COLLIERS INSIGHTS CAPITAL MARKETS | ASIA PACIFIC

MARKET INSIGHTS: COVID-19 –

IMPLICATIONS & RECOMMENDATIONS
FOR ASIA PACIFIC INVESTORS

In this paper, our Colliers experts examine the economic implications of COVID-19 on the real estate
investment markets of Australia, China, Hong Kong, Japan and Singapore, and discuss how investors can take
advantage of opportunities and achieve future returns.

OVERVIEW
The COVID-19 pandemic has brought much of the world and many of the key gateway markets in Asia that we discuss in this paper, to
a near standstill. It has been an almost domino effect, where the health crisis has led to an economic and financial crisis. However,
out of crisis can emerge new and interesting opportunities, as can be seen in the GDP forecast for 2020 and 2021, with China and
Hong Kong, in particular indicatively forecasting the widest jump of over 700 bps – a clear indication of economic growth potential
and the opportunities that will come with it.

HEALTH CRISIS ➔ ECONOMIC CRISIS ➔ FINANCIAL CRISIS

OPPORTUNITIES

JAPAN -4.8% 3.9% Medium

CHINA 1.0% 8.4% Medium

HONG KONG SAR -3.5% 3.9% High

SINGAPORE -1.0% 4.3% High

AUSTRALIA -5.2% to -0.7% 1.2% to 3.8% High

Country real GDP Country real GDP Disruption from

growth 2020 growth 2021 COVID-19

Source: Oxford Economics (most recent forecasts), plus Deloitte Access Economics for Australia, Colliers International for degree of disruption by COVID-19.

In recent months, the hospitality and prime retail sectors across the region have experienced the greatest adverse impact. For
hospitality, COVID-19 brought an end to the good run the sector had experienced in recent years, from a point where yields were
compressed and values were achieving new highs, to one where room rates and occupancy have dropped substantially, and in some
markets, sale price have also decreased by some 30% in the span of a few months. Prime retail is a sector, which has already been
affected by e-commerce boom in recent years, but with the closing of borders resulting in no tourist arrivals, the lockdown of cities
has seen even greater reduction in footfall in retail malls which has adversely affected this sector.
On the extreme end of the spectrum however, as companies introduced different forms of remote working, technology real estate
assets such as data centers, technology parks, business parks, as well as logistics core assets have been least effected and have
instead emerged as beneficiaries despite the economic downturn.
COLLIERS INSIGHTS CAPITAL MARKETS | ASIA PACIFIC

COVID-19 Impact on APAC Real Estate Capital Value

China Hong Kong Singapore Japan Australia

Most
Affected Hotel Hotel Hotel Hotel Hotel
(for conversion) (especially regional)

Prime Retail Prime Retail Prime Retail Prime Retail Prime Retail
Impact

Residential Office Industrial Logistics/Data Centre Residential

Office Community Retail Office Community Retail Industrial

Community Retail Residential Community Retail Office Community Retail

Least Logistics/Data Centres

Affected Industrial Residential Residential Office¹
Business Parks

Source: Colliers International; Note: Our preferred asset classes are shown in blue
¹ especially biomedical precincts

MARKET ANALYSIS
Australia

Macro Impact Investment Implications

> The Reserve Bank of Australia lowered cash rates from .75bps to > Australia presents an increasingly rare income
.25bps through March 2020 as a result of COVID-19’s impact on growth opportunity.
GDP. This could lower the risk-free rate, making Australian
> New South Wales will remain dominant in
property more attractive.
logistics and distribution growth.
> Income growth is under threat.
> Biomedical precincts will be a focus for
> According to Real Capital Analytics data, 2020 investment investors, notably those from Asia. Australia –
volumes are down 47% from 2019 levels. especially Melbourne – is a global centre for
biomedical research.
> Valuations across all markets – material movement is being
reviewed. > Government stimulus may cushion some effects
of COVID-19.
> Currency devaluation will make Australia even more attractive
through this period and will be a key investment factor. > Slowing occupier demand may delay the supply
of new developments
> Majority of investors are looking at listed markets and see more
value in top tier listed REITS trading at discounts to NTA, which
represents a significant discount to where these assets would
trade if taken to market.

