dtz property times kuala lumpur q4 2013

Property Times Kuala Lumpur Q4 2013

Market sentiment affected by cooling measures

DTZ Research

15 January 2014

Contents

Economic overview 2

Investment 3

Office 4

Retail 5

Residential 6

Definitions 7

Authors

Brian Koh

Executive Director

+60(3) 2161 7228 ext 400

[email protected]

Saleha Yusoff

Associate Director

+60(3) 2161 7228 ext 410

[email protected]

Contacts

Ong Choon Fah

Head of Consulting & Research, SEA

+65 6393 2318

[email protected]

Dominic Brown

Head of South East Asia and Australia New Zealand Research

+61 (0)2 8243 9999

[email protected]

Hans Vrensen

Global Head of Research

+44 (0)20 3296 2159

[email protected]

Amidst the uncertainty over the strength of the global economic recovery in 2014 and rising cost, Malaysia is still a bright spot for business within ASEAN. Driven by stronger domestic demand and a recovery in exports, the Malaysian economy grew by 5.0% in Q3, outpacing the Q2 growth of 4.4%.

Investment activity remained steady, but with the recent announcement of an increase in Real Property Gains Tax (RPGT), and a pending imposition of a Goods and Services Tax (GST) of 6% in April 2015, sentiment is expected to be impacted in the short term across the property sectors.

The overall office market demand remained stable throughout 2013 with average rental rates and capital values remaining unchanged despite substantial supply (Figure 1). The market will continue to see challenges ahead as it is not certain if projected future demand is able to absorb the significant office supply in the pipeline.

Prime malls in urban and suburban locations continued to enjoy robust occupancy of above 95%, in spite of weakening consumer confidence in view of the rising cost of living and lower purchasing power of Malaysian households.

A substantial supply of 3,971 units of high-end condominiums were completed throughout 2013, a four-fold increase on the 748 units recorded in 2012. Average capital values were relatively strong and registered an increase of 2.0% quarter-on-quarter (q-o-q) and 11.3% year-on-year (y-o-y) in Q4. However, the rental value declined 1.0% q-o-q and 2.5% y-o-y in Q4. The number of completions in 2014 is likely to be the highest level recorded since 2005. This is expected to exert further downward pressure on rental values, especially in the city centre and it remains to be seen if capital values will be affected if speculative investors were to offload their units when they are completed.

Figure 1

Prime office rental index

Source: DTZ Research

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Kuala Lumpur Q4 2013

www.dtz.com Property Times 2

Economic overview Malaysia remains the bright spot in ASEAN Amidst the global economic uncertainty over the strength of the global economic recovery in 2014 and rising cost, a recent Thomson Reuters/INSEAD survey in December 2013 pointed out that Malaysia is still a bright spot for business in ASEAN. In Q4 2013, Malaysia recorded a score of 75 in the business confidence indices, an increase from 69 in the last quarter. A reading above 50 indicates an overall positive outlook. This is far better than Thailand which scored 40 on the index due to the prolonged uncertainty of its political status. In line with this, the Malaysian GDP growth rose to 5.0% in Q3, outpacing the Q2 y-o-y growth of 4.4% (Figure 2). It was supported mainly by robust domestic demand, especially private investment and consumption, and a recovery in exports. The government expects economic growth to range between 5.0% and 5.5% in 2014. Notwithstanding, Malaysia’s growth outlook is also subject to downside risks such as instability in the employment market and volatility in the financial asset market, especially with interest rates potentially rising in H2 2014, reflecting the uncertain economic environment as warned by the International Monetary Fund (IMF). Unchanged Overnight Policy Rate (OPR) Bank Negara Malaysia (BNM) maintained the OPR at 3.0% which has been unchanged since May 2011. This monetary policy supports domestic activities as the growth of major trading economies currently remains volatile and uneven. However, domestic demand is expected to grow moderately. Headline inflation at highest rate since December 2011 Inflation in October was recorded at 2.8%, compared to 2.6% in September. This was also the highest rate since December 2011. The increase mainly reflected higher prices for alcoholic beverages and tobacco due to the upward adjustment in cigarette prices, following higher tobacco excise duty. The transport category also recorded higher inflation of 4.9% in October due to the full impact of the upward adjustment in prices of RON95, RON97 petrol and diesel in September. Consumer and business confidence weaken in Q3 The consumer and business confidence indices moved in tandem. The Consumer Sentiment Index (CSI) was recorded at 102.0 points in Q3, a decline of 7.7 points q-o-q. The Business Conditions Index (BCI) also declined in Q3, settling at 98.6 points compared to 114.2 points in the Q2.

