For our ﬁrst in-depth sector review we assess the impact that COVID-19 has had on the commercial leasing market by focusing on three main stakeholders; tenants, asset owners and developers. All three of these stakeholders have been affected by COVID-19 in different ways and this brief will look at how they are dealing with the challenges posed by the pandemic.
Speaking to SPS, Grade A oﬃce tenants expressed their serious concerns about the short to medium-term effects of the virus on their business operations. As previously mentioned in the market brief, disruption to supply chains, decreased consumer spending, a sharp reduction in FDI and the postponement of expansion plans have all been major stumbling blocks that have led to a signiﬁcant fall in cashﬂow best electric skillet and a sudden contraction of business activity.
Most of the companies SPS spoke to are still advising that they will assess their operations within three to six months and conclude whether harder measures are needed should COVID-19 continue to cause major disruption. Tenants have indicated that very diﬃcult decisions may have to be made if businesses want to survive the fallout from this pandemic.
Tenants are watching closely to see how the Myanmar government induction cookware is strategising to manage the virus and stimulate the economy during this downturn.
In terms of rent relief, Grade A oﬃce tenants have not been offered any rent-free at this stage. Furthermore, none of the tenants we contacted have asked for any rent relief. However, they have advised that if the situation persists their position could change dramatically and tenants may actively seek rent reductions to counter the loss of turnover and the reduction in staff numbers.
Alternatively, SPS have found that occupiers of Grade B oﬃces have taken a more aggressive stance with regards to rentals. Many are actively seeking rent reductions from their landlords. This is likely due to the fact that many occupiers are SMEs and do not have the ﬁnancial weight to sustain prolonged periods of dramatically reduced revenue, and while the government stimulus will help nationally owned SMEs, foreign owned businesses will receive no such beneﬁts.
In terms of business development and marketing, most businesses have placed these activities on hold as they do not want to promote their business services at a time when most of their customers are focusing on their own operations and survival. Again, this decision will be reviewed periodically and business development and marketing activities will commence once the business environment has improved.
Looking past COVID-19, most tenants believe the business landscape will change signiﬁcantly. They have indicated there will be a “catch up” period and time for toowoomba electricians re- organisation as companies recover from the effects of the virus. Again, tenants indicated that asset owners should incorporate a high level of hygiene control into their property management as they have become more prudent on the matter.
In general, tenants believe and hope that COVID-19 will be a short-term issue and will last no longer than three to four months before things start to return back to normal. None of the businesses SPS spoke to are looking to close their operations in Myanmar and believe they will gradually increase their workforce to pre COVID-19 levels within three to four months of the virus being under control.
Grade A oﬃce building owners have expressed grave concern over the effects that the virus will have on their assets having only just recovered from a period of high vacancy and falling rental rates.
Whilst mixed-use building owners have offered retail tenants within their developments generous rent relief due to the forced closure of shopping malls, at present they are not offering oﬃce tenants any rent-free as there are still reasonable numbers of tenants using their oﬃces, albeit at a reduced capacity. Oﬃce tenants are offering their staff the ability to work remotely either full time or part-time so their oﬃces are still operational, which seems to be the justiﬁcation not to offer any rent relief at this time.
COVID-19 is expected to have a signiﬁcant impact on owners of both Grade A & B oﬃce buildings in Yangon.
Post Thingyan the consensus has been that owners expect tenants will request rent relief if the pandemic impacts operations for more than two months. They suspect that tenants who have leases coming up for renewal within 6 months will negotiate hard to reduce their rental levels.
Additionally, asset owners have indicated that they expect very little new leasing activity for the foreseeable future as a result of the virus. In SPS’s most recent oﬃce snapshot it was reported that average prime rental rates were likely to increase from US$30 per sqm per month in 2019 to US$35 per sqm per month in 2020. However, due to the outbreak of COVID-19, owners are expecting downward pressure on rental rates. As such SPS suggests that average rental rates will likley plateau at US$30 per sqm as displayed by the blue line in the graph below.
Although the impact of the virus may not have been immediate as with other real estate sectors, office developments that are currently under construction or earmarked for construction have also been affected by COVID-19. Uncertainty over supply chain issues and movement restrictions caused developers to plan for major delays, however, guidelines published by the Ministry of Health and Sport (MOHS) have now allowed construction to continue.