Colliers’ Recommendations
> Logistics and distribution are growth markets with a forced shift to e-commerce not yet seen in the local market.
> Office occupation markets will be the main focus for existing investors to better understand sector opportunities.
> Decreasing cash rate and favorable currency are keeping Australia high as a global investment focus.
> Lessee Covenants to become the key investment focus in the short to medium term.
> Limited hotel acquisition opportunities in the short term as vendors digest the impacts on trading markets; expect off market
distressed asset sales to pick up over Q2-Q4.
COLLIERS INSIGHTS CAPITAL MARKETS | ASIA PACIFIC

China

Macro Impact Investment Implications

> China’s GDP growth in H1 2020 has been cloudy;
however, a sharp rebound in H2 2020 is possible.
> In the office leasing market, business park performance
is relatively stable compared to downtown office
performance.
> In retail, the COVID-19 pandemic has driven the growth
in online shopping. Even senior citizens are learning to
shop online.
> Hotels are going through a downturn, although
opportunities for conversion to rental apartments are
looming.
> Investors are cautious and looking to opportunities in
defensive assets such as income-producing offices in
downtown and business parks. Investors may spot a
good deal to convert privately-owned hotels to rental
apartments.
> The business park sector is resilient as part of their
users’ businesses are still growing, such as online
businesses, pharmaceutical and healthcare and TMT
sectors.
> E-commerce players and end-users are expanding into
new logistics markets in Tier 2 cities; investors and
developers need to follow.
> Much investment is targeting data centers despite high
barriers to entry; investors require adequate expertise
and partners.
> Domestic players remain more active in moving forward
deals than foreign players due to international travel
ban. Domestic companies are more motivated sellers,
including both developers and fund managers.
> Investors might have a window to bargain hunt now; for
example, domestic insurance capital or special
situations.

Colliers’ Recommendations
> The policymakers have been agile in rolling out a series of fiscal and monetary policies to ensure liquidity and to instill market
confidence. These macro policies will contribute to the stability of the markets and maintain market momentum.
> Generally, investment strategies have not changed although the rhythm of investment deal processes has been disrupted.
> The investment markets in Q1 2020 have remained resilient in Beijing, Shanghai, Guangzhou, Shenzhen, and West China;
however, our view is that there will be yield decompression in some markets.
> We expect more investment activities in income-producing properties, value for money or special situation deals.
> Developers will be looking to divest assets to shore up their balance sheets; multinationals exploring monetizing their aging
industrial assets.
> We highlight logistics warehouses since COVID-19 is further boosting online shopping and thus demand for logistics space, as
well as data centers, for which demand is surging.
> 5G and cloud services are pushing the development of the data center sector.
COLLIERS INSIGHTS CAPITAL MARKETS | ASIA PACIFIC

Hong Kong

Macro Impact Investment Implications

> The capital market was very much impacted by social > Weak investment sales over Q1, but expected deal flows
unrest since H2 2019 and now COVID-19; transaction to pick up in Q2.
volume was down by 89% (YOY) to HK$3.4B in Q1.
> Price corrections will definitely be seen for retail and hotel
> The hospitality and retail sectors have been further assets.
impacted by COVID-19. For hotels, this pressure is fully
> A soft rental market will give pressure to some property
reflected in a decrease in prices of about 30% from
owners to lower their holdings.
their peak.
> Investors might hold property as opposed to stocks or
> The office sector will probably see further pressure on
bonds due to the low return in equity markets.
leasing demand in H1.

Colliers’ Recommendations
> Strata-titled office market should increasingly have greater discounted stock.
> Industrial redevelopments and data centre conversion are still the main drivers for industrial transactions.
> The hospitality sector has probably offered the greatest discount and the outlook should still be positive due to a limited
supply over the medium to long term.
> Neighborhood malls are still in high demand to some investors.

Japan

Macro Impact Investment Implications

> Bond yields are likely to stay close to zero or negative.
Yield spreads over bonds for Japanese property assets
should remain the widest in Asia, albeit the gap is
compressing with global interest rates trending lower.
> Decisions have been delayed due to lower risk appetite
and rising needs for cash preservation. We expect a
temporary fall in new investment with Real Capital
Analytics data showing a fall of over 60% YOY in Q1
investment volume.
> Uncertainty surrounding price impacts to hotels and
retail. Before the shock of COVID-19, tourist
consumption had risen 4.2x over seven years but supply
of hotels had risen 5.9x. High supply has softened the
impact of firm demand in popular inbound destinations.
> Targets: Grade A offices in Tokyo, which yield about 3.4%.
Large rent gaps between offices of different grades also
give opportunities to generate additional profit from
better building management.
> Modern warehouses represent only 5% of logistics stock in
greater Tokyo, necessitating major upgrading. Overall
logistics rents should stay firm despite high near-term
supply.
> Urban rental apartments should benefit from additional
money from those seeking stable returns and low volatility.
> Hotel assets may struggle to reach target occupancy rates
given restrictions on tourist arrivals and Olympics
postponement.

