COVID-19 Has Catalyzed a Permanent Shift Towards E-Commerce
Lockdowns and social distancing in Southeast Asia have brought forward decade-long structural trends as consumers have been forced to adopt digital services at a time when traditional brick-and-mortar is considered unsafe. E-commerce, in particular, is having a shining moment as the service evolved from a luxury to a necessity for households all over the world.
According to the SEA e-Conomy report, a well-referenced study produced by Google, Bain, and Temasek, the Gross Merchandise Value or GMV (total monetary value of items sold over a given period of time) of e-Commerce in Southeast Asia is expected to quadruple in size from US$38 billion in 2019 to US$153 billion by 2025 as more consumers transition online. While these forecasts may seem high at first glance, we note that they are likely too conservative now given that they were produced pre-COVID.
E-Wallets and Digital Payments to Serve as Gateway into Broader Digital Economy
As seen in the chart below, China’s e-commerce GMV experienced tremendous growth right around the same time as the boom in e-wallet and mobile payments adoption. We believe a major reason for this is that e-wallets can serve as a gateway to the broader digital economy - helping influence consumer behaviors and making it easy to try digital services.
We expect a similar trend to happen in Southeast Asia as consumers transition away from cash payments towards digital payments and e-wallets. As per the table below, governments in Southeast Asia have begun actively pushing consumers to “go digital.” We see this as a long-term positive catalyst that will ultimately drive sustained growth in digital services like e-commerce as more consumers grow accustomed to the convenience and safety of the service.
Due to the onset of the COVID-19 pandemic, businesses and consumers who were previously obstinate with brick-and-mortar stores and physical cash payments are now forced to adapt to the digital economy in order to survive the new normal. Any previous trial barriers or lingering doubts that existed are now shattered as COVID-19 has super-charged the momentum of these trends, and e-commerce adoption and growth will only increase in the foreseeable future.
The Boom in E-Commerce is Rapidly Changing Supply & Demand Dynamics in Real Estate
As a consequence of the e-Commerce boom, we see dynamics in the real estate sector drastically changing as assets linked to the traditional retail value chain experience headwinds, whereas those linked to e-commerce see sustained higher demand.
As seen in the table below, what sets e-commerce apart from traditional retail is the key role of data processing and online platforms. From consumer behavior studies through machine learning to product demo live streaming through social media, online is core in driving e-commerce. All these activities are supported by data centers that store and process massive amounts of data. These are only set to grow in value in the wake of the e-commerce boom.
In addition to that, logistics and fulfillment will play a larger role in the shift to e-commerce as more emphasis is placed on faster deliveries while maximizing efficiency and minimizing costs. To keep up with the shifting demand, acquisitions in geographically-distributed fulfillment centers are in the cards now for 3rd Party Logistics (3PL) firms, as well as further investments in both computerized sorting systems and sophisticated storage facilities. This will only drive up the demand for logistics real estate.
Given this, we expect consumer preferences for convenient at-home-delivery to be a resilient and growing trend, whereas brick-and-mortar shopping will likely remain under pressure even after the resolution of the coronavirus. Real estate assets anchored on physical retail consumerism will give way to the new e-commerce economy. In particular, the key real estate sectors that we believe will be most affected by the transition towards e-Commerce are Retail, Logistics, and Data Centers.
Retail Real Estate: Limited Visibility & Headwinds Due to Mixed Results in Government Pandemic Response
As e-commerce continues to boom in Southeast Asia, the retail real estate sector will experience headwinds as the recovery of shopping malls and groceries remains uncertain as the region’s response to COVID-19 has seen mixed results. For example, as cases in Indonesia and the Philippines continue to rise with no signs of slowing, real estate consultancy Colliers predicts mall vacancy rates in the Philippines to rise to 12% this year, putting pressure on mall operators as nonessential stores remain closed.
In countries with better pandemic responses such as Singapore, Malaysia, Thailand, and Vietnam, shopping malls have begun to reopen, but with shorter mall hours and less foot traffic due to social distancing. Revenue will likely remain under pressure for the foreseeable future given the caps in capacity utilization.
