ULI China Full Members Discussing the Impacts of COVID-19

ULI China Full Members Discussing the Impacts of COVID-19

March 13, 2020

by Annie Yao (YLG member)

ULI China Mainland successfully held an online Full Member seminar (in Chinese) on March 5. Seven experts from different real estate backgrounds shared their views on the current status and trends of the real estate market under the influence of the Corona virus from the perspective of real estate leasing, development, investment, legal affairs, and technical consulting. In the end of the seminar, they also provided professional answers to questions from audiences. In addition to the mainland China, this webinar is also open to members from the Hong Kong, on the purpose of giving a positive impact on improving the professional practices of real estate practitioners in the two areas. ULI Webinar Series: ULI Full Members Town Hall Meeting.

Highlights of this seminar:
An analysis of the real estate market in Beijing  
The virus affects the rhythm of the development of the market, rather than the development itself. The rent of overall commercial projects in Beijing has fallen, and the vacancy rate will continue to rise. The office market had a very low absorption rate in the first quarter and we foresee a very slow recover in market in the second quarter. The market rebound will most likely to happen in the second half of 2020.—— Charles Yan, Managing Director, North China Colliers International, ULI Full Member

Brief introduction of Chengdu and Xi’an property market
Affected by the virus, residential developers in Xi’an and Chengdu closed their show suites in February, and mainly used online sales platforms for sales, but the transaction was few. Since this March, show suites in both cities have gradually opened, and residential sales have been slowly turning back to normal.At present, most consumers still have high confidence in the housing markets of Chengdu and Xi’an. Affected by this, the land markets of both cities performed strongly in February. While high-net-worth client groups are still more pessimistic about the housing market than the majority.

—— Na Huang, Head of Research, Zhenghe Group，ULI Full Member

Leasing contracts strategies  
Lease contracts challenges during the virus mainly include compensations for breaches and rental discounts.The rights for tenants now vary according to different types of landlords’ properties (such as office, shopping malls, industrial logistics, etc). In addition, whether tenants have completed fit-out should be considered into the judgment of the tenants’ compensation. The most important thing for tenants now is to make the best use of the current rent reduction policy promoted by the government. While landlords now are relatively in a weak position in the epidemic. But we shall still highlight that the market practices should be fair to both tenants and landlords.

—— Bernie Liu, Partner, LLinks Law, ULI Full Member 

Tips on real estate legal experience
1) We should be aware that return of advance payment and contract breaches are different terms. The rental and rental discounts discussed by the former speaker is close to the concept of return of advance payment, while the responsibility under the contract breach clause is about penalty. The false of payment of many companies affected by virus generally cannot be claimed as force majeure.2) CMBS property owners need to pay attention to two important aspects, namely the compactness of the money collection channels and the frequency of debt payment after the money is collected. Under current market conditions, the debtors may be required to pay their debts in advance. Hence, all CMBS property owners are recommended to check carefully on the terms of their loan contract and be well prepared for any payment risks. The domestic penalty interest rate in China is currently non-linear, so it is difficult to determine the daily penalty rate if any penalty happens.

3) Owners of Equity REITs assets should review and adjust the performance goal, the performance commitment and the reward system of property’s management team when the changes in circumstance terms on the operation contract allow.

4) In the future, if any breaches and bad debts happen, the normal dispute resolution procedures will likely be mixed with the bankruptcy processes, which gives a big challenge to get a final judgement under the existing legal system.

—— Paul Lee, Partner, Jingtian & Gongcheng, ULI Full Member

Inspirations of resilient cities
Building’s resilience refers to the ability of enterprises and developers to learn and anticipate unknown risks and their influences, and at the same time to establish self-healing capabilities to tackle the uncertain risks. During the virus period, technical consulting enterprises should leverage their knowledge and professional networks to provide effective property management improvement suggestions to help enterprises improve their space management.—— Atlas Chan, Associate Director/China Planning Leader, Arup, ULI Full Member

Impact of the virus on commercial assets
Commercial assets: From the sales revenue perspective, the negative impact on community malls is slightly smaller than that of on large shopping malls located in the city center. Conversely, from the perspective of rental income, the virus has a greater impact on community malls. The negative impact of the virus on new projects is greater than on properties with stable operation.Office building assets: New properties with high vacancy rates are affected greatly. However, tenants of matured projects are more willing to consider lease renewal.

Investor preference: Investors are likely to be risk avoided and will pay more attention on pipelines’ operational stableness.

—— Carrie Liu, Managing Director, China Life Captial Investment, ULI Full Member

Market trends stimulated by the virus
Firstly, we estimate that the government will not create common stimulus policy. Secondly, shopping malls may not be able to go back to normal operation until the second half of 2020. Besides, office owners should pay more attention to the national policies of their tenants’ industries to estimate their ability of payment.New trends stimulated by the epidemic include:

  • Healthy buildings will play a more and more important role in residential market, and consumers will pay more attention to properties’ quality and brand
  • Online digitalization becomes a trend, including telecommuting, online marketing, online services, etc.
  • Residential project development needs to integrate the services for residents’ daily life so that to improve their product competitiveness—— Alfred Wu, Assistant President, General Manager of Greater China Asset Management Department, Fosun  Hive, ULI Full Member
Q: Smart Building Operation
Each operator should conduct comprehensive inspection of the building’s facilities and operating processes to identify and solve problems in time. When replacing equipment, it is more and more important to consider its sustainability to ensure long-term operational efficiency.—— Roger Qian, General Manager, HARVENCY, ULI Member

Q: Impact on Co-working operators
The economic dynamic of a city is the basis for the profitability of co-working. Therefore, co-working operators in tier1 & tier1 plus cities are relatively less affected by the virus than other cities. Although the virus weakened the financial performance of small and medium-sized enterprises, it also promoted small and medium-sized enterprises, especially those in second-tier cities, to actively adopt more flexible office methods, which provided more business opportunities for co-working operators in tire 2 cities. Now co-working operators should take this chance to focus on providing high level of building management and community service quality so that the market would recognize their operating capabilities and brands.—— Carrie Liu, Managing Director, China Life Captial Investment, ULI Full Member

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