Market Outlook

Hong Kong Island Grade-A office leasing demand remained soft in December amid weak economic conditions and the traditional offseason, but the overall market was buoyed by the professional sector, particularly the finance and legal service industries, which took up space in premium buildings in the CBD area. Two Chinese Mainland financial companies, the Bank of Dongguan and FountainVest Partners, leased an entire floor in Two IFC, which was previously occupied by Nomura Holdings. Medical companies also expanded their footprint in the core districts. A medical centre leased the entire top floor of 9 Queen’s Road Central to meet the increasing demand for healthcare and wellbeing. Given the weak economic situation, some tenants gave up more office space. With the current high vacancy rate of 7.8% on Hong Kong Island, we expect some landlords to soften their approach and be more willing to negotiate.

Kowloon Leasing activity in Kowloon continued to slow down in December. New lease transactions dropped by 20% on a monthly basis. Most of the leasing activity was in Kowloon East, at monthly rents below HK$25 per sq ft. While most industries have been largely affected by the COVID-19 pandemic, the logistics industry has remained strong and is one of the winners. Some logistics companies have taken advantage of this golden opportunity in the downbeat market to expand and upgrade their work environment and location. A recent notable example was the relocation of logistics giant DHL. It moved out of Megabox and took up a 91,015 sq ft space in the premium Grade A office International Trade Tower in Kwun Tong, making it the largest new lease acquisition in the market so far in 2020.After reviewing its office requirements, DHL chose to reconfigure its work pattern and adopt agile work practices to achieve workplace size optimisation. Curtailed by the pandemic and economic uncertainty, tenants will continue to be cost-sensitive and seek cost-effective options in Kowloon. Given the approach of the traditional festive season and the continuing unstable COVID-19 situation, we expect leasing demand to remain soft and the current low-level leasing volume to last until at least Lunar New Year.

In this January 2021 issue, we take a look at the latest updates on the local commercial real estate market as well as share an outlook for the sector in 2021.

• While the gradual return to office is expected this year, the office segment may not immediately return to its pre-pandemic vibrancy as the uncertain global business environment may continue to affect expansion decisions of businesses over the short to medium term. The office segment, however, is seen to benefit from the anticipated growth of the IT-BPM sector with the United States’ less protectionist policies under its new administration.
  
• The new COVID-19 variant has caused renewed anxiety and further stalls the resumption of international travel. It is also seen to discourage domestic travel as the country extends the more stringent community quarantine qualification in major urban areas and tourist destinations, thus, further blurring the tourism industry outlook.

Q4 2020 was a crucial quarter as it marked a recovery momentum with leasing indicators trending favourably compared to the previous couple of quarters. In a time of change with COVID upending the workplace playbook, the leasing trends and occupier strategies are undergoing a rapid shift and will have a bearing on market activity. Even as the COVID scenario was evolving and occupiers continued with evaluating their real estate portfolios and charting their space requirements, almost all the cities saw heightened levels of market activity with expansion driven demand making a comeback of sorts as well.  Mumbai, Pune, Delhi NCR, Ahmedabad, and Kolkata have witnessed higher fresh leasing activity for expansion and consolidation during the last quarter of the year. This augurs well for the leasing momentum in 2021, which is likely to get broad-based across cities with introduction of a vaccine and a gradual return to the workplace providing the much-needed push to market activity. 

In this report, we analyse the Indian office markets’ performance in Q4 as well as during the full year of 2020.  

Although office leasing activity was generally more muted in Q4 compared to other quarters in the year, it was broadly similar to Q4/2019 levels.

• Demand for office space largely emanated from tenants looking for replacement space because of the need to move out of older buildings to be redeveloped, as well as tenants with office leases due for renewal.

• Owing to the uncertainties arising from the pandemic, tenants are continuing to adopt a wait-and-see approach and looking for clarity on trends to emerge on future workplace practices before deciding on future office space requirements.

• In Q4, the office market saw relatively significant leasing deals from technology companies. These companies are expected to continue expanding their presence in Singapore, which they deem as an attractive base due to its political stability, strategic position and strong economic fundamentals.

