COVID-19 and the Singapore real estate investment sales market

Our view: If there is a quick resolution to COVID-19

In our previous quarterly write-up, we had anticipated investment sales to come in between S$30 and S$35 billion in 2020. However, we believe that the range may have to be reduced significantly to S$20 to S$25 billion, not because of any deterioration in buyer sentiment but rather coming into the new year, there are hardly any large seller’s mandates. Owing to the sudden crimp in supply, it is creating a condition where buyers, as the year progresses, face greater pressure to invest, and may end up stretching their offers. This may result in generally higher prices in some asset classes, especially the office, retail and hospitality sectors.

Since H2/2019, the China region has been experiencing a brew of issues. Beginning with the HK protests, the entire Chinese continent has, at the time of writing, sunk into a quagmire of uncertainties. Graph 1 shows the output of the RICS investor and sentiment index survey for Q4/2019. We believe that, come Q1/2020, not only will both indices fall further but also that Hong Kong and China will fall relatively greater compared to other Asian cities.

However, in the backdrop, liquidity is piling up and those with an Asian mandate will have to find relative safety in a sea of uncertainty stemming from the outbreak of COVID-19. Using Q4/2019’s indices as a guide, within the China, Hong Kong and Southeast Asian region, both investors and occupiers’ sentiments towards Singapore had been relatively strong and had placed the country above previously popular markets in China and Hong Kong. We believe that 2020 may turn out to be a year where the channel of investment flow bifurcates sharply with a pool heading towards North Asia ex-China (Japan and South Korea), and another moving down to Singapore and Vietnam. All this is due to the relative risk of being affected by the direct and indirect fallout from the COVID-19 outbreak and the need to find an abode for both institutional and family capital.

Whilst there is still a lack of visibility with regards to large sell side mandates in Singapore, the weight of money looking for relative safety may force bring about off-market transactions at record prices. Nevertheless, even if record prices are set, but because of a dearth in selling mandates and the chasm in the bid-ask spread, total investment values this year may still come in below 2019’s.

Our view: If COVID-19 infections prolong or the virus finally becomes the new norm

Our approach to looking at the future of our investment sales market is based on the various scenarios that may take place. There are four general ways as to how investment confidence may behave ahead. This is predicated on governments and society accept the presence of COVID-19 in our daily lives as the new norm, or if hope is rekindled with the discovery of an effective vaccine. The fifth direction of investment confidence is severe and may be discussed in a subsequent blog. These are conceptually shown in Graph 3.

The point O is the start point when investment sentiments begin to fan out. O begins from the day after this current period. Its timing is relative. It depends on the strategy governments take to contain the spread of the virus. The directional vectors are basis vectors representing sentiments. Each vector is not of equal time (e.g vector 1 is 6 months and vector 3 is 2 months) but have been normalised to unit time for comparison. The same goes for sentiments. We normalise both sentiments and time because we do not know the strength of the former and how long the latter will be for each scenario. Therefore, we must weed off these effects and focus only on the directional behaviour of investors. In other words, Graph 3 depicts five scenarios that are time independent.

At the time of this writing, governments around the world have not taken a unified approach to tackling the outbreak. Some are reporting incredulously low infection numbers, some are conducting selective testing while others are game to their residents having easy access to tests. Naturally, the various stance adopted would result in differing infection rates. Also, the degree of border controls appears selective. Some countries are exercising strict border lock downs e.g. Mongolia, and many others have selective border controls. The multichotomous approach adopted by other governments and changing domestic policies on travel that makes it difficult to get a sense of the infection curve profile for any country. For countries that do not take precautions, it is easy to pick the curve. It is similar in shape to the pink curve in Graph 4. But for us, because we adopt a multi-pronged approach (social distancing, quarantine or stay home orders for those travelling in and barring short term visitors from entering etc.) our rates of infection will be lower but the time for the infections to fall to negligible levels will also be prolonged.

If we believe that the infection numbers follow the stylised curves in Graph 4, we really don’t need to get to the peak in order to find out when things will start to get better. All we need is to get to the point when the infection numbers begin to slow, and the informed will be able to build the math to estimate when the inflexion point is and when the whole episode may end. Unfortunately, at the time of this writing, for Singapore and the world, that is difficult to ascertain because we are seeing an acceleration of infection rates in some countries, different approaches taken by countries to test for infections and some countries incredulously reporting almost negligible infection numbers. Also, because of confounding factors, the shape of the infection curve may be distorted. If there are no surprises then, once the infection numbers begin to lower, we may be able to have an idea of when the worst will be over.

