WILL MALAYSIA’S PROPERTY MARKET PICK UP – WHERE ARE THE ‘CATALYSTS’?

It’s not all doom and gloom as 2017 beckons with several mega catalytic developments emerging

AS 2016 draws to a close, there seems to be some level of uncertainty about what 2017 holds for the local property sector.

It’s true that while many are cautious about the outlook for the year ahead, it won’t be all doom and gloom – far from it, in fact.

Hong Leong Investment Bank (HLIB) Research in a recent report points out that with the multitude of rejuvenation projects taking place currently, several large-scale catalytic developments have emerged.

“These include the Tun Razak Exchange (TRX), Warisan Merdeka, Bukit Bintang City Centre, Bandar Malaysia, Kwasa Damansara and Cyberjaya City Centre.

“Collectively, these six catalytic developments have a gross development value (GDV) of at least RM275bil over 3,355 acres.”

Foo: ‘There’s demand due to population growth and new house buyers coming into the market.’

Foo: ‘There’s demand due to population growth and new house buyers coming into the market.’

The research house adds that all the catalytic developments have government participation as the master developer, be it directly (Finance Ministry) or indirectly via its related entities – Permodalan Nasional Bhd (PNB) and the Employees Provident Fund (EPF).

“As such, we reckon that much effort will be accorded to ensure its success. Tax incentives will be given for developments such as TRX and Bandar Malaysia.

“Take-up rates will also be supported by the relocation of government offices there (for example the EPF relocating its headquarters to Kwasa Damansara and PNB to Warisan Merdeka).”

With a host of projects in the pipeline, how will the outlook for the different property sub-sectors be like in 2017?

Residential sector

CBRE|WTW managing director Foo Gee Jen says he is cautiously optimistic about the landed and affordable housing sub-sectors.

“There’s demand due to population growth and new house buyers coming into the market,” he tells StarBizWeek.

PPC International Sdn Bhd managing director Datuk Siders Sittampalam concurs, emphasising that prices for landed residential units will hold next year.

“Landed properties – they are a rare commodity and developers are just not building enough of them, unless it’s within the outskirts of the Klang Valley.

“I believe that prices of landed properties will hold in 2017.”

Siva: ‘Everything is a cycle and 2017 will see the market finding its level.’

Siva: ‘Everything is a cycle and 2017 will see the market finding its level.’

In terms of the affordable housing sub-segment, Siders is certain that demand for such units will increase in 2017, given the poor economic fundamentals and weak consumer sentiment.

“The question is whether there will be enough (affordable) units in the Klang Valley. The 1Malaysia People’s Housing Programme (PR1MA) is below its target,” he says.

As of October, more than 12,000 units of PR1MA housing worth RM3.3bil have been booked, while 85,000 units are at various stages of approval.

In Malaysia, prices began its steady rise from 2009. This eventually invited complaints about high property prices from various quarters.

Stringent lending rules and the 2014 ban on interest bearing schemes led to demand drying up.

According to the National Property Information Centre (Napic), since 2008 the value of properties transacted priced from RM500,000 and above doubled from 31.74% in 2008 to 57.16% in 2014.

In terms of the residential high-rise sub-segment, Foo says the high-end and small office/home office (Soho) units will experience pressure in terms of pricing due to oversupply.

“Over the last three to four years, a lot of these units have come into the market and occupancy rates have been low,” he says, adding that 2016 has seen a drop in the gap between asking and transacted prices.

“The gap between the two has been dropping. We believe that this sub-segment will experience a correction of between 15% and 25%.”

HLIB Research notes that the Kuala Lumpur city centre is experiencing a potential excess supply situation within the condo and office segments.

“Traditional developments will have to compete with the catalytic ones which have an edge as transit oriented developments and government backing. Nonetheless, most developers under our coverage have a diversified product mix spread across several states.”

Citing Napic data, HLIB Research says there is an incoming supply of 33,000 high rise units.

Soo: ‘The general feeling is that 2017 would not be any better.’

Soo: ‘The general feeling is that 2017 would not be any better.’

“Assuming the completion period to spread across five years, this will add 6,700 units per annum or 4.2%, which is almost double the compounded annual growth rate of 2.2% in the past five years.

“This increase will be even higher if planned supply is taken into consideration, which will add 73,000 units or 46%. We believe it would be challenging to absorb this incremental supply, especially for the high-end segment, in view of the current soft property market condition.”

Foo believes growth in value for the residential segment will likely be flat in 2017.

“Overall, it will be a flat year. Should there be any growth at all, it will likely be less than 5%.”

Siders believes that the market will likely start “inching up” by the fourth quarter of 2017 – or early 2018.

“Although oil prices are going up, the ringgit has continued to depreciate and transaction volume has dropped. Launches is 2016 will be slower next year than it did in 2016.

