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APREA Investors' Outreach: New Normal – The Future of Real Estate in the APAC Region

Insight 1 July 2021

APREA Investors' Outreach: New Normal – The Future of Real Estate in the APAC Region

Leading Asia-Pacific investors, managers and developers joined APREA’s first Investor Outreach roundtable, hosted in June 2021. Read the key takeaways from the event here.

With the global landscape having been dominated by the Covid-19 pandemic, and the restrictions on social movement and interactions acutely felt within the real estate industry, the focus of the discussion was to look to the future of the industry in the APAC region. The fortunes across the industry in APAC have shown large contrasts from both a sector-by-sector and geographic perspective, with some countries in the region being impacted disproportionally to others. The roundtable was moderated jointly by Sanne’s Natalie Breen, Global Head of Strategic Growth and Simon Vardon, Global Head of Real Assets and there was an insightful and active discussion as industry leaders explored sentiments around the future of retail, office and logistics, as the region starts its road to recovery post pandemic.

The retail sector has been one of the hardest hit by the Covid-19 pandemic due to lockdown restrictions and a rapid acceleration of the trend towards increased online retailing. To mitigate the impact on tenants, some jurisdictions introduced moratoriums on eviction for non-payment of rent, which has resulted in some tenants owing significant arrears of rent and the respective landlords also suffering the negative cash flow consequences. All of these factors have put pressure on retail asset values.

It was interesting to hear the views of the leading investors, that while the sector remains under pressure, in APAC the sector has been somewhat insulated vis-à-vis the rest of the world due in some part to the comparatively newer retail shopping centres which were already skewed towards a tenant mix that included experiential retail and high-end F&B. It was clear from the discussion, a recognition that moving forward there is a need for the sector to adopt and create immersive and shareable experiences (experiential retail), while maintaining an element of convenience retail. Arguably, APAC countries have also been ahead in terms of the shift to e-commerce, which was well underway pre-pandemic, due to its younger and upwardly mobile demographic which makes up a significant portion of these populations. Some regional differences were noted, in that the repositioning of large retail assets, such as traditional malls, would likely be seen more in Australia than in some of the other Asia-Pacific cities where they had newer built product. Tenant mix will continue to evolve, potentially incorporating last mile distribution and offices into some of the existing retail space, but this will be very much asset-specific.

It is not just the tenant mix and retail experience which will adapt and change, but also this crisis has had landlords and tenants taking a closer look at the terms of their leases and perhaps taking a different approach to what has traditionally been the status quo. The concept of risk sharing between landlords and tenants has taken centre stage, which can be demonstrated by a move in some sub-sectors to a minimum base and turnover rent contribution. Generally speaking, most standard retail leases do not cover force majeure events, including a pandemic. There may also be a shift as to how leases are structured going forward, with rent suspension clauses in regard to force majeure events, break rights, adjustments to insurance and common area costs in certain circumstances. We will need to see how this evolves over the medium term.

From the landlord perspective, investors are having to take a deeper look into risks associated with their tenant base. In the current situation, landlords have had to make hard decisions around which tenants to support and offer concessions. In some instances, large global landlords have actually invested in the business of the tenants to support what they consider to be a robust business, but for the short term impact of the pandemic.

The work-from-home phenomena occurred across the globe almost overnight as governments grappled with how to suppress the virus and mandated that where employees could, they worked from home. Nearly 15 months on and most country workforces still have not fully returned to the office with social distancing requirements and intermittent lockdowns continuing. There is no doubt that work-from-home has disrupted the office sector; the question is to whether this is a temporary or permanent structural shift?

Interestingly in our session, it was noted that if only 10% of office employees continue to work-from-home, this will still create a potentially significant amount of surplus office space. There was strong consensus that the office is not dead and that there are many tangible and intangible benefits of the office, including developing and maintaining the culture of a business, providing collaboration opportunities for employees, increasing innovation, maintaining employee engagement and socialisation opportunities to help build solid working relationships. Then there is the benefit to graduates and new joiners, ensuring they can learn on the job and build their own work and client relationships. The client is also imperative, how do you develop and maintain strong client relationships purely over Zoom?

There is currently no clear answer as to how the balance of work-from-home vis-à-vis office working will ultimately settle once we move beyond the pandemic. What seems to be the consensus that there will be a  hybrid working model going forward, but that model will not be a ‘one-size-fits-all’ and will depend on the nature of the business of the organisation and particular roles within that organisation. The needs of tenants will differ depending on their operating sectors and also the population demographics in different cities, for example countries with a younger workforce or offering large-scale BPO and outsourcing centres, such as India, will have different needs of the office to a more senior workforce. The investor group was positive that there was a real opportunity that the office sector will react well, particularly the prime office locations. These locations might have to work harder to be a ‘magnet’ for employees, not just to recruit and retain talent but now also to compete with the work-from-home model. Enhancing offices to meet this challenge, would include increased amenities, more creative, collaborative and experiential spaces, ESG credentials and flexibility to spur innovation and attract and retain talent. Ultimately, while there may be more flexibility around work-from-home, the consensus was the office is here to stay, and still remains an essential space for business and employee engagement and collaboration.

While there is no such thing as a “winner” in this pandemic, it was agreed that the logistics sector had outperformed all other sectors given the prominence of online retailing, a trend which looks here to stay from our earlier discussion. Although many agreed that they continue to be confident about this sector, it was noted that the premiums being paid for logistic assets in APAC and the consequential cap-rate compressions were starting to give investment committees pause for thought. For the moment the fundamentals and demand for this sector are positive, particularly with capital moving to the logistics sector from other real estate sectors. The investor group were confident about the long-term value in this sector, with a view that income would ‘catch-up’ and thus reward investments being made today in this sector.

The new normal is playing out at pace, it is not static, but evolving, with different prospects dependent upon sector, country and social and demographic factors. Disruption has bred opportunity and coupled with the new demands from ESG and sustainability considerations, the positive potential of the new normal is starting to be quite exciting.

If you would like to learn more on how Sanne can assist you, contact Xander, Natalie Breen or Simon Vardon

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Real Assets
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Xander Huang Head of Business Development, Singapore - Singapore
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Natalie Breen Global Head of Strategic Growth - United Kingdom
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Simon Vardon Global Head of Real Assets - Jersey
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