Investing in real estate has long been viewed as a safe bet, particularly in the growth regions of Asia. However, the disruptions caused by Covid-19 have seriously scuffed the property sector’s once-bulletproof sheen. The decline of brick-and-mortar retail space seems to have accelerated, as stores struggle to stay afloat during global lockdowns. Many offices remain under-utilised as work-from-home protocols persist. All over the world, uncertainty prevails over the prospects for commercial real estate.
But this new landscape also presents new opportunities. During the Mapletree Real Estate Forum webinar “Opportunities and Challenges for the Real Estate Sector in the COVID-19 Era”, organised by SMU’s Lee Kong Chian School of Business, three panellists shared their insights on some of these opportunities. They were SMU Assistant Professor of Finance Song Changcheng; Wendy Koh, Group Chief Financial Officer of Mapletree Investments; and Stephen Bramley-Jackson, Head of Real Estate Equity Research at Hong Kong and Shanghai Banking Corporation. These are some key takeaways from the session.
The rise of the suburban office
Citing Mapletree’s experiences on the ground in 13 markets, Koh noted that workplace norms have evolved differently in different places depending on how the pandemic has played out, as well as differences in work culture. In China, for instance, employees have largely returned to offices.
“Does WFH (working from home) mean the demise of the office space? We do not think it’s so straightforward. We do not think there will be a substantial reduction in office space,” she said, but pointed out that suburban office space is likely to outperform office spaces in city centres. That’s because suburban offices are closer to homes, and in lower-density areas.
Nonetheless, the supply of grey space – office space surplus to the needs of the original tenant but where the lease contract has not yet expired – has increased in London, Bramley-Jackson pointed out.
“Companies whose WFH experience during the early months of COVID-19, and whose productivity has held up, would have decided to give up a part of their office space,” he said. “I think a number of large corporations will downsize their HQs.”
Landlords need to offer flexibility
With the pandemic still playing out, conditions on the ground are apt to shift. That means landlords need to consider new business models that adapt to these mutable conditions.
“The implication for the landlord is that, in the long run, there will a great demand for flexibility,” said Song. “Flexibility in terms of decentralisation [for offices to be] close to homes, and flexibility in lease terms with shorter leases and more options to upsize and downsize.”
That goes for retail spaces as well, he added. For instance, flexible leases are likely to appeal to e-commerce businesses that want to open physical stores to improve their brand image.
The relationship between e-commerce and physical retail is symbiotic rather than cannibalistic, said Bramley-Jackson. These days, established retail companies and digitally native brands alike are apt to adopt an omnichannel approach, so physical retail remains relevant.
That said, with supply of physical retail spaces outstripping demand, landlords need to work harder to appeal to prospective tenants. That means leveraging technology more, whether it’s using artificial intelligence to curate trends, or offering e-commerce businesses useful data on how to position their foray into the brick-and-mortar world.
For instance, footfall data could be useful for machine learning, to make predictions for rent, traffic and sales for each tenant. “This could lead to improved services for the tenant, and attract them back to the mall,” said Song.
Design industrial property for present and future technologies
Warehouses and data centres have been bright spots for commercial real estate during the pandemic. Demand for the former has increased due to the rise in e-commerce and a desire to bolster supply chains, while demand for the latter has increased due to WFH arrangements, which require better internet connectivity.
Those investing in these categories need to be aware of the factors that make warehouses and data centres effective. A data centre, for instance, requires a backup power supply to ensure it doesn’t close down if there are problems with the electrical grid, said Bramley-Jackson.
Upcoming data centres will also likely benefit from being built near residential centres, if technologies such as autonomous vehicles become more common.
“A lot of large data centres are often hundreds of miles away from the end user, and there’s a response time of, let’s say, 0.1 seconds,” Song explained.
“That’s ok with most consumers checking email and surfing for videos. But if we are talking about self-driving cars and large robotics, this 0.1 seconds is not acceptable. We need these data centres to be closer to the end user to reduce the response time.”