Therefore, it was generally concluded that consumers remained cautious in spending and business confidence was generally weak in the third quarter of 2013. Malaysian Ringgit appreciated against major currencies According to BNM, the Malaysian Ringgit appreciated against the currencies of Malaysia’s major trading partners in October amid the partial US government shutdown. This triggered an inflow of funds into regional financial markets. Nevertheless, this was a temporary spike and the Ringgit declined against the US dollar in the rest of the year. Strengthened yet cautious economic condition Economic growth is expected to be stronger in 2014. This is in spite of the cautious sentiment amongst households and businesses, as the challenges of various price hikes in 2014 will have an adverse effect on inflation and domestic demand. If the government implements a substantial cut in the public budget to narrow its deficit amidst public pressure, this could affect the projected GDP growth of 5.0% to 5.5% in 2014. Figure 2

GDP growth (y-o-y) and unemployment rate

Source: Bank Negara Malaysia, Department of Statistics Malaysia, DTZ Research

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Investment Uptick in net value The last quarter of 2013 saw an uptick in the value of deals at RM342.2m against a paltry RM65.6 m in the previous quarter (Figure 3). A major deal at RM206m for Menara 238, a mixed-use development comprising principally offices, with retail suites and apartments on the lower floors, accounted for 60% of the total value transacted (Table 1). Other notable deals included the sale of the former office of Malaysian Institute of Management on Jalan Ampang by Hwang DBS for RM82.5m. This reflected a gain of RM36.8m above its original purchase price of RM45.7m in 2010. A major deal being negotiated for the sale of Tropicana Mall in Petaling Jaya by CapitaMalls Malaysia Trust however fell through. Overall, 2013 was a slower year with lower investment volume of RM1.87bn, a 73% y-o-y decline. Activity was affected by the 13

th General Election in May as investors

held back their investments due to increased political uncertainty over the outcome of the closely-fought election. RPGT and GST are expected to impact sentiment in the short term There is no obvious change of trend in investment activities, but with the recent announcement of an increase in RPGT, and a pending imposition of GST of 6% in April 2015, sentiment is expected to be impacted in the short term across the property sector. However, we expect momentum to recover in 2014 with several known deals being negotiated. Two hotels in Penang belonging to the Employees Provident Fund (EPF), The Northam and Gurney Resort hotels have been placed on sale and are expected to see strong interest given that Penang is seeing a strong recovery of the hospitality sector since gaining its UNESCO heritage status in 2008. Another major deal that is likely to be completed in 2014 is the sale of Menara CIMB. The start of the tapering of quantity easing measures in the US will have several implications for investors in Malaysia, affecting interest rate, liquidity and possibly foreign exchange. How this pans out remains to be seen as its overall impact on entry yield will determine if the market remains attractive for major investors, given the pending softness of certain market sectors due to new completions.

Figure 3

Total investment sales in Malaysia, RM bn


Table 1

Significant deals in Q4 2013

Name of development

Purchaser Vendor Price,

RM m

Menara 238 KPJ Healthcare

Prokhas 206.0

Malaysian Institute of Management

Putrajaya Ventures

Hwang DBS 82.5


0

2

4

6

8

10

12

2009 2010 2011 2012 2013

Q1 Q2 Q3 Q4



Office Substantial new supply in Q4 The market will continue to be overshadowed by high pipeline supply. There were three new completions during the quarter which added about 1.1 million sq ft of Grade A office space to the existing stock. The new offices were 1 Sentrum in KL Sentral (450,000 sq ft), D’Damasara @ Glomac Damansara Block D in Damansara (255,000 sq ft) as well as the Menara LGB @ The Greens (414,000 sq ft) in Taman Tun Dr. Ismail (TTDI). With the new additions, total office stock in Kuala Lumpur increased marginally by 1.8% q-o-q from 68.3 million sq ft in Q3 to 69.5 million sq ft in Q4. Nevertheless, the cumulative supply for the year 2013, at 2.4 million sq ft, is 15% lower than 2012’s supply of 2.8 million sq ft. A massive 12.2 million sq ft of office space is expected to be completed between 2014 and 2016. In 2014, a significant 4.5 million sq ft will be completed, while another 5.0 million sq ft and 2.7 million sq ft will be completed respectively in the following years (Figure 4). Rental and capital values were unchanged Average prime office rents remained stable in 2013 at RM6.13 per sq ft per month, with top-tier office rents also holding firm at RM7.76 per sq ft per month since Q4 2012 (Figure 5). Similarly, the average capital value has stood at RM838 per sq ft since Q2 2012. Among the office transactions noted in 2013 were V Square at RM856 per sq ft and Plaza 33 (Tower A) at RM786 per sq ft. The occupancy rate also remained unchanged at 85% for the whole year of 2013. Despite a significant increase in the cumulative net absorption to 2.5 million sq ft in 2013 from 1.2 million sq ft in 2012, the increase in net absorption was offset by the sizable additional supply (Figure 6). Risks going forward The increasing competition for office tenants has not resulted in any significant impact on rental level. However, the pressure to secure higher occupancy at new buildings will continue especially if the funding rate rises. This pressure is not likely to abate in the short to medium term and as such the office market is forecasted to remain challenging in 2014 and beyond.

