Commercial Real Estate

Offices could be emptier in the future as people work from home. Here's what investors need to know

Key Points
  • The pandemic could significantly affect office real estate investment trusts, or REITs, in the short to medium term, according to analysts.
  • An increasing number of companies could allow their employees to work from home for an extended period of time, analysts predicted. That could lower the need for office real estate space.
  • That risk is higher when the exposure to coworking spaces are taken into account, with office REITs in some Asian financial centers such as Singapore being particularly exposed. Coworking operators such as WeWork have been badly hit as their offices emptied out amid global lockdowns.
A man with a mask on taking a walk at Marina Bay Sands in Singapore's central business district seen in the background on April 1, 2020.
Suhaimi Abdullah | Getty Images

The future for office commercial space looks increasingly uncertain, as more and more people work from home and some employers consider making it a permanent arrangement — even after the pandemic.

Transactions for office leases or sales are already significantly lower this year compared to a similar period in 2019, according to data from real estate companies.

The pandemic could significantly affect office real estate investment trusts, or REITs, at least in the short to medium term, according to analysts. However, some are still somewhat positive on the longer term outlook.

REITs are companies that manage a portfolio of properties such as offices, malls, or hotels. Income generated from those assets, after accounting for fees, is distributed as dividends to shareholders.

The risk to real estate is higher when the exposure to coworking spaces is taken into account, with office REITs in some Asian financial centers — such as those in Singapore — being particularly exposed.

Investors generally find REITs attractive for their dividend payout and the potential for capital appreciation, and as a diversification in a portfolio of stocks, bonds and cash.

For now, here's what investors need to know.

Will office space get cut?

An increasing number of companies could allow their employees to work from home for an extended period of time, analysts predicted.

Companies could even look at longer-term flexible working arrangements, spurring concerns of a smaller real estate footprint ahead, said Derek Tan, head of property research at Singapore's DBS Bank.

Rentals may get affected as a result.

Esther Liu, director at S&P Global Ratings, said: "We expect that the recessionary conditions will soften leasing demand in major central business districts across Asia Pacific. We also believe the 'working-from-home' measures may lead to a shift in longer term demand, as they present companies with the opportunity to cut space requirements."

However, that shift will take time, and there won't be a "significant drop" in occupancy in the near term, particularly in the prime, central locations, she added.

Co-working (flex-office) generally has been a major disruptor to the office sector in recent years, and a major contributor to the take-up of office space. However, COVID-19 makes this business model difficult...
Chris Robinson
APAC head of liquid real assets for DWS

Overall, transactions have plunged in the first quarter of this year, industry reports show.

Office sale transactions across Asia-Pacific fell 36% year-on-year, said real estate services firm, JLL.

According to property firm Knight Frank, 73% of its Asia-Pacific markets saw a drop in office leasing demand from April 1 to April 14. Overall, in the first quarter, its Asia-Pacific commercial transaction volumes fell 51% year-on-year to $21.6 billion, data from the firm showed. Hong Kong was among the top declines and fell 80%, while in Singapore, commercial transactions tumbled 75%.

Are office REITs a buy?

Investors should take a long-term view on office REITs, analysts said. There will be more immediate pressure on operations and cost for companies, but ultimately the impact on office REITs will be "manageable and temporary," said Ken Foong, equity analyst at Morningstar.

In Singapore, a major financial hub in Asia, balance sheets of REITs "remain sound," said Foong, adding that they are "better positioned" now than during the global financial crisis in 2008.

But investors should expect that distribution of dividends might not be the same as before.

"Given the ongoing challenges and costs in the near-term, it is possible REITs may delay portions of their distributions to a later date, or until their full year results are announced," Foong said. "Providing options for unitholders to participate in a distribution reinvestment plan to preserve cash in the near term is another possible scenario."

VIDEO1:0601:06
The office sector will come back, but with some changes: Analysts

One headwind for office REITs is that capital expenditure could go up with the need to reconfigure spaces to cater for distancing requirements, said Chris Robinson, APAC head of liquid real assets for DWS.

For investors who are still keen, here are some analysts' top picks for Asia REITs:

Are coworking spaces a risk?

Coworking operators such as WeWork have been badly hit as their offices emptied out amid global lockdowns and employees were ordered to work from home.

WeWork has reportedly sought rent rebates from landlords, as thousands of its tenant companies halt rent payments or try to break their leases.

That problem worsened as the company expanded aggressively last year before the pandemic hit, and signed hundreds of new leases.

In Asia-Pacific, office REITs in Singapore are among the most exposed to coworking operators, analysts say.

That exposure for Singapore's listed REITs is among the highest — at close to 5%, according to DWS' Robinson. It is lower for those in Hong Kong, Sydney and Tokyo, he said.

VIDEO4:4004:40
Is coworking really the future?

Overall, in Asia, coworking operators have been expanding the most across Singapore, Jakarta, Kuala Lumpur and Bangkok, said DBS in a report last year.

In Singapore, Capital Commercial Trust is the most exposed, with 10% of its total occupiable floor space leased to coworking operators, said Tan of DBS. Just last year, it leased an entire 21-story office building in the city-state's central business district to WeWork.

"Co-working (flex-office) generally has been a major disruptor to the office sector in recent years, and a major contributor to the take-up of office space," said Robinson. "However, COVID-19 makes this business model difficult, especially in the next 6 to 12 months with the potential for rent relief ... in this tenant base having increased materially."

Some REITs have also been running their own coworking spaces, he added.

Disclosures: Ken Foong of Morningstar does not own any shares in Keppel REIT, Capitaland Commercial Trust or Suntec REIT. Derek Tan of DBS does not own any shares in Keppel REIT.