Malaysia Property Market Overview
A stronger economic growth of 5.8% year-on-year (YOY) was registered in Q3 2011, reversing the earlier trend of declining growth rates as domestic demand remained resilient, and both private and public sectors experienced a healthy expansion. A growth of 5.0% to 5.5% is estimated for 2011 and forecasted at 5.0% for 2012. The government will be depending on domestic demand to drive the economy in 2012.The office market saw a significant jump in net absorption during the quarter with the oil and gas industry being the key player. Average prime office rent in 2011 remained steady at RM6.25 per sq ft per month, an increase of 0.5% quarter-on-quarter (QOQ) and 4.7% YOY . With a substantial supply in the pipeline, rental movement is expected to trend downwards.
The retail sector remains positive with sales growth forecasted to move upwards to 6.5% in 2012 from 6.0% for 2011, notwithstanding cautious consumer spending. Major developers showed optimism by announcing new retail projects. Prudent consumers and escalating cost of goods and operation faced by retailers will be key challenges for the market in 2012.A quieter residential market in term of new completion was seen in the quarter but a significant number of projects entering the market in the next two years will add downward pressure to the rental market. Average capital and rental values were stable in the quarter and capital value increased by 4.5% YOY whilst rental value dropped 1.8% YOY. The slower economic growth outlook for 2012 and tightening of credit by banks will contribute to cautious demand for luxury properties.
The investment market in 2011 was active with 31 deals worth RM7.62bn and dominated by REITs and real estate funds as buyers. Going forward, a slower projected GDP growth, a weakening property marketacross most segments and expected forthcoming general election may deter investors, especially foreign entities.
The Malaysian economy registered a higher growth of 5.8% YOY in the third quarter of 2011 reversing the previous quarter’s trend of declining growth rate as domestic demand remained resilient. The growth rates for previous quarters were revised upwards to 4.3% in the second quarter and 4.9% in the first quarter from 4.0% and 4.6% respectively. For 2011, the economy was estimated to expand by between 5.0% to 5.5%. Both private and public sectors experienced healthy expansion in Q3 2011. The stronger domestic demand was contributed by increased commodity prices, bonuses and public spending that led to higher income growth. Economic growth was also boosted by the receding impact from the supply chain disruptions arising from the Japan natural disaster. Most sectors maintained their positive growth in Q3 2010 led by the agriculture and service sectors which expanded 8.2% and 7.0% YOY respectively. The manufacturing sector grew by 5.1% YOY and the construction sector expanded by 3.0% YOY. The mining sector which had been contracting since the third quarter of 2010 continued to contract by 6.1% YOY. The Consumer Sentiment Index (CSI) remained at an optimistic level, above the key benchmark 100-point level since early of the year, with the latest CSI at 108.7 points as at Q3 2011, compared to 117.2 points at Q4 2010. From January to September 2011, unemployment rates were between 2.9% to 3.4%; and the figure remained low at 3.0% as at October 2011, compared to 3.1% at December 2010. The headline inflation rate moderated slightly to 3.3% YOY in November compared with 3.4% in October, spurred by higher prices in the food & nonalcoholic beverages, partly contributed by a weakening Ringgit which made imports costlier. The inflation rate was expected to hover around 3.2% to 3.3% in 2011.Bank Negara kept the Overnight Policy Rate (OPR) unchanged at 3.0%, following a 25 basis points increase in May 2011, after being maintained at 2.75% since July 2010, as part of the measures to stimulate the economy. The move was expected by the market as the global outlook remained highly uncertain and volatile that could present downside risks to Malaysia’s growth prospects.
Between January to October 2011, total new approved investment was RM40.7bn with Foreign Direct Investment (FDI) amounting to RM21bn. This is an encouraging level which is close to the 2010 total investments (domestic and foreign) of RM47.2bn, with FDI accounting for RM29.1bn.Going forward, domestic demand will continue to drive Malaysia’s economic growth due to supportive government policies such as the Tenth Malaysia Plan,Economic Transformation Programme (ETP) and the 2012 Budget. Under the 2012 budget, short and long term measures are undertaken to stimulate domestic economic growth including implementation of the RM6bn Special Stimulus Package through the Private Financing Initiative which will boost the construction sector. Despite a worsening global economic climate, the economy is projected by the government to grow at 5.0% for 2012 with expectations of private and public investments.
