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Home Investing News

Changes in retail and the property sector

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July 17, 2022
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Changes in retail and the property sector
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The economy is slowly but surely opening up. As of the end of May, vehicular traffic was already at 81% of pre-COVID levels. Foot traffic in shopping centers was 65% of its 2019 peak. More people are back to work as unemployment decreased from 7.1% in March 2021 to 5.8% last April. Local and foreign tourism is rebounding too, thanks to fewer restrictions.

Our consumer-led economy is pulsating again, albeit with permanent changes in some sectors resulting from the two-year lockdown. Nowhere are these changes more pronounced than in the retail and property sectors.

Jon Canto of McKinsey and Company provided valuable insights in BusinessWorld’s recently concluded economic forum entitled, Revolutions 2022.

IN RETAILThe pandemic accelerated the evolution of the retail landscape. Consumer behavior shifted, now fully embracing e-commerce. McKinsey’s survey shows that more than 90% of consumers in ASEAN’s six largest economies have continued patronizing at least one digital retail service even after their lockdowns were lifted. That number was highest in the Philippines where 95% said they continued purchasing products online. Filipinos were the second highest adaptors to e-commerce during the pandemic, following Indonesia.

Growth of pureplay e-commerce sites like Lazada and Shopee are seen to slow down as consumers migrate to purchasing directly from the e-commerce sites of their preferred brands. The number of consumer brands entering the digital space is growing at quantum rates.

This is not to say that brick and mortar stores have lost their relevance. Consumers will still visit physical stores to test, touch, and sample products, to avail of in-store promotions, and to window shop. Thus, physical stores continue to play an important role in branding, in creating product experiences, and as fulfillment centers for brands. Most retailers will maintain both physical and digital stores.

Consumers are looking for more convenience when visiting physical stores, says the McKinsey report. Convenience comes in the form of automated checkouts, personalized offers sent to mobile devices, scannable codes to track inventory levels, and product customization.

Another emerging trend is a decrease in brand loyalty. The McKinsey report reveals that 70% of Filipinos are willing to switch brands if they discover better value for money elsewhere. High inflation rates have underlined the need to seek savings wherever one can find them.

Essentials like packaged food, personal and home care products still dominate the shopping baskets of Filipinos. Given the razor-thin number of wealthy families in the Philippines, sales of luxury goods and services have dropped by 6% and 50%, respectively, from pre-pandemic levels. Full recovery is still three to four years away.

With these emerging trends, McKinsey offers three bits of advice to retailers. First, adopt an omnichannel (and online-led) strategy with respect to marketing. Second, align products and services towards greater value for money. Third, enhance the customer experience by offering greater conveniences.

PROPERTY/REAL ESTATETwo key trends have emerged in the real estate sector. The first is the permanency of “hybrid operating models.” The second is the overarching trend towards sustainability and reducing carbon emissions.

How does one define a “hybrid operating model?” It is a working model where schedules are flexible; where working hours or working days are reduced; where employees work part time in the office and part time at home.

Eighty-seven percent of Filipino workers prefer a hybrid operating model given its convenience and workability (improved internet service has made remote working more efficient). In fact, the preferred ratio is three days of remote work and two days in the office. Filipinos put value on working from home given the time and cost of commuting.

Studies show that there will be 10 times more employees working from home in 2023 than there were in 2017. That said, there is a need for companies to re-imagine, re-design and re-equip their offices to adapt to the new hybrid operating model. Office spaces will be of smaller configurations as employees report on a round-robin basis. What is essential are common spaces where employees can gather, collaborate, and co-create. As of the moment, only 29% of all office space in Metro Manila is configured for hybrid work. Thousands of offices are seen to downsize in the next few years.

So, what is the impact of this on demand for office space? In Metro Manila, demand plunged by 183,100 square meters in 2020 and 273,100 in 2021 but will recover by +350,000 (forecast) in 2022. Meanwhile, 1,881,300 square meters of supply have come on line in the last three years. All things being equal, it will take five years for demand to catch up with supply.

Take-up of commercial spaces will be sluggish as e-commerce encroaches on the customer base of physical stores. Commercial lessors and malls will have no choice but to rationalize their lease rates if only to keep their tenants.

In as far as sustainability is concerned, Filipino property developers are hard-pressed to become more environmentally efficient given government’s nationally determined commitment (NDC) to the United Nations Framework Convention on Climate Change (UNFCCC) to reduce the country’s greenhouse gas emissions by 75% by 2030.

Developers are encouraged to reduce their power consumption by 25% to 35%. Although 35% of new office buildings will be LEED certified by next year, the number is seen to increase rapidly due to governmental pressure.

So, while it is a buyers (or renters) market as supply for office space exceeds demand, there is pressure to increase property prices as LEED certification could be expensive, what with the mandatory adoption of power saving technologies. Ultimately, the forces of demand and supply will determine prices.

Welcome to the new normal in retail and property.

Andrew J. Masigan is an economist

andrew_rs6@yahoo.com

Facebook@AndrewJ. Masigan

Twitter @aj_masigan

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