Knight Frank launches Global Cities: The 2016 Report Kuala Lumpur – one of the five cities to watch

Knight Frank launches Global Cities: The 2016 Report

Kuala Lumpur – one of the five cities to watch;

Foreign developers & institutional investors seeing opportunities in Malaysia real estate

 

 

Kuala Lumpur (Malaysia), 27 October 2015 – Knight Frank, the independent global property consultancy, today launches Global Cities: The 2016 Report, examining the market performance of 20 global cities across the world, of which 10 are in Asia Pacific. 

   

The UN is forecasting the world’s cities to increase in population by 380 million people in the next five years.  Consequently, the planet will need to build the equivalent of five cities the size of Los Angeles every year between now and 2020, and all the supporting infrastructure. 

 

This year, the report has a new section titled the “Watch List” which lists cities with the potential to become a Global City in the future, and Kuala Lumpur is one of the five cities to watch, with infrastructure investment a key to the city’s future growth.

 

Sarkunan Subramaniam, Managing Director, Knight Frank Malaysia, says, “Future improvements in urban mobility such as the Mass Rapid Transit line in Malaysia is expected to revitalise the economic, business and social activities within the city centre while countering the pace of office decentralisation. There will be renewed interest in the city – to live and work and also as a destination for entertainment and tourism.

 

“The impending entry of upscale hotel brands such as Four Seasons, Fairmont, Kaminski and Jumeirah in the city will further catapult Malaysia into the global tourism market.”

 

Nicholas Holt, Head of Research, Asia Pacific, Knight Frank Asia Pacific, says, “The level of infrastructure in a market is a useful indicator as to the level of development while also a guide to the potential for catch-up.  We must distinguish between different levels of infrastructure; national, intra-regional, and local.  While airports, national rail networks and interstate highways are all indispensable elements of transport infrastructure; urban mass transit systems, within a city’s boundaries, have a more obvious impact on a local, residential and commercial level.

“Despite the slowdown of China and its impact on the region’s economies, the Asia Pacific region will still see relatively strong economic growth over the coming years.  Coupled with the huge forces of urbanisation in India and China, the next three years are still very much a growth story for the Asian Global Cities.”

 

On a kilometre per million of population basis, Malaysia, at the 10^th position out of 14 cities in Asia, has 9km of metro line provided to every million residents, compared to Seoul which tops the chart at 40km.

Kilometres of metro system per million of population (with Kuala Lumpur in focus: projection to 2022)

Source: Local Transport Authorities, Public Sources, Knight Frank Research

 

 

New investors into Malaysia real estate

James Buckley, Executive Director, Capital Markets, Knight Frank Malaysia, says, “We continue to see foreign buyers entering the market from Japan, Singapore, the Middle East, Indonesia and China hunting for opportunities in Malaysia, particularly Kuala Lumpur.  These investors are attracted by the relative ease of transacting in Malaysia, the favourable foreign ownership rules relative to other Southeast Asian markets, and the weakness of the Malaysian ringgit which has fallen 29% against the USD during the last 12 months.”

 

On Asia Pacific as a whole, Neil Brookes, Head of Capital Markets, Asia Pacific, Knight Frank Asia Pacific, highlights, “We are experiencing record transaction levels in the core markets of Asia Pacific such as Sydney and Tokyo, driven by investor demand from the US, Singapore and China. Investors are attracted to these markets by the relatively high returns achievable and the recent weakening of the currencies against the USD.”

 

 

Destinations attracting Asian outbound capital

A growing wave of Asian outbound capital is targeting core real estate assets in Western markets.  Over the last 24 months, Asia investments into the US, UK, Australia and Continental Europe totalled US$78.4 billion.

 

Holt comments, “The last two years have seen a tremendous surge of capital, emanating from Asia, targeting real estate assets in mature western markets.” 

 

Destination markets from Asia investment (Q3 2013 – Q2 2015)

Destination	US$ million
US	31,032
UK	22,245
Australia	16,283
Continental Europe	8,835
Source: Real Capital Analytics / Knight Frank Research

Buckley explains, “There is a strong desire from Malaysian investors to diversify their wealth into overseas markets. There has been a slight shift in outbound capital with Malaysian investors focussing more on the Australian market compared to the UK.   This has largely been driven by the value of the Malaysian ringgit relative to the AUD which has weakened 6.6% versus 24% relative to the pound.”

 

 

To the US			To the UK			To Australia			To Continental Europe
Origin	US$ million		Origin	US$ million		Origin	US$ million		Origin	US$ million
Singapore	10,684		Singapore	6,443		Singapore	6,849		South Korea	2,762
China	8,935		China	5,625		China	6,263		China	1,271
Japan	4,373		Hong Kong	2,559		Malaysia	1,371		Singapore	1,128
Hong Kong	3,164		Malaysia	2,229		Hong Kong	1,183		Thailand	1,050
South Korea	2,365		Taiwan	1,900		South Korea	306		Malaysia	1,033
Malaysia	1,007		India	1,420		Japan	241		Hong Kong	1,024
Other	504		Japan	808		Taiwan	60		Other	567
			Other	1,261		Brunei	10

Source: Real Capital Analytics / Knight Frank Research

 

Capital markets opportunities

Jeremy Waters, Head of International Capital Markets, Knight Frank, comments, “We expect advanced industrial nations to drive the global economy in the next three years; with the Global Cities in those nations offering the strongest opportunities for real estate investors.

 

“With the US moving closer to a rate rise, the dollar is strong, and American private equity investors are already buying more stock overseas.  We see this trend accelerating in 2016. They tend to be more comfortable with a higher risk profile, so we expect increased interest in sites and short income assets.

 

“In Europe, thanks to low bond yields and signs of economic turnaround, we are predicting more opportunist money will come into the market. In general, we see investors casting the net wider, with specialist property rising up the agenda. In part, this reflects a growing desire to seek diversity in a portfolio.”

 

Over the longer term, commercial real estate has proved its value within a mixed investment portfolio, notably during times when other asset classes have been unstable.

 

Prime Yields – end of 2015 forecast

 

Ranking	Global City	Prime Yields
1	Bengaluru	10.50%
2	Mumbai	10.00%
3	Delhi	9.50%
4	Mexico City	7.00%
5	Shanghai	6.30%
6	Beijing	6.30%
7	Melbourne	6.10%
8	Kuala Lumpur	6.00%
9	Sydney	5.75%
10	Chicago	5.40%
Ranking	Global City	Prime Yields
11	Washington DC	5.00%
12	Los Angeles	4.90%
13	Frankfurt	4.50%
14	San Francisco	4.00%
15	New York City	4.00%
16	Madrid	4.00%
17	Tokyo	3.70%
18	Singapore	3.70%
19	London	3.50%
20	Paris	3.50%
21	Hong Kong	2.90%

Source: Knight Frank Research, Newmark Grubb Knight Frank Research, Sumitomo Mitsui Trust Research Institute

 

Subramaniam concludes, “With the Malaysian market for income producing properties thinly traded, buyer and seller yield expectations are not necessarily in line for prime assets. While buyers are typically looking for a minimum income yield of 6% in the prime office market, many potential vendors have yield expectations perhaps 50 to 100 basis points lower. We see that in order to bridge this pricing gap, some flexibility is required between buyer and seller, which we are now starting to witness in the market.

“Looking at the Southeast Asian markets, at 6.00%, Kuala Lumpur has some of the most attractive prime office yields in the region.”