The coronavirus outbreak has led to investors hitting pause due to an uncertain economic climate. When compared to the 2008-09 global financial crisis, the peak-to-trough for it occurred over a two-year period but this time the economic decline will likely be much sharper. Singapore-based Priyank Shah, Director Capital Markets, Asia-Pacific, JLL, tells Vandana Ramnani of Moneycontrol in an interview that like other markets, India will likely see a rebound in transactions in the second half of 2020 and the country remains high on investors’ radar globally.
Edited excerpts:
Q) If the economic impact of COVID-19 lasts for many months and social distancing measures are maintained, how will it affect institutional investment in the real estate sector globally as well as India?
Commercial real estate investment in India, as in other regional and global markets, has been impacted by the COVID-19 spread and the closure of many parts of the economy. As a result, many global investors have paused activity due to the uncertain economic environment and hence, deal activity has been impacted. We see this reduced activity continuing into Q2, with trading volumes likely to bounce back more strongly in the second half of the year.
Q) Will investments get impacted? If yes, by what percentage?
Transaction volumes in the first quarter of 2020 declined significantly, which was widely expected by the market. Real estate transaction volumes experienced a steep contraction in Asia-Pacific, a year-on-year drop over 30% for the Asia-Pacific region, ending the quarter at $29.5 billion.
In terms of individual markets, mainland China, Hong Kong, and Singapore were the most adversely affected markets in Asia-Pacific, all declining by over 60% year-on-year. South Korea and Japan were the least impacted, where investment activity was similar or slightly higher year-on-year.
Q) What is the impact of investments into India?
India experienced a sharp moderation in the first quarter, although not as severe as mainland China, Hong Kong and Singapore, owing to activity in the first two months of 2020. JLL estimates that transaction volumes fell by around 50 percent in the first quarter of 2020 as the severity of the pandemic became more apparent. Like other markets, India will potentially see a rebound in transactions emerging in the second half of 2020 and remains high on the radar of investors globally.
Q) Which commercial real estate sectors have seen the most obvious drop-off in investment?
Different sectors were impacted to different degrees across Asia-Pacific but all were influenced in some way by the COVID-19 spread and containment measures introduced by governments. By sector, retail investment took the worst hit, in the wake of forced shutdowns and the ramping up of safe-distancing measures.
Hotel transaction activity also moderated sharply, partially aided by a few large-scale deals finalised in the earlier part of the quarter in major markets in East Asia. Office assets continued to be most sought after by offshore and domestic investors, yet volumes fell as investors reassessed strategies and owners held back on sales due to perceived pricing dislocation.
Encouragingly, the industrial and logistics investment market has weathered the storm, so far, and proven to be the region’s most resilient asset class. As communities become more reliant on e-commerce and businesses look to shore up supply chains and warehousing space, the industrial and logistics space became a more essential part of the Asia-Pacific real estate market and we would expect its attractiveness to investors to only grow in 2020 and beyond.
Q) What happens to the existing deals and those in the pipeline?
Some existing deals remain in play and others have been put on hold until more clarity around the economic impact of COVID-19 becomes available. Despite how the COVID-19 outbreak influences economic activity in major markets like the US and EU, the majority of the tenants will get likely impacted in some form and their expansion and growth plans will be delayed for the short-term. However, there are many well-capitalised investors waiting for opportunities, and we think the dislocation in the markets will create a strong deal flow across most sectors in the second half of the year.
Q) How is the current situation different from the 2008 financial crisis? Will the impact be similar to the real estate sector or far greater?
The global financial crisis peak-to-trough occurred though over a two-year period, so this time around it’s likely the economic decline will be much sharper. However, the prospects for a quicker recovery are high, due to lower leverage and early liquidity in the financial system. Real estate will rebound quickly.
Q) When do you see the global and Indian real estate sectors turning around?
Our dialogue with the market has shown that new investor entrants are keen to play a bigger role in regional markets like India. Opportunistic capital, like private equity and family offices, will play a more significant role in the national and regional real estate sector when stabilisation becomes more apparent.
In recent weeks, some early indications of what comes next are also emerging from an economic and investor standpoint. We are beginning to see some signs of market dislocation that is generating more frequent conversations with investors. Another factor that will potentially restart capital deployment is the fact that investors in Asia-Pacific sit on a record level of dry powder. Given that pension funds and insurers are also looking to buy cash- yielding assets like real estate, we’re optimistic that signs of a rebound will likely emerge in the second half of the year.
Q) What are the takeaways for the real estate sector from this crisis?Staying close to our clients and the market is the key. At this time of fluidity globally, the best indication and support we can give to this market is by staying close to it and listening to all views, understanding individual appetites and concerns, and most of all, helping.
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