Residential Property Sector
This quarter saw the only completion of Katana II, a boutique condominium development which comprises 40 units. Overall, the year 2011 saw the completion of a total of 4,072 units, with 1,151 units located in the city centre and 2,921 units outside the city centre.A significant number of condominiums are expected to enter the market in the next two years with about 5,004 units in 2012 and another 4,502 units in 2013. This is expected to put downward pressure on the rental market especially in the city centre as a majority of them are in this location. Banyan Tree Signatures Pavilion Kuala Lumpur which comprises a 55-storey block of 441 private residences, 51 service residences, and 50 hotel suites was launched in the quarter. Since its sales preview in July, 80% of the units has been taken up mainly by local buyers. With average sizes of 1,076 sq ft to 2,174 sq ft, the residences are priced at an average RM2,000 per sq ft. Three major mixed projects that have residential components were also launched. They are KL Metropolis (set to be the country’s largest exhibition centre and the city’s latest international trade and exhibition district), KL Eco City (an integrated mixeduse commercial and residential development) and Aurora Tower (which will comprise premium office spaces, over 280 serviced residences, a luxury hotel with five-star suites, three sky levels as well as signature retail spaces. The residential components within all these projects are yet to be officially launched, but for the 708 units within Residential Tower One at KL Eco City, about 70% of them have already been booked. Prices and rentals of high end condominiums in Kuala Lumpur were noted to be stable in the quarter with the average capital value and rental value maintained at RM626 per sq ft and RM3.50 per sq ft per month respectively. The average capital value increased by 4.5% YOY whilst rental value dropped 1.8% YOY.
However the rental market will continue to feel the pressure from the significant new supply that will be completed in the next two years. In addition, the economic uncertainty and tightening of credit by banks will contribute to the cautious demand for luxury residential properties.Under the 2012 Budget announced in October, the ceiling price of homes under the My First Home scheme has been revised from RM220,000 to RM400,000 with effect from 1 January 2012 in a bid to make home ownership more affordable. However, this may not assist the targeted group (households with income of RM3,000 and below) as affordable homes are scarce, especially in the Klang Valley.To help reduce property speculation, under the October Budget, the 5% (Real Property Gains Tax) rate will be revised to 10% for properties acquired and disposed within two years with effect from 1 January 2012. The 5% rate stays for properties held and disposed after two years and up to five years. This will help reduce property speculation and promote a more stable and healthy growth for the housing industry given the rampant broad increase in prices over the last 24 months.
Retail Property Sector
The Malaysian economy and consumers have been relatively resilient despite the volatile external environment. The Consumer Sentiment Index (CSI) edged up marginally to 108.7 points in Q3 2011 from 107.9 points in Q2 2011. However, it showed a 7.1 points decline on a YOY basis. Generally, consumer spending remained cautious and households continued to be worried about inflation. The Malaysian retail sales growth forecast for 2011 was revised upwards from 6.0% to 6.5% giving a total sales value of RM82bn by Retail Group Malaysia Sdn Bhd. The upward revision was due to a better sales performance in the second quarter where sales grew 9.1% YOY, compared with a forecasted 7.0% growth. For the third and fourth quarters, retail sales are expected to grow by 7.0% and 5.0% YOY respectively. For 2012, the growth is expected to be 6%, the slowest in three years, with an anticipated total sales value of RM86.9bn.
KL Festival City Mall was completed in Q4 2011, offering approximately 450,000 sq ft of retail space. With the completion of the mall and six others in the previous quarters, the retail stock in Kuala Lumpur stood at 23.7 million sq ft, an increase of 7.4% from the preceding year. Outside of Kuala Lumpur, within the Klang Valley area, the total stock stood at 22.5 million sq ft, a 3.7% increase from theprevious year with two new malls completed and one old mall demolished. No new major mall completion was seen in Q4 2011.Retail centres in Kuala Lumpur recorded a slight decrease in the average occupancy rate by 0.3 percentage point QOQ and 1.3 percentage points YOY to 90.7%. Retail centres outside of Kuala Lumpur also saw a decline of 1.1 percentage points QOQ and 0.1 percentage point YOY in the occupancy rate to 86.9%. The decline was largely due to slow leasing rate in the newly completed centres. Despite a marginal decline in the occupancy rate,major developers showed optimism in the market by announcing expansion plans, adding to the upcoming retail centres. Pavilion REIT will add another 300,000 sq ft to its existing Pavilion shopping mall besides aiming to acquire three more retail properties that its sponsor is developing. The Pavilion REIT is Malaysiaís largest listed REIT with the largest exposure to the retail sector by appraised value. KLCC Property Holdings Bhd, the owner of Suria KLCC which recently opened its new extension covering a total NLA of 140,000 sq ft, has announced its plan for additional expansion by building a new 300,000 sq ft retail mall which will be integrated with the Suria KLCC mall. NAZA Group will develop two retail centres with over 2 million sq ft retail space as part of its RM15bn KL Metropolis development at Jalan Duta. Looking forward, the retail sector will be challenging as consumers continue to be prudent in their spending and retailers are facing continuous surges in both cost of goods and cost of operation. This will affect the rents they can afford with consequential effects on occupancy and future rental growth.