Scenario 1

One of the ways for this scenario to play out is when there is visibility of how the COVID-19 issue is expected to turn out. For example, using Graph 4 as a reference, when the rate of infections begins to lower (the light blue boxes), even before reaching a peak, fear levels will begin to dissipate and markets, being forward looking, will pounce on the opportunity, generally once travel restrictions are lifted (for decision makers to fly in). Thus, even if the numbers of infections continue to rise, there will be a sudden rush to acquire assets (both private or public equity) regardless of whether yields are compressed or if real assets (opposed to equity) are attractively priced.

Scenario 2

Once there is either some clarity on certain fronts (e.g. the ability to travel relatively openly without restrictions), companies can begin to return to a business-almost-as-usual mode. Investors will be able to travel to carry out due diligence work on Singapore real estate assets. Under this scenario, infection numbers are still rising but the rate of increase appears constant rather than accelerating. (The light green boxes in Graph 4.) Scenarios 1 and 2 need not be absolute in terms of the degree of climbdown in the severity of COVID-19 affecting our lives. It can be relative. For example, if a complete lock down is implemented in Singapore and then relaxed sequentially, the effect is the same to feeling relieved. (Similar to the feeling that if one is subjected to tough Special Forces conditioning and then brought back to basic, but nonetheless tough commando training, the psyche improves.) If infection curves are smooth, like those in Graph 4, the first two scenarios can begin. Other possibilities that can lead to an improvement in investment sentiments can be:

• The global village begins to accept that COVID-19 is here to stay;
• COVID-19 mutates to a less virulent strain;
• Society runs into fatigue from prolonged anxiety.

Scenario 3

If there is continual flux in the way governments react to COVID-19, it may not give investors and society alike the ability to get a clearer picture of where markets may be headed. For instance, if some governments take draconian actions to limit social movement whilst others do not, the possibility of mixed curves cannot be ruled out. Extending and expanding travel bans or sporadically turning them on and off would also be categorised under this scenario. The re-emergence of rising infection numbers after a period of decline may also keep investment sentiments within this category. Investment activity would, therefore, continue to face a protracted period of dead calm but the desire to invest would remain latently positive.

Scenario 4

Any further moderate decline in investment confidence may come about should governments, who after months of trying to battle infection numbers, suddenly implement policies that adversely affect the financial and real estate economy, for example, forcing companies and markets to shut for weeks. Investment activity will be similar to that in the previous scenario, namely non-existent, and the interest of wanting to invest will begin to wane.

If confidence levels quiver, then scenarios 3 and 4 may be the case.

Scenario 5

This is an extreme case where the outbreak takes a turn for the worse and societal behaviour gets twisted out of norm. We shall not discuss too much about this scenario, but some general possibilities that lead to this are:

• The virus mutates to a more virulent strain
• The breakdown of economics when social and economic systems function beyond tolerable norms
• Force Majeure clauses get invoked, leading to a chain of defaults
• Hostilities breakout amongst major economic powerhouses or prices of basic commodities reverse change drastically (up or down)
• Interaction effects arising from global warming

Outlook

Under the above mentioned 4 scenarios, we have constructed a matrix of vectors relating to several investment variables. This constitutes what we believe is the market place (i.e. our prior beliefs- see Table 1.)

Excluding the Scenario “Present vs late-2019”, we have 24 directional outcomes and, of this, 11 are pointed up, 3 sideways and 11 down. Therefore, on balance, the ups outnumber the downs. This forms our a prior belief (hypothetical deduction). Now we combine that with what we are picking up on the ground from potential investors.

• The interest to invest/relocate to Singapore is strong and becoming stronger. We arrived at this view after having gone through numerous meetings and teleconferencing sessions with entities presently based in Hong Kong, for example, or elsewhere in Asia
• The weight of money has not diminished. Although the amount of dry powder within private equity to invest in Asian real estate has decreased in 2019, it is still high and, for the period until March-2020, has increased to US37 billion (probably due to the inability to conclude deals during the intensification of cracking down on the spread of COVID-19 ) (See Graph 5)

• COVID-19 has spurred manufacturers (both F&B and goods) and stockists to think about the need to set up facilities in Singapore to mitigate risks of import disruptions. In this regard, the Singapore government is very likely to be looking at future incentives or ways to lower disruptions due to extreme risk events
• If economic systems do not break down, then an even lower interest rate environment may get investments, which in 2019 were deemed too rich, across the line

Prior to the outbreak of COVID-19, we were positive about prospects within the Singapore real estate investment market. Now, if scenario 5 does not materialise, we have turned even more positive for the abovementioned reasons. The impact of COVID-19 has shut down the investment sales market because of travel restrictions. The need by private equity to invest once the ability to do so is like that of a spring that has been compressed right down to the shut load. (Please see Figure 1.) The potential energy for a rebound is now high. In fact, for those who are able to pull the trigger and do a deal, the time is now, rather than wait until everyone flocks back to work.