“I personally think that financing will continue to be an issue and developers will come up with more incentives or freebies. Some projects may also be deferred.”

Office sector

In spite of the large number of office space coming into the Klang Valley, the outlook for the sector is not as bleak as some make it out to be.

Axis REIT Managers Bhd head of investments and Malaysian Institute of Estate Agents immediate past president Siva Shanker says the economy should continue to remain stable with support of domestic consumption and investment.

“Although things look bad now, it won’t be like that forever. Everything is a cycle and 2017 will see the market finding its level,” he said during his presentation at Rahim & Co’s property research seminar earlier this month.

Siva noted that the property market remained “unexciting” in the first half of this year, and was expected to show some improvements by the end of 2016.

“But that didn’t happen due to the current political and economic scenario,” he says.

Siva says some 5.8 million sq ft of office space is expected to come into the Klang Valley within the second half of this year.

He said this included space within Public Mutual Tower, JKG Tower, Menara Ken, Menara Hong Leong at Damansara Heights, Iconic Tower and Signature Tower at Empire City.

“Occupancy rates remained flat at 83%, falling from nearly 90% in the second half of 2015,” Siva said.

He said the market will “start to level out” by 2018 or 2019 and start peaking by 2020 or 2021.

Siders: ‘I believe that prices of landed properties will hold in 2017.’

Siders: ‘I believe that prices of landed properties will hold in 2017.’

“With the additional office space expected to complete by end-2016 on top of the still available space in the Klang Valley, the general market will continue to be a tenant’s market.

“Landlords or building owners have become more aggressive in marketing to attract tenants,” says Siva.

He added that reducing rentals was not the key to attracting tenants.

“Rent reduction may not be the answer. Lowered rents mean less money for maintenance. Pretty soon your building will run down and it would then be difficult to bring up standards again.

“If you must reduce rents, make sure your services are up to mark. This will enable you to raise rents when the market improves.”

Quoting Savills Malaysia executive chairman Chris Boyd, StarBizWeek reported earlier this year that a total of some eight million sq ft of office space is expected to be completed within the Klang Valley this year.

Boyd said he expected some two million sq ft of office space to enter the market next year, with another eight million expected in 2018.

According to Savills World Research on the Kuala Lumpur office market for the first half of 2016, demand for offices is traditionally driven by the oil and gas (O&G) and finance sectors which typically require extensive office space located in the central or strategic areas of KL City.

“The market absorption in KL (excluding Selangor) was much less active in 2015, compared with the past three years. Only 1.12 million sq ft of Grade A offices was taken up in 2015, about 50% of the average annual absorption recorded from 2012 to 2014.

“Low global oil prices, along with the sluggish financial markets, in particular the banking industry, has triggered a revision or consolidation of office space requirements for the affected tenants as part of their cost-cutting measures,” it said.

RAM Ratings in a report earlier this year said it had retained a negative outlook on the office sector in the Klang Valley, due mainly to lethargic economic conditions, as well as subdued consumer and business sentiment.

“This is compounded by the caution weighing on the finance and O&G sectors – traditionally key take-out sources for office space in the Klang Valley. With the finance and O&G sectors affected by the decelerating economy and the plunge in crude oil prices, both sectors have been trimming their workforces and, consequently, their office space requirements,” RAM said.

RAM expected occupancy rates of the office sector to fall two percentage points this year.

Retail sector

On the retail side, Savills Malaysia managing director Allan Soo says businesses have been experiencing a slowdown since 2015, with some already experiencing a drop as early as 2014, mainly due to the two Malaysian airline tragedies which affected tourist arrivals that year.

“While we have seen an increase in Chinese tourist arrivals in 2016, and regional stability has improved, things in Malaysia don’t seem to be getting better.

“The general feeling is that 2017 would not be any better.”

Soo says that many retailers are worried about hidden costs, especially due to the depreciation of the ringgit.

“A lot of seafood is imported and many retailers can’t expand. This will result in them cutting cost or lose profit margins.

“However, the arrival of tourists might help. But if you’re planning on opening a mall next year, it might be difficult,” he says.

Malaysian Association for Shopping and High-Rise Complex Management past president Richard Chan says that at the end of the day, it comes down to how one manages the mall.

“It all comes down to the basics – it’s how you manage it. A lot of shopping centres are not planned or well designed. They don’t do their homework from day one, such as studying the market or if there will be an impact of traffic congestion, for instance.

“If there is a problem, it should be rectified from day one,” he says.

Chan says performance in the fourth quarter of this year has been surprisingly good, with some high-end brands performing well.

He believes, however, things may slow down next month after Chinese New Year and pick up again towards the Hari Raya festive holidays in June.

