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The real estate landscape during COVID-19

The real estate landscape during COVID-19

By SMU City Perspectives team

According to Goggle’s COVID-19 Community Mobility Report, visits to offices during Singapore’s Circuit Breaker (CB) period between April to June 2020 was down 60 percent compared to pre-CB figures in January. By mid-October, it was only about 20 percent.

“The data is not seasonally adjusted but we have a sense that human traffic back to the office was bouncing back,” observes Song Changcheng, Assistant Professor of Finance at SMU. “In the long run, it’s important to understand, at least from an academic point of view, the productivity effect of working from home (WFH), and the preferences of the employee. The challenge is identifying the types of jobs that can be done from home with reasonably high productivity.

“Once that is determined, we can have a sense of what proportion of the workspace is really needed in terms of flexible working space. The implication for the landlord is that, in the long run, there will a great demand for flexibility. 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.”


Song made those remarks at the recent Mapletree Real Estate Forum webinar “Opportunities and Challenges for the Real Estate Sector in the COVID-19 Era” organised by the SMU Lee Kong Chian School of Business. The trends of decentralisation and companies reconfiguring to accommodate hybrid work arrangements were acknowledged by fellow webinar panellist Wendy Koh, Group Chief Financial Officer of Mapletree Investments.

While noting the uncertainty WFH places on tenants’ real estate planning, Koh points to Mapletree’s differing experiences on the ground in 13 markets ranging from North America to China, Europe, and Australia.

“There are also differences in work culture between companies that we need to take into account,” says Koh. “In China, employees are almost 100 percent back in offices and there are no safe distancing measures. They are pretty much back to pre-COVID ways of doing things.

“In summary, there will be downward pressure like in any recession in the short-term. Does WFH 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. We also believe the suburban office space, due to its proximity to homes and its lower density, is likely to outperform that of the city centre.”

The third panellist, Stephen Bramley-Jackson, Head of Real Estate Equity Research at Hong Kong and Shanghai Banking Corporation (HSBC), believes some of what he terms “trophy HQ buildings” will be downsized. He says: “This would be so if the lockdown experience has been a positive one on basis of productivity and efficiency, and of course the well-being of the workforce. I think a number of large corporations will downsize their HQs.”

Bramley-Jackson also highlighted a Savills report examining an increase in London’s supply of grey space – office space surplus to the needs of the original tenant but where the lease contract has not yet expired. “When Savills looked at the area of grey space that was coming back [on the market], it was all small spaces,” he reveals. “Small office spaces have returned to the market. Small businesses with a small headcount would have, proportionally, a real estate cost that is very high.

“Companies whose WFH experience during the early months of COVID-19, and whose productivity has held up, would have decided to give up their office space.”


Another casualty of COVID-19 lockdowns is commercial property, with papered-over mall units often accompanying stories detailing brick-and-mortar retail’s decline. However, Bramley-Jackson cautioned against offering it as proof that e-commerce is the be-all and end-all of retail.

“The notion that just because there was a big spike in e-commerce activity during the lockdown period, and that it totally eclipsed physical retail, is wrong,” he stresses. “Margins in pure online retail businesses are very, very thin, and therefore profit is precarious.

“Most of the bigger, more established retail companies that have an online business enjoy an ideal combination of physical and online that align with each other. Online penetration may have gone up but it’s more of a symbiotic relationship with physical retail. It’s been many years since it’s been cannibalistic. I don’t see it eclipsing the physical space.”

While agreeing on the need for an omnichannel approach, Koh noted an increase in online brands “moving to stores to capture a wider audience and increase brand awareness”. She asserts brick-and-mortar malls will not go obsolete, but landlords will need to position their properties carefully.

“Retailers now have more options, and therefore they will be more selective,” she explains. “Location and accessibility will be critical for the success of a mall, as well as scale and positioning. We think the large destination mall where the landlord can curate a trade mix that caters to the consumer will do better.”

For Song, the Westfield London shopping mall near Notting Hill offered an example of driving footfall and spending with a popup store named Trending Store. With the help of Artificial Intelligence (AI), fashion stylists filled the store with items sourced from mall tenants such as Topshop and Stuart Weitzman to reflect trends of social media. In-store screens showcasing live trend data and relevant hashtags complete the online-IRL (in real life) combo shopping experience that ran from July 3-7.

“A lot of e-commerce businesses want to open physical stores to improve their brand image. To meet this demand, landlords can provide shorter or flexible leases to attract them,” Song says. “When I want to open a store online, there are lots of ways to find data whether paid or otherwise. But if I am opening a physical store, it’s not so easy to get help from landlords or experts on things such as positioning, what to sell, and marketing.

“The landlord and tenant really have a lot of data, such as camera data and footfall that can be useful for machine learning to make predictions for rent and change the rental model. You could also use footfall to predict traffic and sales for each tenant. This could lead to improved services for the tenant, and attract them back to the mall.”


The increase in e-commerce and WFH arrangements has also spurred demand for warehousing and data centres during COVID-19 lockdowns. Koh explains that e-commerce players selling essentials such as groceries and pharmaceuticals fuelled a surge for warehouse space, and the supply chain disruption during the period had led to companies adopting a ‘just-in-case’ approach which translated to higher stock levels.

Demand for data centres have also seen a similar surge tied to internet connectivity and software companies’ ability to meet requirement for WFH arrangements. While Koh acknowledges a general shift towards the digital economy that COVID-19 has accelerated, her fellow panellists point out things to consider when building data centres.

“It’s not easy to get the power supply you need because it’s a lot more than what you can get off the grid,” Bramley-Jackson explains. “You need a backup power supply to ensure the facility doesn’t close down when you do get problems with the grid.

“It’s tricky but the good thing for investors is that once you have a data centre established, it’s a little like logistics warehousing in that the tenant puts a lot of investment into the unit. As with fulfilment warehousing, the data centre tenant is much more captive because of the investment that has been put into the facility.”

Song, meanwhile, points out the possibility of future data centres being built near residential areas out of necessity.

“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,” notes the professor. “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.”

Song Changcheng, Wendy Koh, and Stephen Bramley-Jackson were panellists at the Mapletree Real Estate Forum webinar “Opportunities and Challenges for the Real Estate Sector in the COVID-19 Era” held on 30 October 2020. The webinar was organised by the SMU Lee Kong Chian School of Business.


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Originally published at https://cmp.smu.edu.sg/article/real-estate-landscape-during-covid-19

Last updated on 30 Nov 2020