Impact of coronavirus outbreak on the real estate market in Greater China

By CBRE GREATER CHINA RESEARCH TEAM / CBRE | February 7, 2020 8:30 AM SGT
The outbreak is likely to hamper any economic recovery in Hong Kong, which entered a technical recession in 3Q2019 on the back of widespread socio-political unrest. (Picture: Bloomberg)
The outbreak of the novel coronavirus – which began in December 2019 and has intensified in the first few weeks of 2020 – poses a new downside risk to Greater China and, to a lesser degree, the global economy.
As of Feb 3, China has confirmed over 20,000 cases of the virus, over 60% of which are in Hubei province. Globally, the World Health Organization (WHO) reported 153 confirmed cases across 23 countries on the same day.
The Chinese government shut down transportation networks in Wuhan and surrounding cities in Hubei on Jan 23 and advised people not to leave the city – a measure not implemented during the 2003 SARS outbreak. Subsequently, cross-city transportation was also limited.
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Comparison with 2003 SARS outbreak

Although the virus has already spread across China, the number of cases is still highly concentrated in Wuhan city and Hubei province, which accounted for approximately 1.6% and 4.6% of China’s GDP respectively in 2019. In contrast, several major cities and provinces including Beijing, Hong Kong and Guangdong – the country’s leading growth engines – suffered SARS outbreaks in 2003.
Despite accounting for a relatively small portion of national GDP, Wuhan nevertheless holds great strategic importance due to its central geographic location. The city is a key transportation hub and is famous for its education institutions and technology sector. These attributes – combined with its large talent pool and easy accessibility to and from other parts of the country – helped Wuhan’s GDP grow 7.8% in 2019, well above the national average of 6.1%.
Chinese SARS expert Zhong Nanshan stated on Jan 28 that he expected the outbreak to peak by early to mid-February, should the control measures be effective. However, other authorities anticipate a longer timeframe, with Gabriel Leung, dean of the Faculty of Medicine at the University of Hong Kong, expecting the number of infections not beginning to decline until mid-year.

Economic impact

China
Advances in technology such as surveillance and big data along with more developed logistics infrastructure means the government is well equipped to move quickly to limit the spread of the virus. Should the virus be brought under control within the next two or three months, the downside risk to China’s full-year economic growth should be limited.
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The PBOC (People’s Bank of China) has already made swift movement to ensure liquidity in the financial market by injecting 1.2 trillion yuan ($236.6 billion) via reverse repo on Feb 3, and CSRC (China Securities Regulatory Commission) also issued a circular forbidding short-selling in the A-share market.
The authorities are expected to adopt more fiscal and monetary measures including:
• Tax reductions/exemptions for impacted industries (similar to those introduced following the SARS outbreak in 2003);
• Further reductions to the Reserve Required Ratio (RRR) and interest rates;
• Specific policy support for Wuhan and Hubei.
Hong Kong
The outbreak is likely to hamper any economic recovery in Hong Kong, which entered a technical recession in 3Q2019 on the back of widespread socio-political unrest. Small- and medium-sized retailers and tourist-oriented stores – which are already under severe pressure – will face the possibility of closure. Employment will experience downward pressure, with Hong Kong Statistics Department data showing that the unemployment rate following the SARS outbreak in 2003 reached 7.9%, also due to the residual impact from the Asian Financial Crisis, 9/11 event and dotcom bubble burst in the previous years. The unemployment rate stood at 3.3% as of 4Q2019.
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The Hong Kong government has already announced HK$10 billion ($1.78 billion) of relief measures on Jan 14, mostly targeting low-income families and addressing housing demand. The scale of this initiative could be increased further if needed.
Global
The size of China’s economy makes it inevitable that a short-term slowdown will drag on global economic growth, with Asian countries and major trading partners likely to be most affected. However, it is too early to assess the impact on global trade, foreign direct investment and supply chains. Interest rates will likely stay low or be reduced further in 1H2020. The US Federal Reserve left its policy rate unchanged following its last meeting on Jan 20 and no rate hikes are expected this year.
Retail
The retail sector will suffer the strongest impact from the outbreak, with shopping malls already having shortened their business hours as is customary during Lunar New Year. Several retailers closed stores completely following the outbreak, with Starbucks temporarily shuttering 2,000 outlets across China – more than half its total – from Jan 29, IKEA announcing the closure of all its China stores on Jan 30, followed by Apple on Feb 1.
A negative impact on footfall and sales in brick-and-mortar malls and stores is therefore inevitable in the short term. Entertainment, F&B and fashion retailers will be most impacted as households curtail activities outside the home and cut back on discretionary spending. Retailers with omni-channel capabilities will be more resilient and may even outperform.
Beijing, Guangzhou and Shanghai all saw retail sales fall in 2Q2003 following the SARS outbreak. The impact upon Shanghai was comparatively lighter and briefer than in Guangzhou and Beijing. The latter was hit especially hard, with Beijing Wangfujiang Group’s department store revenue in Beijing failing by 21% y-o-y in 1H2003 and retail net absorption slumping to near zero during the same period, followed by a gradual recovery in 2H2003.
Following the outbreak of the coronavirus, several major retail landlords announced temporary rental cuts, which CBRE believes could help to alleviate pressure on retailers in the months ahead.
CBRE expects occupancy to remain resilient in existing malls in Wuhan but new malls in the city may be forced to offer more flexible lease terms or postpone opening dates. The impact on other cities will be limited.
Office
The national office market will be negatively impacted, with the outbreak already curtailing business activity. Leasing activity is expected to slow in 1Q2020, with many occupiers – especially those in severely impacted industries such as F&B, retail and transportation – likely to delay decisions involving large-scale capital expenditure.
The degree of impact in individual cities will vary based on the severity of the infections. SARS had a more prolonged and deeper impact on the Beijing office market in 2Q2003 and 3Q2003 than it did on Shanghai, which saw comparatively fewer infections (see Charts 3 and 4).
Provided the virus can be largely contained within Hubei province, its impact on the national office leasing market – with the exception of Wuhan – will be short-lived. Leasing activity is likely to recover as early as late 2Q2020, supported by the accelerated opening up of the financial sector to foreign participation.
From a longer-term perspective, the outbreak could encourage more occupiers and landlords to place a stronger emphasis on flexible working, property management, the workplace experience and employee wellness.
CBRE expects the outbreak to have a limited impact on the industrial and logistics market as e-commerce remains the dominant demand driver. On the manufacturing side, most factories are already closed until mid-February (or even longer) for the Lunar New Year holiday.
However, given Wuhan’s status as a national strategic transportation and manufacturing hub, there may be disruption to supply chains – a situation that could worsen if the virus is not prevented from spreading to other major urban hubs.
Real estate investments in China are expected to slow significantly in the short term as business activity declines and non-essential meetings and travel are cancelled. However, expected relief measures such as supportive monetary policy and interest rate cuts will lend some support to pricing.
Highly-leveraged developers and landlords could come under significant pressure, particularly if they have limited cash flow during this period of reduced business activity. However, real estate debt will remain an attractive investment option.
Investors will strengthen their focus on gateway cities and assets providing steady income streams. Areas of interest will include logistics, with cold chain facilities for pharmaceutical products likely to emerge as a longer-term focus. Investors are advised to adopt a wait-andsee approach towards retail and closely monitor individual asset performance.
Based on the report “The Wuhan coronavirus outbreak: What does it mean for real estate?” by the CBRE Greater China Research team.