Figure 4

Office development pipeline, sq ft (million)


Figure 5

Prime office rental index


Figure 6

Office net absorption, sq ft (million) and vacancy rate


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Net absorption (LHS) Vacancy rate (RHS)



Retail Weakening consumer confidence Malaysians remained cautious in spending, clouded by the unfavourable financial and job outlook, as well as concerns regarding inflation. The Consumer Confidence Index has declined for two consecutive quarters to 102 points in Q3 from 109.7 points in Q2, indicating weakening confidence in the current country's economic climate. Potential price hikes for electricity, toll roads, and a host of other items are expected to further erode consumers' confidence and slow down retail spending. Revived malls entered the market With weakening consumers' confidence, retail sales were reported to slow in the last quarter of the year. Nevertheless, occupancy rate remains unaffected in the short term, coming in at a high of 93%, a significant q-o-q improvement of 1.1 percentage-points. This was driven by the completion of a new mall and strong take-up of a refurbished mall in the city centre. Generally, prime malls in urban and suburban areas are still enjoying strong occupancy of 95% and above. The problem-plagued Avenue K, located adjacent to Suria KLCC, has finally completed its refurbishment and made a comeback with strong take-up, as Swedish retailer H&M occupied 35,000 sq ft of retail space across three floors. Meanwhile, another revived mall, Cheras Sentral (500,000 sq ft) entered the market with Japanese brand Uniqlo as an anchor tenant. The retail stock in Kuala Lumpur stood at 22.9 million sq ft, a marginal decline from 23 million sq ft due to the closure of Capsquare for repositioning after being acquired by a major textile retailer, Jakel. The owner will reposition the mall, previously a one-stop centre selling genuine IT products and electronic gadgets, to a Jakel Department Store (Figure 7 and Table 2). Slower retail sales The retail sector has started to see slower retail sales as various government subsidy rationalisation measures took a toll on consumer spending. Generally retailers experienced a slowdown in sales despite the expected seasonal increase in sales during festive season, year-end sales and school holidays but selected food and beverage outlets performed relatively well. More challenges for coming months The recent announcement on the increase of electricity tariffs was another blow to shopping mall operators after the announcement of the GST and the proposed hike in

property tax by City Hall. Meanwhile, consumers are still upset from the previous increase on petrol prices and rationalization on sugar prices resulting in a higher cost of living. According to the Malaysian Shopping Mall Association and Highrise Complex Management, the increase will affect the operating costs of shopping malls and this will have to be passed down to consumers. On retail sales growth, Retail Group Malaysia (RGM) had revised downward its growth estimate from 6.4% to 6.2% for 2013. With all the potential challenges from recent government announcements, the growth for 2014 is projected to be slower at 6%. Moving forward, it is expected that 2014 will be a challenging year for both retailers and consumers in view of the rising cost of living and lower purchasing power of Malaysian households. Figure 7

Retail new supply (NLA) in Kuala Lumpur, sq ft (million)


Table 2

Selected upcoming retail malls in Klang Valley

Name of development Est area (NLA, sq ft)

Est year of completion

IOI City Mall, Putrajaya 1,300,000 2014

Nu Sentral, KL Sentral 680,000 2014

Atria Shopping Mall, Petaling Jaya 450,000 2014

Sunway Velocity, Kuala Lumpur 800,000 2015

Quill City Mall, Kuala Lumpur 770,000 2016

Central Plaza@i-City, Shah Alam 1,500,000 2017


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Completed Supply New Supply



Residential

An active year for the residential market despite general election sentiment Generally, 2013 was an active year for the residential market despite slowing GDP growth, the tightening of credit by financial institutions, and the uncertainty initially brought about by the general election in May.

