Covid-19 slams Retail

Footfall had been slowly decreasing since early February as awareness and public concern increased. Following the April 1st shutdown and temporary closure of retail centers, Q2 segment performance has slumped.

No new leases were recorded in in Q1/2020, average occupancy slightly decreased -1ppt QoQ, following some short-term lease expiries and late cancellations in the non-CBD. Prior to the lockdown, Retail centers in non-CBD areas saw occupancy decreases, especially in podiums with their higher proportions of F&B and entertainment. International and local retailers are attempting to delay or have lease terms re-evaluated. In the short term, vacancies will increase.

Average asking rents decreased -2% QoQ, reflecting the lower non-CBD offers to attract new tenants. Some retail center vacancies in these areas offered up to -30% lower rents than Q4/2019. Many CBD shopping centre landlords with full occupancy were reluctant to adjust rents in the short term but increasing downward pressure is anticipated.

Landlords and Occupiers respond

Local landlords have moved faster to support tenants than foreign proprietors. Since Feb, Vincom Retail in February announced existing rents would by subsidized relative to the impact Covid-19 has on each tenant business. Hung Thinh have also offered reductions between -20 to -40% on a case by case basis. Over the last two months of Q1 most tenant requests for rent support have been handled individually. A recent pre-shutdown Savills Landlord survey found -10% to -30% monthly rent reductions were being offered and, in a few cases, up to -50 percent.

With students at home since Tet, Educational providers, Gaming and F&B occupiers have seen significant drops in revenue and are also seeking lower rents over the shutdown.

New retailers considering entry have been renegotiating rents. Some have deferred finalizing new leases and those with pre-shutdown leases have sought rent-free extensions.

Street Retail hit hardest

Shopping center leases tend to be more legally binding and with occupiers wishing to retain space, occupancy has remained high. For prime street Retail landlords, the Covid-19 effect has been immediate.

As most are small to medium enterprises, street retail tenants are more affected by sudden revenue losses than larger scale retailers. Well-known brand outlets with shopping center and prime street retail presence are closing their street outlets first.

Since early February many street retailers have decided not to renew leases. Those wanting to retain prime locations after the pandemic has eased, are under temporary closure or requesting rent reductions over the shutdown. A recent Savills Research survey found some restaurant revenues had dropped -50% MoM in February and -80% in March. Whole-lease requirements and high rents were further reasons for closures.

Weaker macro indicators

The temporary lull in demand has severely affected quarterly Retail macro indicators.

In Q1/2020, sales of goods and services were over US$54 billion and up 4.7% YoY. Excluding inflation, real growth of 1.6% represented the lowest Q1 performance in 10 years. Quarterly retail sales valued at US$13 billion were down -1% YoY. Against the 12% growth in January and 2% in February, was a -11% YoY drop in March.

Accommodation and F&B revenues were down -31% YoY. While social distancing has resulted in declining consumer confidence, the pandemic has further hit businesses already affected by the zero-tolerance drink driving ban made Law in January 2020 by Decree No. 100/2019/ ND-CP.

E-commerce and home delivery booming

The social effects of the pandemic have since amplified e-commerce. A Google Temasek Report anticipated 43% YoY local segment growth from 2018 to US$15 billion in 2025. This was supported by 66% of Vietnamese being regular internet users, 72% having smart phones but most significantly. with 35% of the population, by Millennials.

Between 22 and 37 years old and at ease with social - digital technologies this is a highly influential and valuable demographic – on and offline. Some effects of Covid-19 and technology accelerating lifestyle change may prove longer term.

As e-commerce has increased, so have delivery services; and especially in F&B, with innovative owners ramping up delivery options. Supermarkets such as Co.opmart and Vinmart have also expanded home delivery services.

Outlook

In the next nine months, 87% of new supply will be in the non-CBD and may result in overall lower average rents. With consumers facing loss of income and increased uncertainty, developers are now considering delaying new launches.

Expectations of early containment, alongside improved financial governance, Government support mechanisms and unprecedented global stimulus programs have raised expectations of a speedy recovery in Vietnam. According to the most recent ADB forecast of 4.8% for 2020, Vietnam will have the highest GDP growth in Asia, with 6.8% forecast for 2021.

On a positive note the lower rental costs will invigorate the industry. Existing retailers will have to innovate with both their offline and online strategies to stay relevant. ‘Social’ sectors most affected by the outbreak such as F&B, gyms and cinemas to recover quicker than others when the virus dies down and local consumers quickly embrace their normal lives after months of social isolation. Sectors with a stronger online presence such as fashion may see a slower return considering the shift in consumer behavior, from bricks-and-mortar to online, during the outbreak.

Retail Leases

For the long-term vision of sustainable outcomes for both parties, our experts provide some suggestions:

• Rent holidays/deferments for a typical period of 3months.
• To be repaid within the next 9-18months or over the remainder of the lease.
• Monthly rents and/or adoption of TO rents for the period of the crisis.
• Service charge to be kept to a minimum and paid monthly.
• Accelerate changes to the traditional leasing model going forward.
• Landlords can ask for future sales performance to agree to concessions. Historically this level of transparency has been lacking. Landlords can improve risk sharing / partnering.
• Using the current situation to identify opportunities.

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