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Subdue But Resilient

Commercial property market remain bouyed by business conditions and positive investors’ expectations.


Demand for commercial space in Klang Valley likely saw modest growth in 2014 given that external demand will be robust whilst domestic spending stays stable throughout the year, reported CH Williams Talhar & Wong’s (WTW) in its recently released Property Market 2014 report.

In the Klang Valley office sector office supply grew by 3.6 million sqft in 2013 which is similar to the average annual supply growth of about 3.7 million sqft during the period from 2008 to 2012, according to WTW managing director Foo Gee Jen.

“The main driver for the decentral-ization has been due to scarcity of land in Central Kuala Lumpur (CKL) for new office developments. Recently the trend has seen a renewed focus at the heart of the city,” Foo told the media during a briefing.

A number of proposed prime office developments, most notably the Tun Razak Exchange and Warisan Merdeka are being planned in the city centre especially in areas close to the on-going Klang Valley Mass Rapid Transit Station projects, the report said. Year 2014 saw a subdued growth in office stock – an estimated 6.6 million sqft (or 7.1% of existing stock) of new office space is expected to be completed within the year.

Growth in office space demand is expected to remain robust in 2014 given that employment figures and business conditions remain upbeat, Foo noted.

“In 2013, an estimated net absorption of 3.3 million sqft of office space was registered – 0.9 million sqft in CKL, 2.09 million sqft in Metro KL (MKL); and 0.48 million sqft in Greater KL GKL) – or a 20% increase in net absorption compared to 2012 which gained 4% compared to 2011. Vacancy rates decrease in 2013 to 14% from 16.2% recorded in 2012 or 15.7% recorded in 2011,” Foo said.

Offices in CKL enjoyed the lowest vacancy rates at 10% whilst GKL offices had the highest vacancy rates on average at 19%, leaving the middle position to MKL offices which had a 17% vacancy rate on average, according to the report.


Prime gross rental grew steadily at 4.6% in 2013 to RM6.80 psf per month compared to RM6.50 psf per month in 2012. Forecast gross prime office rent in 2014 is estimated to improve or be stable supported by favourable business conditions and a further moderation in new supply over the next 12 months.

“Business conditions are likely to remain supportive of the office space market in 2014. New supply in 2014 is not nearly as high as foreboded in early 2013. Moderating new construction starts is anticipated to bring supply growth to a more sustainable level. The office segment will continue to be a tenant’s market in 2014 as in-coming supply will keep the office rental market competitive,” the WTW report said.


“The take-up rate is still healthy. Kuala Lumpur offices have an occupancy rate of about 85%, not too far off from Singapore, Bangkok and Jakarta which have it around 90%,” Foo said. He expects Kuala Lumpur to see an additional availability of 100 million sqft of office space by the end of 2015, a major milestone for a city, surpassing other business hotspots like Singapore, Bangkok and Jakarta.

In retail sector, cumulative supply in the Klang Valley recorded a marginal growth of 0.5% in 2013 y-o-y compared to the historical five year average of 2% annually.

Moving forward, retail space is expected to increase by 6.4 million sqft or 14.5% in 2014 – 1.61 million sqft in CKL, 2.51 million sqft in MKL and 2.25 million sqft in GKL. This is expected to mount significant pressure on existing shopping centres to keep existing tenants.

A spate of new supply in 2014 will likely see vacancy rates rise compared to the previous year. CKL shopping centres will continue to enjoy a low average vacancy in 2014; MKL and GKL retail centres will see vacancy rise further as new supply enters into the market.

In terms of demand in retail sector, the Retail Group Malaysia estimated in August 2013 that the retail sector grew by 6.4% in national retail sales in 2013, higher compared to 5.5% in 2012 and on par with 6.5% in 2011, WTW report noted. “After two years of above average net take up rates in 2011 and 2012, net retail space absorption slowed significantly in 2013,” it said.

The Klang Valley recorded a positive 810,000 sqft net take up in 2013 – CKL experienced a negative net absorption of 400,000 sqft due to the closures of PIKOM ICT Mall, CapSquare and Sunway Putra Mall whilst MKL and GKL registered a net take-up of 440,000 sqft and 780,000 sqft of retail space, respectively.

Average prime retail rents maintained the steady growth trend with a 10% increase y-o-y in 2013 to RM22 psf compared to RM20 psf in 2012.