Additionally, tourism retail - a strong driver in the sector - will likely see continued shortfalls due to border restrictions, with Singapore already experiencing a 71% decrease in visitors for the first half of 2020 as published by the Singapore Tourism Board (STB). The potential of case resurgences, like those experienced in Singapore and Vietnam (Da Nang), will keep consumers cautious, further pushing forward e-commerce and placing uncertainty in retail real estate’s short to medium-term prospects.
Logistics Real Estate: Fulfillment Centers are the New Core as Untapped E-Commerce Categories Boom in the New Normal
In the past, fresh foods and groceries were not usually ordered online due to preexisting mindsets that you needed to see food before purchasing it. But in a postCOVID study by Niesen referenced below, the majority of consumers are now permanently shifting to a “safe-in-home consumption” trend - ordering their groceries online and having them delivered to their homes.
This represents a huge opportunity for e-commerce firms, as only 0.3% of fresh foods and groceries (out of a US$350 billion market) were being ordered online against a broader retail e-commerce penetration of 3% in the region. Assuming the e-commerce penetration for fresh foods and groceries reaches parity with broader retail e-commerce, it would imply a 10x GMV uplift for the category. E-commerce firms have already begun to capitalize on this, with Lazada Malaysia successfully launching a virtual store to connect farmers in the Cameron Highlands district to consumers, having over 70 tons of vegetables delivered from farms directly to people’s homes by the 3rd week of its launch.
We note that this is just one example of a category that is likely to see permanent increases in adoption post-COVID. Other e-commerce categories such as clothing, beauty care, and household appliances are also likely to experience increased adoption due to safety reasons and convenience. As seen in the chart below, Facebook and Bain expect these categories to grow at a compounded annual growth rate (CAGR) of 20-30% from 2018 to 2025 as e-commerce adoption spreads through the region.
With this, 3rd Party Logistics (3PL) players must adapt to the flood of new ecommerce orders from new categories, while upholding industry expectations of next-day or same-day delivery and maintaining freshness of produce.
We foresee opportunities in logistics real estate as these same 3PLs will invest in distributed, small-scale fulfillment centers to optimize its ability to deliver to any and every consumer. In addition, the unique challenges in storing and delivering fresh produce will force 3PLs to invest in either advanced IT systems or cold storage equipment (in the case of fresh produce), both of which will drive up further the value of logistics real estate assets.
Data Center Real Estate: On the Rise as the Foundation of E-Commerce Growth
As a result of the coronavirus pandemic, the data center real estate sector will experience tailwinds as demand for more bandwidth and server capacity rise from the significant boom of user traffic and orders placed on e-commerce platforms.
As shown in the chart below, Facebook and Bain forecast the number of digital consumers and average spend per consumer to increase by 1.2x and 3x, respectively, by 2025. New “shoppertainment” features like e-commerce live-streaming, wherein an influencer demonstrates a product and responds to questions in real-time from a digital audience, is also set to boost app traffic and order conversion.
All this will lead to a rise of transaction volume which will require even more computing power to both forecast consumer demand and ensure efficient processing of orders placed.
All these factors in e-commerce require a strong IT foundation to ensure its sustained growth, fueling demand for data centers to facilitate data storage, bandwidth support, and connectivity. A 2019 report by Cushman & Wakefield, estimated that the Southeast Asia data center market, currently at a market size of as US$ 3.5 billion, will expand by a compounded annual growth rate (CAGR) of 13% between 2019 to 2024, with Singapore, Malaysia, and Indonesia leading the charge. As these forecasts were produced pre-COVID, we note that these are likely too conservative, and we foresee a strong demand for data center real estate as e-Commerce booms in the new normal.
Investors are well-advised to take note of the e-commerce mega trend catalyzed by the COVID-19 pandemic, as it drastically shifts both value chains and supply demand dynamics for real estate.
We believe segments such as data centers and logistics & fulfillment centers are likely to benefit from the new normal, as multi-year structural tailwinds propel them to stable real estate assets, while brick & mortar retail is likely to remain under pressure for the foreseeable future.
This research article is commissioned by ADDX in collaboration with Zero One and SmartKarma.
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