 million) in the last quarter of 2019 – the lowest since 2017, according to CBRE research.
“Not surprisingly, we have seen institutional real estate transaction volumes in Hong Kong drop sharply since the protest movement began last summer,” real estate capital advisory firm Hodes Weill wrote in a report published in February. “The coronavirus outbreak adds a new level of concern and anxiety over the market.”
Hodes Weill, however, remains optimistic on Hong Kong over the longer term: “We believe that most investors have concluded that in spite of the protest movement, Hong Kong’s relevance as a gateway city and an important global capital market is not going away any time soon.
A shift in sentiment could therefore occur quickly if the coronavirus is contained in the upcoming months and buyers sense the economic and political environments have stabilized enough.”
Asia has a history of rebounding from setbacks. The SARS outbreak in 2003 saw transaction volumes in Hong Kong, mainland China and Singapore drop sharply in the first half of the year to then recover in the second half.
“Past crises have typically moved the market downward sharply, but it has come back fairly quickly,” says one Hong Kong-based senior executive at an international real estate investment firm. “Obviously, we’re hoping for the best.”