MERS Outbreak in Korea Impacting Local Retail, Tourism Sectors

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The Bank of Korea (BoK) last week lowered base interest rates by a further 25 basis points to a historically low level of 1.50%, the fourth rate reduction since August 2014. The BoK justified the cut as a pre-emptive measure to ward off the economic damage caused by the ongoing outbreak of Middle East Respiratory Syndrome (MERS).
 
Justin Kim, Head of Research, CBRE Korea, commented: "The MERS outbreak has caused some pain for it has hit bricks and mortar retail but is boosting online shopping. The South Korean economy has seen a modest recovery in consumption growth in recent months along with strong tourism arrivals. However, the MERS outbreak, which began in late-May, has hit retailers hard as people are avoiding public areas with large crowds, particularly shopping malls, restaurants and cinemas. Online retail is benefitting from the outbreak however, as South Koreans opt to shop for food and daily necessities from the safety of their own home, as reflected by the 60% y-o-y growth in online shopping sales of hypermarkets during the first week of June. It appears, therefore, that the jump in online sales may somewhat make up for the drastic fall in store sales.
 
The tourism sector has also been hit, with thousands of inbound tourists cancelling their bookings in recent weeks according to the South Korea Tourism Organization, which will have an impact on the retail and hospitality sectors. The short term impact has been minimal but could threaten resort areas such as Jeju should it fail to be contained. Top hotels in Seoul reported a slight decrease in bookings in the first week of June but they mainly cater to business travelers.
 
The effect of MERS and the rate cut on the commercial real estate investment market has been minimal thus far. Lower financing costs will create an even more favorable lending environment for investors. For many core property investors, it means the spread will become more attractive. Strong investment demand coupled with the lack of good investment opportunities is expected to push down yields over the course of 2015."
 
From a real estate perspective, the MERS outbreak is having a range of impacts:

• Hitting bricks and mortar retail but boosting online shopping. Credit card use fell by 12.3% in the first week of June and F&B sales were down by 36% during the same period. Meanwhile, in the online space, leading domestic retailer E-mart reported a 9.8% m-o-m drop in store sales in the first week of June but its online revenue increased by 45% m-o-m during the same period. Elsewhere, e-commerce retailer Wemakeprice reported a 300% y-o-y surge in sales volume during the first week of June.

• The tourism sector has been hit as thousands have canceled their bookings, which will have an impact on hotels and retail

• The commercial real estate investment market has so far been unaffected and lower financing costs could make the environment more favorable for investors