The new guidelines issued by the MOHS, which have been released since our initial overview, are aimed at allowing the continuation of construction whilst minimising the risks of virus transmission. The guidelines include measures such as;
By implementing these measures it is likely that developers can continue construction without incurring major delays.
Iain Fairbairn, Project Director at Yoma Land, told SPS “on the Yoma Central site our contractor has implemented workplace practices that are in line with the guidelines published by the Ministry of Health and Sport in order to limit the spread on COVID-19.The Employer (MDL) and Engineer (SPADPS) are also working within these guideless as well as their own company policies and procedures for the current COVID-19 issues.”
That being said, since Thingyan, developers have had to deal with workers unable to return to Yangon as disruption to transport links has meant many workers have been forced to stay in their domestic provinces following the holiday break. Additionally, the pandemic affected productivity further by creating hurdles in the hiring process which has seen new employee numbers fall signiﬁcantly, especially in those workers coming from abroad. Developers can continue construction without incurring major delays.
Developers have stressed that the disruption to supply chains is a major issue. Restrictions on movement in countries such as China has meant some developers have had to secure new suppliers of raw materials to “feed the build machine”. The true extent of how these issues will impact developers is still to be seen, however, at present most developers are still looking to complete construction inline with their original timelines. Initially, developments due for completion in H2 2020 were seen as being most at risk from the pandemic. However, Ycomplex, by Tokyo Tatemono Co., Ltd., and M Tower, by Mottama Development Group Co., Ltd., are still due for completion in the latter half of this year.
As seen in the graph below, the addition of these projects will see oﬃce space in Yangon grow by 51,355 sqm, however, if COVID-19 does cause further delays we could see this stock completed in Q1 2021
Developers continue to suggest that leasing activity after COVID-19 will likely be sluggish, however, they remain conﬁdent that their new developments will attract tenants as rental rates remain low. A number of developers believe demand will come from companies that are currently leasing comparatively hard anodized cookware inferior buildings in Yangon and are looking for an upgrade at a relatively small increase in net effective rent.
Some developments due for completion from 2022 have indicated that they are relatively conﬁdent market rental rates will have recovered by the time they come online as they expect COVID-19 to be contained and controlled by then. These developers are looking to attract tenants that want to make up for lost ground that was encountered by the virus’ outbreak in 2020.
Notwithstanding the comments above, one internationally funded developer commented; “The global slowing down of hospitalization and death rates is positive news as is the phased re opening of many economies.
Myanmar’s economy is forecasted to grow at a reduced 2% compared to a negative 2% growth for the world in general. Despite the downgraded forecast this is positive news for Myanmar. Whilst remaining cautious in this unique global and domestic situation we are continuing to develop our project with expectation the market will recover within this year albeit a changed landscape. Changes to the way we work and the work spaces required must be seen as an opportunity for developers not a threat. One certainty is this world is changing.”
There is no doubt that the effects of this virus are unprecedented on a global scale.
Whilst government statistics on the effects of the virus in Myanmar suggest that the impact on the population has been signiﬁcantly less than other nations globally, as well as in the region, responsible measures introduced by the government to contain the virus have understandably resulted in a slowdown of business activity across the whole economy.
The property market is no exception. Demand for Grade A oﬃce space is likely to fall in the short term. FDI into Myanmar, especially from the Asia Paciﬁc Region will likely be deferred and reassessed in the ensuing three to six months.
These factors will place downward pressure on rental levels in the short term.
Additionally, the longer the situation remains, tenants will look to secure rental relief from building owners during this time.
Developers who are in the process of constructing new Grade A developments have indicated that there will be little or no disruption to their build schedule and anticipate that rental levels will recover once the virus is contained and controlled and business activity starts to recover and improve.
Moving forward, building owners and developers have conﬁrmed that much greater emphasis will be placed on health and hygiene and these new measures will be implemented permanently.
Whilst the negative impact on the property market has been dramatic, it is likely that the recovery will gain momentum quickly as the virus is controlled and contained, businesses recover and FDI begins to ﬂow back into Myanmar.