Based on reports, about 40 malls would be entering the market in Greater Kuala Lumpur by 2020, of which a dozen would have a net lettable area of one million sq ft.

According to Napic’s 2015 Property Market Report, the retail sub-sector recorded a slight improvement in occupancy from 81.8% in 2014 to 82.4% in 2015, with a take-up rate amounting to more than 8.39 million sq ft.

HLIB Research says there is currently a total of 65 million sq ft worth of retail space within Greater Kuala Lumpur, 47% of which is in Kuala Lumpur.

“While the current retail space per capita of nine sq ft within Greater KL is higher than the ideal retail space of five sq ft per capita, this is at parity with Bangkok and lower than 12 sq ft per capita in Singapore.

“However, zooming into Kuala Lumpur, the retail space per capita is significantly higher at 17.8 sq ft, suggesting that it may be tough for the area to stomach even more retail space supply.”

Greater Kuala Lumpur refers to an area covered by 10 municipalities surrounding Kuala Lumpur, each governed by local authorities, namely Kuala Lumpur City Hall, Perbadanan Putrajaya, Shah Alam City Council, Petaling Jaya City Council, Klang Municipal Council, Kajang Municipal Council, Subang Jaya Municipal Council, Selayang Municipal Council, Ampang Jaya Municipal Council and Sepang Municipal Council.

HLIB Research estimates that 2.9 million sq ft worth of mall space recently opened this year, with another seven million sq ft coming soon and eight million sq ft beyond 2017.

“We feel that the malls under the catalytic developments, particularly the four Kuala Lumpur ones, will only worsen the current supply glut situation.

“This would dilute footfalls across a larger base of malls and inevitably put pressure on rental reversions.”

According to the Retail Group Malaysia (RGM) in its latest retail report, next year will remain a challenging year for Malaysian retailers with a significant recovery in retail sales only expected during the second half of 2017.

For 2017, it forecasts a 5% growth in retail sales. In its retail industry report, the group said Malaysia’s retail industry recorded a dismal growth of 1.9% in the third quarter ended Sept 30, 2016, from a year ago as the department store sub-sector reported disappointing sales.

For the entire 2016, RGM has revised downwards the retail industry’s sales growth rate from 3.5% to 3% or to RM99.1bil in retail sale value. Notably this is the second revision for 2016 on the retail sales growth rate due to the poor performance of sales during the third quarter.

Industrial sector

Unlike the rest, the industrial sector may just be the bright spark of the Malaysian property market in 2017, as observers believe that this segment has good potential for growth.

Siva says the rapid growth of online businesses is spurring demand for larger warehouses, especially units above 500,000 sq ft.

“We’re going to see more 500,000 sq ft, to up to one million sq ft units, coming in. Logistics is becoming a serious player in the marketplace, driven by online marketing.

“There is a lot of room for growth and many of these online marketing players will need larger facilities to store their products and supplies.

“Some of them may even need more than one facility.”

According to reports, there are more than 20 million Malaysians, or two-thirds of the country’s population, who are active Internet users. This high Internet usage is rapidly fueling the boom in online shopping.

Siva nevertheless says that despite the rising demand for industrial space, a portion of the segment has still been adversely affected by the current property glut.

“The portion of the industrial sector that’s been suffering this year are the small cookie-cutter units, namely the rows and rows of terrace and semi-detached units. When you drive by these units, many of them are still empty.”

Siva says the bigger units, between 100 sq ft and 200 sq ft, are generally purpose-built and already have a pre-committed tenant.

“These units are still doing okay. They are also not sold with speculation in mind. Hence, supply and demand has actually been in good equilibrium within the local industrial sector.”

Napic’s 2015 Property Market Report showed that the industrial property sector recorded 7,046 transactions worth RM11.97bil in 2015, down 13% in volume and 17.5% in value from 2014.

Selangor continued to dominate the market with 28.9% of the nation’s volume, followed by Johor and Perak, each with a 16.1% and 9.6% market share, respectively.

Napic said the industrial overhang saw a slight increase to record 243 units worth RM240.57mil, up by 7.5% in volume and nearly triple the value of 2014.

“The significant increase in value was contributed by cluster industrial property, which accounted for 45.6% of the national overhang value and was solely in Johor.

“The unsold under construction also observed a similar trend, up by 29.7% to 1,731 units, whereas the unsold not constructed reduced to 87 units, down by 41.2%.”

Napic said the sector’s construction front was sluggish compared to 2014.

“Completions, starts and new planned supply were down by 11.6% (927 units), 32.7% (2,294 units) and 65.1% (1,104 units), respectively. As at end-2015, there were 103,868 existing units with another 11,206 units in incoming supply and 9.981 units in planned supply.

– ANN

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