Offices Property Sector
The quarter witnessed six new completions which added approximately 2.97 million sq ft to the total stock. Two of the completed projects - Menara 3 PETRONAS (NLA:850,000 sq ft) and Menara Prestij (NLA:500,000 sq ft) - are located within the Golden Triangle. Other completed buildings are Lot E@KL Sentral (NLA:450,000 sq ft) and The Horizon Phase 2 located at a new office district known as Bangsar South, will provide some 630,000 sq ft of new space. Total stock increased by about 4.2 million sq ft for the whole year.In 2011, net absorption reached over 3.2 million sq ft compared to 1.7 million sq ft in 2010. The increment is largely contributed by major completions with high pre-committed rates in Q4 2011. The net absorption in Q4 2011 increased to more than 1.7 million sq ft, a significant increase from the previous quarter ís net absorption of 0.12 million sq ft. The newly completed Menara 3 PETRONAS has a high pre-committed level. Some 70% of its space will be occupied by tenants relocating from Petronas Tower 2, which will be then be occupied by Carigali, a Petronas subsidiary, making KLCC a hub for the oil and gas industry. In Kuala Lumpur, the average office vacancy rate in the quarter rose to 14.2% from 13.1% in Q3 2011, and increased by 1.1 percentage points YOY. The figure is anticipated to rise in tandem with incoming supply. Nonetheless, office rents have remained steady and prime buildings are being leased at RM6.25 per sq ft, an increase of 0.5% QOQ and 4.7% YOY. City centre buildings such as Menara IMC and Menara Dion have a gross asking rent of RM8 per sq ft, while Menara Maxis and Menara 3 PETRONAS are in the RM10 per sq ft range or above. Given the supply of office in the pipeline, landlords will have limited leverage to raise rents in a softening market.
The government recently announced additional pro-business policies with the goal to attract more institutions and corporations to set up business in Malaysia, especially Kuala Lumpur. Under the new Budget, new tax incentives will be offered to new tenants who commit to locate at KL International Finance Centre, a greenfield development that will be the next iconic project to break ground by next year. Meanwhile, the proposed first line of the MRT project, from Sungei Buloh north of Kuala Lumpur to Kajang on the southern side that passes through the city centre is seen as the solution to reduce traffic congestion currently plaguing city centre office locations.Looking ahead, the overall office sector forecast points towards a weakening market as oversupply is expected due to major completions scheduled in the next two years in the midst of weakening economy. By 2014, an additional 13.4 million sq ft of office space will enter the market. Of this, about 11.0 million sq ft is accounted by 16 buildings located within the Golden Triangle, compared with previous peak in 1998 with a total office space of 4.8 million sq ft.
Investment
The number of investment transactions in the last quarter of the year was similar to Q3 2011. However, there was a strong jump of 3.6 times in value totaling RM4.8bn in Q4 2011 against the RM1.35bn recorded in Q3 2011. This is mainly accounted by the listing of the Pavilion REIT with an asset value of RM3.54bn. The Pavilion REIT is anchored by its key integrated asset, The Pavilion Mall and Pavilion Office, which is located at the prime location of Jalan Bukit Bintang. Overall, although 2011 recorded fewer transactions from the previous year, it has been an active year with 31 deals worth RM7.62bn transacted. The retail sector was the most active with 10 deals worth RM4.81bn transacted followed by the office sector with 12 deals worth RM1.7bn. Besides REITs and other real estate fund buyers, one major office building, namely Menara Multipurpose, was sold in the quarter to the Malaysian Chinese Association, a political party, as an investment asset whilst Bangkok Bank purchased several stratified office floors for their own occupation at one of two towers at the proposed Berjaya Central Park, now renamed Menara Bangkok Bank.
Deals for offices in Q4 2011 were done at between RM693 per sq ft for Menara Multipurpose to above RM1,000 per sq ft for Menara Bangkok Bank@ Berjaya Central Park. The latter is an office building under construction in which Bangkok Bank has purchased eight floors with naming rights. In the retail sector, the Pavilion Mall was transferred to the Pavilion REIT at RM2,558 per sq ft.Yields were in the low 6% generally for prime properties as liquidity continues to be ample, and access to funding and its cost relatively low. Most of the assets transacted were located within the Klang Valley, with a single deal involving a warehouse located in Penang and two retail centres located in Kedah. Other assets include a 130-bed private hospital, DEMC Hospital, which was sold on a sale and leaseback basis to PHB Bhd, a Government linked investment agency. Such agencies which include the pension funds (EPF, KWAP) and trust fund (Amanahraya) have been particularly active in pursuing sale and lease back transactions in offmarket deals where available.Going forward, given the projected slower GDP growth, and a weakening property market across most segments, there will be more caution and deals will probably get harder to be done due to the widening gap between buyer and seller expectations. With the forthcoming general election expected to be called in early 2012, an element of political uncertainty will arise and may deter investors, especially foreign entities which would like to see a clearer political landscape settling in after the election before embarking on major purchases.
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