Strata Office Market outlook

•  In 2021, the strata office market together with the larger office sector in Singapore is expected to remain under pressure, with companies critically reviewing the way space is occupied in the post-pandemic era characterised by evolving remote work protocols. Therefore, transaction volumes as well as prices are likely to remain subdued for at least the first six months of the year.
• Nevertheless, as office users rationalise and right-size their space requirements, occupiers such as small enterprises may turn towards owner-occupied strata offices as a viable alternative to tenanted space. As such demand for strata offices, especially those in central locations, could improve in the second half of 2021.

Strata Retail Market outlook

• Moving forward, the global economic outlook remains uncertain with recurring infections in other nations despite the distribution of the vaccines. And even if vaccine distribution proves to be successful, prices of strata retail units in Singapore are envisaged to remain soft with more distressed sales expected due to the lack of tourists and safe distancing measures still in place.
• The demand for such strata spaces is expected to come from proprietors that intend to run their own businesses, preferring to set up shop in locations where strata retail developments tend to be typically located. Often the lower costs when compared to renting retail space in a prime shopping mall in the same location act as the greatest incentive.
• Thus, with the retail market gravitating towards more experiential placemaking strategies and migrating some of their services to digital platforms, there is a growing imperative for strata retail storeowners to also adopt similar ways to survive in a market that is in constant change.

2020 was a challenging year for Philippine real estate and the global property market, but we see the new year as a promising time for sectors such as industrial & logistics, office, residential, REITs, and data centers, among others. The industrial & logistics sector was the most stable asset class in the past year, and there are huge opportunities in the e-commerce and the rollout of COVID-19 vaccines. The office sector is likely to perform better than 2020, while we anticipate residential real estate to exhibit a slow but gradual rebound.

In 2021, macrotrends such as the boom of e-commerce, flexible office setups, and continued decentralization outside Metro Manila
are likely to continue and contribute to the property market’s soft recovery.

The Philippine population, which has grown at 1.5% on average each year since 2015, is key to recovery. This growth has created a “demographic sweet spot” and continues to drive consumption and, in particular, the expansion of online retail and the related logistics platforms. The young Philippine population will also continue to keep the country at the forefront of the global BPO industry as outsourcing continues to increase.

Global Economy

• Global growth estimated to decline by 3.5% in 2020 but expected to rise by 5.5% in 2021
• Advanced economies likely to grow by 4.3% in 2021 on the back of the early rollout of vaccines
• Emerging economies are expected to grow by 6.3% in 2021 on the back of a contracted base

Indian Economy 

• India’s GDP growth for FY21 is estimated to decline by 7.7%, hit by the global pandemic and the lockdown
• Private consumption estimated to contract by 9.5% in FY21 based on income loss, mobility restrictions, and supply constraints
• Government consumption estimated to rise by 5.8% due to increased expenditure as part of pandemic relief packages.
• Investment estimated to decline by 14.5% due to economic uncertainty and delay in implementation of capital projects

Outlook 

• Consumption indicators, including FMCG, auto sales, and GST collection indicate a faster demand recovery in Q3
• Continued momentum post-pandemic in health, pharma, telecom, and technology (e-commerce, fintech, ed-tech, etc.) owing to a significant shift in consumption patterns
• The pandemic has led to a preference for digital services and adoption of digitalisation in many companies
• GDP is estimated to grow at 11% in FY22 owing to robust growth in consumption and investment and lower base effect

The pandemic has induced behavioural changes amongst consumers that are likely to stay permanent. This has hit the physical retail and F&B sectors hardest and the industry has to be quick to adapt to this new reality in order to nurture the sector back to recovery, albeit in an evolved form.

Footfall numbers will be hard-pressed to return to pre-COVID levels so long as the need to social distance is enforced. The takeaway channel is therefore vital. With incomes falling and unemployment rising, food delivery companies are seeing a decline in activity from the peaks witnessed in the months of April and May. Parents are telling their children now not to order frivolously. Footfall ebbs and flows with some days seeing much greater activity than others (same as our office – some days we have 30% of the workers back while for most of the time, it’s just 15% to 20%). It is difficult to predict the daily flow these days. Whenever helicopter money is disbursed by the government, the crowd emerges in the suburbs. But give it about 10 days and the patronage falls back to pre-payout levels.

