Asian Cities Report – 1H 2020

REPORT Savills Research Retail Taiwan Retail Department store revenues have been particularly hard hit during the outbreak

THE PANDEMIC HAS BEEN TOUGH FOR BRICKS AND MORTAR GRAPH 1: Retail Sales Growth Rate By Sector, 2011 to RETAIL Q1/2020 Since the fi rst COVID-19 infection in Wuhan, Taiwan confi rmed its fi rst Department store sales Supermarkets infection on 21st January 2020. Relying on the SARS experience in 2003 Convenience Stores Hypermarkets E-commerce and early intervention by Taiwan’s government to contain the spread of the 25% coronavirus, and despite its geographic proximity to China and frequent people- to-people exchanges with the PRC, Taiwan shas shown resilience in combating 20% Covid-19 confi rming 440 cases and seven deaths, as of 20th May. Compared 15% with other countries where strict measures were imposed, including city lockdowns and the closure of non-essential retail services, schools, offi ces and 10% shops in Taiwan are operating as normal with some measures still in place, such as mask use, temperature checks and social distancing, which have inevitably 5% had an impact on retailing. 0% While the pandemic has hit Taiwan’s economy, success in the COVID-19 fi ght resulted in positive GDP growth in the fi rst quarter of 1.54%, an outstanding -5% achievement. Private consumption shrank most, especially the catering and tourist industries. As stay at home guidance become a useful way to prevent -10% infection, Taiwan’s government has positive expectations of GDP growth of 1.53% in 2020, however, the IMF is more pessimistic adjusting downward its forecast by 6 percentage point(ppts) to -4% owing to the global economic fallout Source Ministry of Economic Aff airs which will damage Taiwan’s export-dependent economy. Remote working was adopted by most companies and reduced the frequency of out-of-home trips during the outbreak with a varied impact on diff erent retail GRAPH 2: Cumulative Retail Supply, 2013 to 2024F channels. According to the Ministry of Economc Aff airs, retail sales fell by 0.6%

Taipei City City year-on-year (YoY) in Q1/2020. The department store sector was hit hardest City Other with revenue slumping by 8.8% YoY in the fi rst quarter. The shutdown of movie Supply Growth (RHS) theaters due to the social distancing guidance and the closure of Taiwan’s 5,000 12% border resulted in a 99% drop in the number of inbound tourists in April causing 4,500 signifi cant damage to the department stores, shopping malls and duty-free 10% 4,000 sectors. In contrast, supermarkets and hypermarkets experienced a 20% and 3,500 13% hike in sales respectively compared with the same period in 2019 as a result 8% 3,000 of the stockpiling of items such as food and other essentials. 2,500 6% GOVERNMENT’S RESPONSE 2,000 In the beginning, Taiwan’s government passed a special budget to help develop 4% GFA GFA (1,000 SQ M) 1,500 production capacity for masks and announced an export ban to ensure a 1,000 suffi cient supply of masks locally, which made Taiwan the second largest mask 2% 500 producer in the world. Measures including fourteen days home quarantine for 0 0% inbound travelers and an order to wear masks in public places, including on public transport and in schools, were effi cient to limit the spread of COVID-19. Department stores and restaurants also implemented several measures to create a safe environment for customers, such as temperature checks, regular cleaning Source Savills Research & Consultancy and disinfecting as well as reduced capacity. In terms of fi scal measures announced by the government, the Central Bank GRAPH 3: Inbound Arrivals, 2011 to Q1/2020 cut the base interest rate by 0.25 ppts to 1.125% in March to help SMEs through a diffi cult time. The government has further passed a total of 1.05 trillion relief Inbound Tourist YoY Growth Rate of Inbound Arrival (RHS) package, equaling around 5% of Taiwan’s GDP for this year, including providing 12 40% access to loans, interest rate subsidies, utility bill reductions and tax deadline extensions. Tenants leasing in property owned by the government, such as 10 20% shops and public housing received 20% to 50% rent relief. As the pandemic is under control, the government is going to allocate NT$30 billion to issue 0% 8 vouchers for local consumers to stimulate consumption this July which is expected to benefi t the retail and tourist sectors directly. -20% 6 -40% LIMITED RENT REDUCTIONS PROVIDED BY LANDLORD The rise of e-commerce has aff ected bricks and mortar retail. As retailers shift 4 -60% their attention to the development of online platforms, large scale street shops in core retail areas which used to be very popular, now have to wait for six to

NO. OF ARRIVALS (MILLION)NO. OF ARRIVALS 2 -80% twelve months to fi nd new tenants with rental levels usually 20% to 30% lower than the former lease. One notable deal is the former Forever 21’s fl agship store 0 -100% in Zhongxiao E. Street which was on the market for nine months and fi nally leased to H&M this January by off ering a 20% discount on asking rents. During the pandemic, even though the retail segment has been hard hit, only Source Taiwan Tourism Bureau a limited number of landlords have been willing to cut rents by 10% to 20%, far

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from retailer’s demands for cuts of 40% or more. Fortunately, the lack of local GRAPH 4: Retail Transactions Over NT$300 Million, infections has led to a return in foot traffi c in May and helped to prevent a large 2007 to 2019 wave of retail business closures. 50 MARKET OUTLOOK 45 Looking back to the 2003 SARS outbreak, the disease started in February and reached a peak in May, following by signs of infections slowing down in July. 40 During the outbreak, department stores experienced a severe impact with 35 revenues declining the most in May and shrinking by 4% YoY in total. Two 30 months after the WHO removed Taiwan from its list of SARS-infected areas, foot traffi c and sales began to recover. 25

As for the coronavirus outbreak, we believe that the retail market has a 20 chance to improve this July as domestic conditions were relatively stable NT$ BILLION in May. However, as travel restrictions are common worldwide as concerns 15 over a second wave of infections mount, it is hard for the local retail market 10 to completely recovered to pre-COVID levels. The new normal in the retail 5 sector will accelerate the development of online shopping platforms which only contributed 2% of sales in the department store and supermarket segments 0 previously and push them to adopt technology to create a safer physical shopping environment. Source Savills Research & Consultancy

Taiwan’s success in containing COVID-19 has helped to prevent the large scale closure of retail businesses, however, changing consumer behavior will push retailers to adapt models to the new normal.

TABLE 1: Signifi cant Retail Transactions, 2019

PROPERTY LOCATION AMOUNT (NT$ MILLION) AREA (SQ M) RETAIL TYPE

Living Mall City 37,200 206,393 Mall

B1 to 3/F, Street shop in Taipei City 1,019 3,570 High street Dana distrct Carrefour in Taichung City 1,518 54,460 Supermarket Fengyuan district

Source Savills Research & Consultancy

TABLE 2: Selected Future Projects, 2020 to 2022

NEW SUPPLY OPERATOR LOCATION COMPLETION YEAR RETAIL GFA (SQ M) RETAIL TYPE

Sky City Far Eastern County 2020 87,600 Mall

Honhui Plaza Honhui Group 2020 86,000 Mall

Mitsui Outlet Park Tinan Mitsui Tainan County 2022 33,000 Outlet

Mitsui Lalaport Nankang Mitsui Taipei City 2022 135,000 Mall

Source Savills Research & Consultancy Savills Taiwan 21/F No. 68 Sec. 5 Zhongxiao E. Road Xinyi District Taipei City 110, Taiwan +886 2 8789 5828