Demand remains strong in sought-after locations The quarter was relatively quiet in terms of the number of new launches. The Kuala Lumpur market only saw the launch of Star Residences, a joint-venture project between Symphony Life and UMLand which is located at Jalan Yap Kwan Seng, within walking distance to KLCC. Tagged at above RM1,500 psf with generally smaller units, with the smallest unit at 625 sq ft, it was reported that about 70% of the units have been snapped up. Q4 was slightly more active in terms of the completion of new residential projects. During the quarter, a substantial 1,946 units were completed. Some of these projects included M Suites (442 units) in Jalan Ampang and One Kiara (Tower A & B) located in the popular Mont Kiara suburb, offering 218 units.

High-end condominium market relatively stable, but registered drop in rental The overall average prices of high-end condominiums in Kuala Lumpur were noted to be relatively stable in the quarter, despite the announcement of anti-cooling measures in October. On a y-o-y basis, average prices of high-end condominiums generally increased in 2013 (Figure 8). The average capital value increased marginally by 2.0% q-o-q and 11.3% y-o-y in Q4 to RM746 per sq ft. Notwithstanding the increase in capital values, however, average rental values registered slim falls by 1.0% q-o-q and 2.5% y-o-y to RM3.56 per sq ft per month in Q4 due to the increasing stock of vacant units, especially larger-sized properties.

2014 likely to be challenging With the recent cooling measures announced such as the raising of RPGT, removal of the developer interest bearing scheme (DIBS), stricter bank lending guidelines as well as new price thresholds for foreign ownership, the residential market is predicted to further soften and slow down in 2014. Notwithstanding the above, more launches are expected in 2014. There is also a significant supply in the pipeline of about 7,595 units, making this the highest level of pipeline

supply recorded since 2005. The majority, (79.4% or 6,029 units), are located in the city centre (Figure 9). Projects that are sited in the city centre and close to infrastructure development such as the new MRT line and extension of LRT line will benefit from their locations and are expected to be in good demand. The value of these projects will hold up in the long term as these projects will attract strong demand from owner-occupiers as well as investors.

Abundant pipeline supply to further depress rents in coming years The abundant new supply expected in the next three years (average of 5,477 units a year) is expected to continue to exert downward pressure on rental values, especially in the city centre. It remains to be seen if capital values will be affected if speculative investors were to offload their units when they are completed. Figure 8

Rental and price indices of high-end condominiums in Kuala Lumpur


Figure 9

Future supply of high-end condominiums in Kuala Lumpur


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Definitions

Development pipeline/potential supply:

Comprises two elements: 1. Floor space in the course of development, defined as buildings being constructed or

comprehensively refurbished. 2. Schemes with the potential to be built in the future, having secured planning

permission/development certification.

Net absorption: The change in the total occupied or let floor space over a specified period of time, either positive or negative.

Net supply: The change in the total floor space over a specified period of time, either positive or negative. It excludes floor spaces that are not available for occupation due to refurbishment or redevelopment, but includes new supply. New supply refers to total floor space/units which are ready for occupation. Ready for occupation means practical completion, where either the building has been issued with a Temporary Occupation Permit or Certificate of Statutory Completion (CSC).

Prelet/pre-commit: A development leased or sold prior to completion.

Prime rent: The highest rent that could be achieved for a typical building/unit of the highest quality and specification in the best location to a tenant with a good (i.e. secure) covenant. (NB. This is a gross rent, including service charge or tax, and is based on a standard lease, excluding exceptional deals for that particular market).

Stock: Total accommodation in the private sector both occupied and vacant.

Take-up: Floor space acquired for occupation or investment, including the following: 1. Offices let to an eventual occupier. 2. Developments pre-let or sold.

(NB. This includes subleases.) Take-up also refers to units transacted in the residential market.

Occupancy rate: Total space currently occupied or not available to let as a percentage of the total stock of floor space. (NB. This excludes shadow space which is space made available for sub-leasing).



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Insight Thematic, ad hoc, topical and thought leading reports on areas and issues of specific interest and relevance to real estate markets. Net Debt Funding Gap – November 2013 UK secondary market pricing – October 2013 German Open Ended Funds – October 2013 Great Wall of Money – October 2013 Quantitative Easing – UK Regions – September 2013 Singapore Government Land Sales – September 2013 UK lending market – September 2013 Quantitative Easing – August 2013 Property Investment Guide Asia Pacific 2013-2014 Singapore Insight – Residential – July 2013 China Insight – The Healthcare Sector – April 2013 City of London occupier demand – April 2013

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DISCLAIMER

This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ.

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