Colliers’ Recommendations
> Grade A and B office stock in central locations remain attractive given restrictions in supply; however, investors should target
long-WALE as, in the short term, tenants will delay decision making over COVID-19 uncertainty.
> Community retail that had been previously neglected as an asset class will be revived under the semi-lockdown situation due
to the low adoption of e-commerce in Japan. We expect capital inflows into these stabilized assets.
> E-commerce demand will be bolstered in the short-term from wider public health concerns and from more comprehensive
delivery channels being established to replace physical retail locations in the long term.
> In Central Tokyo, an increasing number of single households and sustained population inflows, averaging around 1.1% YOY,
continue to support attractive fundamentals.
COLLIERS INSIGHTS CAPITAL MARKETS | ASIA PACIFIC

Singapore

Macro Impact Investment Implications

> Singapore investment sales in Q1 declined 36.9% QOQ > Singapore has been highly commended for the
and 15.8% YOY to SGD3.9bn (USD2.8bn) as the COVID- government’s approach in handling the COVID-19 crisis.
19 pandemic and recession risks dampened investors’ This augurs well for Singapore in terms of attracting
confidence. talent, businesses and investors.
> In the absence of big-ticket deals, the largest deals > Market fundamentals for the office sector are stronger
during Q1 include five residential public land sales than they were in 2003 (SARS) and 2008 (GFC). The
totaling SGD1.4 (USD 1.0) billion and two properties commercial sector remains a key focus for investors. The
transferred during the Frasers Logistics and Industrial challenge is really with limited investible assets.
Trust (FLT) and Frasers Commercial Trust (FCOT)
> There will be real estate opportunities as businesses
merger.
affected by COVID-19 will have to reassess their options.
> Decisions are delayed with disruptions to business
operations due to safe distancing measures and stay-at-
home orders. Buyers are adopting a “wait-and-see”
approach, while showing keen interest in exploring
opportunities.
> Wealthy Indonesians and Chinese buyers continue to
invest in Orchard Road street front retail units and
luxury housing.
> Volumes could recover in H2 2020.

