There is enormous disruption to the retail sector, however opportunities remain; quick responses, adaptive business practices and forward planning are important now
Unprecedented Impact of COVID-19
With no new projects in the first quarter stock at approximately 1.6 million m², was stable QoQ and up 13% YoY. Average ground floor gross rents eased -2% QoQ and -4% YoY and occupancy was down -1 ppts QoQ and stable YoY. Non-CBD projects had steeper declines in rents and occupancy. Highest take-ups were in the department store segment and the ‘Others’ area after occupancy improvement in the recently launched Aeon Mall Ha Dong.
Retailers have seen footfall drop since February and in mid-March when the first Hanoi infection was reported it fell. Contagion concerns led to temporary closures of restaurants, cinemas, social-entertainments and fitness centres. A recent Savills Tenants survey found 55% had revenue drops of over 50% QoQ. Most categories were affected and only supermarkets registered up to 20% growth. In the short term, mall vacancies are set to escalate.
Landlords and Tenant Actions
Short-term lease amendments to support struggling tenants include: rent reduction, rent-free periods, extended payment schedules, or moving to a monthly rental basis. Relief requests over the last two months have been handled individually. New tenants considering entry have been renegotiating rents or have postponed finalizing contracts.
Our Tenants survey showed 57% participants wanting landlords to lower rents by up to 50%, and 31% seeking exemptions. Our Landlords survey showed a reluctance for rent reductions that high but most would reduce by around 30 percent.
Street Retail Affected
Mall occupancy stayed high since well known brands are better equipped to endure and wish to avoid losing security deposits or risk legal action. Street retail had more widespread closures with smaller business more sensitive to economic fluctuation. Brands with outlets in both initially closed their street stores.
Small and large street retailers with revenues falling 50% were hardest hit with rents accounting for up to 50% of total operating costs. Tenants have proposed rent exemptoons over the lockdown in April and 20-50% rent reductions for the next three to 12 months. Many are continuing to negotiate further reductions in other business expenses; some will not renew their leases.
Macroeconomic Deceleration
In Q1/2020, total goods and service retail sales, were approx. VND 135.7 trillion up 2.3% YoY, or US$5.9 billion, and 7.8 ppts lower than Q1/2019. Growth eased from 11.7% in January to 7.6% in February and -3% in March.
Retail sales valued at VND 87.6 trillion, or US$3.8 billion, maintained high 9.3% YoY growth. Despite incomes and purchasing power under pressure, growth was attributed to temporary higher demand from stocking up household essentials and increased moves to e-commerce.
Despite being high season, accommodation and F&B sales fell -20.2% YoY. Alongside pandemic effects, stricter drink-drive laws in Decree No. 100/2019/ ND-CP, effective since January 2020, has seen a significant drop in tourists and locals drinking and eating out.
CPI increased 1.07% MoM in January but decreased -0.07% in February and -0.89% MoM in March. Four out of 11 groups reported falls, notably Transportation; Culture, entertainment & tourism; Food, foodstuffs & catering; Housing, electricity, water, fuel & construction materials; and Beverages & tobacco.
Shopping Channels
COVID-19 is accelerating e-commerce while hitting bricks-and-mortar retail. A Savills survey revealed 28% retailers were using online channels with 28%, solely online. Many have seen 30% growth in online sales. Growth is supported by 68% of citizens being internet users, which is expected to be 75% in 2020, according to the ‘Plan on E-commerce Development in Hanoi in 2020’.
The related surge in F&B moving to delivery platforms is an innovative way to stay operating. Mid- and high-end restaurant brands were immediately affected, but most switched to home-delivery. Low-end had less changes with many already prioritizing online for cost savings.
Fewer shopping trips by stocking up saw a move away from street shops and convenience stores to major retail. Hypermarkets, supermarkets and minimarkets have wider and lower priced product ranges and have recently extended home-delivery services.
Outlook
Until 2021, 19 projects with approximately 195,000 m² will enter. Notable developments include Vincom Mega Mall Smart City, Vincom Mega Mall Ocean Park and Hinode City. The majority, at 43%, will be in the West with 28% in the Secondary. Continuous supply expansion to non-CBD areas has overall rents expected to decrease. Projects scheduled to enter in 2020 are considering delaying launches.
A recent Savills survey found 61% occupiers are positive about recovery, if the pandemic ends in Q2; but if it continues, 86% felt recovery would take at least six months. F&B, entertainment, education and fitness centers are anticipated the first to bounce back as local consumers will want to rapidly embrace ‘normaliity’ after extended social isolation. Categories such as fashion & cosmetics; or furniture, households & electronics are likely to take longer to recover.
COVID-19 has amplified opportunities for e-commerce and home delivery services. However, supply chains will face demand challenges from quarantined workers and travel restrictions. In the mid-and long-term, e-commerce and home delivery are expected to grow as a result of pandemic affected consumer sentiment and behavior.
With the global pandemic still developing, predicting a post COVID-19 economic scenario is difficult. The Asian Development Bank forecasts Vietnam will maintain economic stability and growth in the mid- to long-term. GDP growth is forecast to ease to 4.8% in 2020 but rebound to 6.8% in 2021 - if the pandemic is contained within 1H/2020. Vietnam will retain its position as one of the fastest growing SE Asian nations.
Retail Leases
Our experts provide suggestions to develop longer term sustainable outcomes:
- Closer tenant engagement, review requests on a case-by-case basis and provide flexible support.
- Rent reductions dependant on location and sales.
- Rent suspension during lockdown.
- Rent paid monthly.
- Extend payment schedules.
- Reduce service charges to minimum and paid monthly.
- Seek online opportunities. E-commerce will emerge with a bigger share when the crisis ends.