The property market in Southeast Asia is taking a hit as investors adopt a cautious approach towards fresh investments amid revenue disruptions in the wake of the coronavirus outbreak.
However, there will also be opportunities for investors eyeing distressed hospitality and retail assets. Alternative real estate classes such as data centre and logistics assets are also expected to be in demand as investors seek to rebalance portfolios.
The COVID-19 epidemic saw transactions in the Asia Pacific commercial property market slump to $19.82 billion in the first quarter of this year, according to Real Capital Analytics data. The first-quarter performance was down 55.6 per cent and 53.9 per cent from $44.64 billion and $42.98 billion in the first and fourth quarter of 2019, respectively.
Knight Frank’s Asia Pacific capital markets head Neil Brookes said there would be a short-term slowdown in terms of purchasing activity in the region as many investors delay investment decisions and adopt a wait-and-see approach.
“The crisis is negatively impacting the emerging markets in Southeast Asia,” said Brookes, adding that Singapore, where the services sector accounts for as much as 69.38 per cent of the GDP, will be most affected by the pandemic.
Stuart Crow, the CEO of Capital Markets at JLL Asia Pacific, noted that uncertainty would be the new normal for the short-term.
“Singapore has seen some drop-off in activity. Investors are taking a wait-and-see approach and major deployments remain grounded for the time being. In an emerging market like Vietnam, investors are also holding-off decisions for now,” he added.
The COVID-19 pandemic has destabilized ASEAN real estate, with many real estate investment trusts and funds encountering major disruptions in revenue streams this year, said another industry veteran.
“Many have pulled back their earnings guidance for 2020 as they scramble to shore up their balance sheets and raise capital to cushion a fall in revenues,” said George Stewart LaBrooy, chairman of Singapore-based regional real estate private equity and advisory firm AREA Advisors Pte Ltd.
He opined that managing debt level and maintaining high occupancy rates are the two key challenges faced by property funds now.
Looking for alternatives
For private equity funds, which typically have an investment horizon of 5-7 years, the virus outbreak has given rise to opportunities in terms of distressed hospitality and retail assets, as well as asset classes such as data centres and logistics.
“They will be seeking distressed assets, particularly in the hospitality and retail sector. Many investors have also indicated they are willing to look beyond a short-term hit in the economy to get into opportunities where they can’t normally access, such as e-commerce and major offices in core markets,” said Brookes, who foresees e-commerce to be the biggest ‘beneficiary’ of the pandemic.
According to Knight Frank, private equity funds in Asia-Pacific raised about $38 billion in the last two years. It estimated that Asia-specific mandates had a $34 billion largesse awaiting deployment as of September 2019.
“Despite current circumstances, there’s still ample capital in the region looking at medium to long-term real estate investment opportunities,” said Brookes, adding that transaction activity recovered very quickly in the region after severe acute respiratory syndrome (SARS) was contained in the past.
JLL’s Crow said that in times of crisis such as the current one, the definition of defensive real estate assets widens, which is reflected in investors looking beyond offices at new economy real estate assets to rebalance portfolios.
“From a real estate investment standpoint, the interest in Southeast Asia remains strong, owing to supportive demographics and attractive long-term fundamentals,” he said, pointing to opportunities in Vietnam’s industrial sector.
AREA’s LaBrooy expects a resurgence in investments in warehousing and distribution, especially in e-commerce facilities, as well as in automation as survivors emerge from the disruption caused by the pandemic.
Meanwhile, grocery-anchored retail centres, healthcare and wireless infrastructure could be the bright spots in the times of the coronavirus.
“Seeing the queues lining up at all the hypermarkets, supermarkets and grocery stores has been an eye-opener. Retail may suffer from this virus but grocery retail will emerge a winner,” said LaBrooy.
Other attractive assets could be healthcare real estate such as hospitals, medical office buildings and life science buildings as well as telecom towers.
“In some countries, [towers] have been securitized successfully backed by long leases. With mobile data growing by 30-40 per cent a year, it is unlikely to slow even in an economic downturn,” he added.