Colliers’ Recommendations
> Office: Current discussion revolves around changes in workplace strategy and business continuity requirements, as well as the
need for split locations, work desk ratio, and increased hygiene standards. Grade A offices will continue to be in demand, and
DCB will also be in demand from a business continuity perspective.
> Residential: Since most people are working from home, considerations lie around larger apartments for WFH, or a home that’s
closer to CBD for convenience. Buying interest for residential properties likely to moderate as the economic outlook becomes
more uncertain.
> Retail: With telecommuting, there has been a reduction in demand; however, suburban and community retail are doing well
and are in demand during this period. Additionally, there is also increased pressure from the boom in e-commerce.
> Industrial: E-commerce and deliveries have created a demand for logistics space. This may result in an increase in demand for
retail warehouses and central kitchens.
> Hotel: Redesign to include flexible office arrangement as an option to allow adjustment in capital expenditure to reflect risk.
COLLIERS INSIGHTS
IMPACT OF COVID-19 ON INVESTMENT MARKET ➔ OPPORTUNITIES
CHINA 1.0% 8.4%
> BCP and work-from-home
experiences have driven demand Preferred asset classes
for technology related real estate
e.g business parks, logistics
assets and data centres
> Lower prices for hospitality
assets may create opportunities
for conversion.
> First country working towards
economic recovery; the official
March manufacturing index
showed expansion
SINGAPORE -1.0%
> Strong policy response and safe
environment appeal to both
multinationals and global high
net worth, attracting talent and
occupiers
> Strong fundamentals in prime
CBD offices and city fringe
business space will offer
potential long term growth.
> Hotels and retail assets may offer
some price correction but most
owners are financially strong.
Country real GDP Country real GDP
growth 2020 growth 2021
Sources: GDP growth - Oxford Economics (most recent estimates) plus Deloittes Access Economics for Australia; Colliers International for degree of disruption by COVID-19; Real Capital
Analytics for investment volumes.
Will markets return to previous conditions post-COVID-19? What this crisis has shown, is
that different asset sectors are affected at varying degrees. Key questions investors should
consider as we move ahead:
Will risk premiums for the different
asset sectors remain the same as
before?
In the past decade, yields and risk
premiums have been compressed, to
almost zero for some asset sectors. This
crisis has triggered the reset button for
asset valuations. Valuations of risk
premiums must now be reexamined.
Investors need to understand how the
risk premium and yields for different
asset classes have been affected, before
they can start pricing risk premiums.
CAPITAL MARKETS | ASIA PACIFIC
JAPAN -4.8% 3.9% Medium
> Impact of COVID-19 is rising, as
shown in delay to the Tokyo Preferred asset classes
Olympics and declaration of
State of Emergency Office
Medium
> Tokyo Grade A office market has
strong fundamentals, with low Logistics
vacancy and high pre-
commitments
Logistics,
Business Parks > Strong demand fundamentals
for modern logistics warehouses
Data centres
HONG KONG SAR -3.5% 3.9% High
> Traditionally a responsive market, quick
to react with price reduction and fast to Preferred asset classes
rebound in activities and price
4.3% High > Hospitality and street front retail assets Office
are seeing price correction of more than
20%. Hotels
Preferred asset classes > Strong fundamentals in hospitality and Industrial (stable,
office assets in the longer term for conversion)
Office > Value add opportunities exist in for
conversion of older premises to
Hotels technology related real estate.
AUSTRALIA -5.2% to -0.7% 1.2% to 3.8% High
> Australia’s 28+ year record of growth will be
broken in 2020, with recovery reliant on the Preferred asset classes
length of the shutdown and on how quickly
Australia can reopen its borders Biomedical
precincts
> Investment activity has dried up since the COVID- (notably in
19 shutdown Melbourne)
> The low AUD should support offshore investment
once markets reopen.
Disruption from However, all sales to foreign firms are now
COVID-19 subject to regulatory review
Post COVID-19, with business How will Asian investors define
continuity planning and core assets in the future?
telecommuting experiences, will One of the asset types that has been
investment considerations change? defensive throughout the crisis is the
With the advent of technology aiding core product with single tenant, long
With ‘Stay At Home’ and telecommuting WALE (Weighted Average Lease Expiry),
requirements, , digital transformation in and strong lease covenants. These core
the workspace has taken a huge leap assets, as traditionally defined, that
forward as people are forced to adopt have been best protected during this
and adapt to new technologies. As this crisis. But this definition of core assets
brings about changes for occupiers has not always held for Asian investors,
behavior and requirements, investors as these single high credential tenant
would need to consider how these assets with long-WALE and strong lease
changes affect their real estate covenants are hard to come by. Post the
investments. crisis though, investors in Asia will likely
appreciate the need to consider
adhering to the traditional definition of
core assets.
COLLIERS INSIGHTS CAPITAL MARKETS | ASIA PACIFIC

Authors

JOHN MARASCO TERENCE TANG TANG WEI LENG

Managing Director Managing Director Managing Director
Capital Markets | Australia & Capital Markets |Asia Singapore
New Zealand terence.tang@colliers.com weileng.tang@colliers.com
State Chief Executive | Victoria
john.marasco@colliers.com

ANTONIO WU BETTY WONG HIDEKI OTA

Deputy Managing Director Managing Director Head of Capital Markets
Capital Markets | Hong Kong Capital Markets | China Japan
antonio.wu@colliers.com betty.wong@colliers.com hideki.ota@colliers.com

Please contact our other capital market experts for further market insights and in-depth discussions on key
trends and opportunities across this fast-changing region.

Adam Woodward Piyush Gupta Imran Mohiuddin

Australia – Sydney India Pakistan
adam.woodward@colliers.com piyush.gupta@colliers.com imran.mohiuddin@colliers.com

James Mitchell Steve Atherton Ieyo De Guzman

Australia – Sydney Indonesia Philippines
james.mitchell@colliers.com steve.atherton@colliers.com ieyo.deguzman@colliers.com

Winter Yan Bayan Kuatova Derek Huang

China – North China Kazakhstan Taiwan
winter.yan@colliers.com bayan.kuatova@colliers.com derek.huang@colliers.com

Jimmy Gu Joon Lee Barny Swainson

China – East China Korea Thailand
jimmy.gu@colliers.com joon.lee@colliers.com barny.swainson@colliers.com

John Lin Karlo Pobre David Jackson

China – South China Myanmar Vietnam
john.lin@colliers.com karlo.pobre@colliers.com david.jackson@colliers.com

Jeff Cui Richard Kirke

China – West China New Zealand – Auckland
jeff.cui@colliers.com richard.kirke@colliers.com

This publication was produced and published in May 2020.