The prospect for retail rents accretion for secondary malls however is coming under increasing pressure from an increasing number of incoming retail centres over the coming years.

“An analysis of REIT-owned malls in the Klang Valley revealed that prime shopping mall net yields have continued to be compressed to the 4.4%-6.2% range whilst gross rents yields ranged between 6.2%-9.4%. The increasing affluence of the urban population and growing middle – income population in Klang Valley will continue to support domestic spending,” Foo said.

In contrast, the rising nominal inflation and a burgeoning household debt threatens to weigh down on domestic demand, he observed.

“Retail space, especially in lifestyle malls, will become increasingly competitive as numerous new mixed use developments have incorporated retail centres as key components; many of them are expected to enter the market in the next 3-5 years,” he added.


In another report, leading independent global property consultancy Knight Frank Malaysia released results on its inaugural survey of insights and preferences of key players, namely fund managers, developers and lenders in the commercial sector for the year 2015.

Knight Frank’s ‘Malaysia Commercial Real Estate Investment Sentiment Survey 2015’ reported that more than 40% of respondent opted not to invest/lend or develop commercial real estate in 2014 cited poor yield/return as the main reason.

“30% attributed their inactivity to global economic uncertainty and lack of good stock and the remaining 22% due to high price expectations,” the report said.

For the year 2014, about half of the respondents (52%) believed that the commercial real estate market had performed below expectation in terms of yield, margin and return, while 44% were of the opinion that the commercial property market had performed as expected. Only a small minority (4%) felt the market performed better than expected.

For the current year, more than 80% of the respondents feel less optimistic about the overall economic scenario in 2015, while the rest believe that the market will remain unchanged from 2014.

“This same is reflected when asked about the investment outlook for commercial property for 2015, with 78% being less optimistic and the rest of the opinion that 2014 trends will continue. A key finding is that no respondents believe that the market will improve in 2015 citing rising interest rates and the implementation of the Goods and Service Tax (GST) in April 2015 as the significant reasons for this sentiment,” Knight Frank said.

Up to 64% of the respondents are of the opinion that the hotel/leisure sector will see no change in yields in 2015 while 56% and 44% of the respondents are of the same opinion about the logistics/industrial and retail sectors respectively. “A rise in yields for the Office sector is a key prediction with 40% of the respondents. Overall commercial yields are predicted to be stable however office yields may trend upwards whilst healthcare/institutional yields may trend downwards,” the survey results noted.


As far as rents are concerned, 48% of the respondents believe rental value of the retail sector is expected to remain unchanged in 2015 while another 30% believe that it will increase. The rental value of the office sector however is expected to decrease according to 48% of the respondents, with 35% saying no change. The opinion on the rental value for the logistics/industrial sector is mostly about 57% expecting it to remain unchanged while another 30% feel that it would increase in 2015.

With regards to Bank Lending Rates, 62% of the respondents expect Bank Lending Rates to increase in 2015 while 38% expect no change, indicating a significant rift in the overall sentiment.


In addition, the reported noted, “Our analysis of the responses gathered has shown that the KL Central Business District (CBD) and Golden Triangle is still the most attractive region in Malaysia for commercial real estate investment for 2015. Up to 57% of the respondents ranked the KL CBD/Golden Triangle as their prime choice followed by 30% opting for the KL Fringe/Klang Valley instead, making it the second most attractive region for commercial investment. Kota Kinabalu and Johor/Iskandar had poorer responses with 87% and 61% marking them as their fourth and fifth preference.”

Sarkunan Subramaniam, managing director of Knight Frank Malaysia, said, “It is predicted that at least for the first ten months of this year, the commercial investment market will see a softer subdued climate, as it will be grappling with rising cost of capital, selective lending and the implementation of the Goods & Services Tax. Opportunities will abound towards the end of the year when we are likely to see some pressured sales where prices become more realistic, driving yields to be attractive.”

He added, “The healthcare/institutional and hotel/leisure sectors are likely to be more resilient whilst the office sector seems likely to see some strain. The retail sector will have a slightly poorer year but certainly better than offices. The logistics/industrial sector may actually turn up a good surprise to investors. But do remember whilst sentiments do drive the market, hard facts determine said sentiments.”

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