The points highlighted above are summarised in the following heatmaps. Table 1A and 1B show the heatmap of revenues by broad tenant types in CBD and Suburban locations. These are the findings obtained after spending weeks soliciting feedback from various retail and F&B operators plus plying the grounds to weed off the weekend-weekday effects.

WHEN CULTURAL VALUE BECOMES COMMERCIAL VALUE AND TRANSFORMS INTO INVESTMENT GAINS.

• The total shophouse transaction value amounted to S$880.7 million in 2020, riding out the pandemic with only a slight 3.8% year-on-year (y-o-y) decline when compared to the S$915.9 million recorded in 2019, as sales in Q4 2020 rebounded to surpass pre-pandemic levels. Gross sales value in the quarter alone accounted for almost half of 2020 shophouse sales value at S$431.8 million.
• The shophouse sales volume was also greater in 2020 compared to the previous year, with 138 transactions lodged as compared to 123 in 2019 (Exhibit 1). The majority (88.4%) sold were freehold shophouses. Q4 2020 saw a total of 51 shophouse transactions, 19 more than in Q3 when sales started to recover.
• Aided by lower costs of borrowing and high liquidity in the market, pent-up demand from different pools of buyers such as first-time investors as well as family offices and corporates contributed to the overall recovery of the shophouse market, especially towards the last quarter of the year. Price expectations between buyers and sellers were realistically met, leading to the materialisation of sales.

Opportunities remain in a challenging market

Despite the year starting with the pandemic and the resulting economic shock, China rebounded quickly and was one of the few countries that recorded economic expansion for 2020. As we look forward to 2021, many aspects of life, work and the economy have fundamentally changed with the significant advances and greater adoption of digital technologies. Nevertheless, we also start where we left off before COVID-19, tackling bigger structural issues that persist such as debt levels, climate challenges and economic stability.

In the property market, 2021 presents challenges and opportunities. The residential sales sector is faced with tighter regulations to deleverage the sector, which will slow growth and restrain demand. However, those with capital will continue to invest as to store, preserve and grow wealth. Travel restrictions have limited secondments and returning expat numbers, but operators have been swift to tailor services and facilities to the growing local client base, which is realizing the advantages of leasing. The commercial sector is confronted with excess supply, though landlords that can create a nurturing creative environment and greater flexibility for tenants will retain market share. Online platforms continue to take a larger share of retail sales, though a thirst for unique experiences and social interaction ensures bricks and mortar locations remain a key touchpoint between brands and consumers. 

The logistics sector’s growth is throttled by regulations and strict land permits, but demand from 3PLs and ecommerce platforms remains voracious. Investment has shied away from the traditional commercial sectors for higher growth opportunities in the logistics and data centre markets, though, as they pull back and vendors feel greater pressure from financing restrictions, opportunities are beginning to emerge, and activity levels are expected to start to pick back up. 

寻路向前

尽管2020年初爆发疫情带来巨大冲击，但中国经济迅速反弹，成为全年经济同比增长的少数几个国家之一。伴随数字技术的进步和推广，我们的生活、工作和经济活动都在发生变化。此外也需积极应对债务、气候、经济稳定等长期存在的结构性挑战。

2021年的房地产市场挑战和机遇并存。住宅销售市场正面临监管加码，短期市场需求或将因此受限，但市场中长期价值前景并未改变，仍是财富保值及增值的重要去向。高端租赁市场持续演进，旅行限制影响外籍租客需求，但本地租客需求上升、日趋多样，为业主带来调整机会。写字楼市场存在局部供应放量，而能为租户创造创意环境和灵活空间的业主将占据优势。零售商纷纷发力电商平台，但顾客对独特体验和社交互动的诉求说明，实体店依然是品牌和消费者沟通的重要渠道。

物流行业的增长受到政策和土地许可的限制，但来自第三方物流公司和电子商务平台的需求有增无减。物流和数据中心的高增长潜力令一些投资者从传统物业领域转向利基资产。但随着竞争减少及部分业主面临融资压力，传统资产的机会也将再次出现，投资活跃度有望因此回升。