This article first appeared in City & Country, The Edge Malaysia Weekly on February 25, 2019 - March 3, 2019
We foresee that 2019 will be another flat year as the government continues to implement changes to the property market. It will take about 12 to 24 months for the market to recover. But I am optimistic [of a recovery] and I say it will be within 12 months,” said Rahim & Co International Sdn Bhd executive chairman Tan Sri Abdul Rahim Abdul Rahman at the release of Rahim & Co Research — Property Market Review 2018/2019 on Feb 12.
Although the property market was slow last year, it is showing signs of bottoming out as the downward trend in property transaction activities has decelerated, he added.
On the whole, the country’s economic performance indicators are still fundamentally strong but market sentiment continued to consolidate last year. Gross domestic product growth last year was 4.7%, which was within expectation, including that of the Malaysia Institute of Economic Research, while household debt shrank to 83.2% from 84.2% in 2017.
Valuation and Property Services Department (JPPH) statistics show that transaction activity for the first half of last year declined more slowly than in the corresponding period in 2017, with a smaller drop of 2.4% in volume and a 0.1% decline in value.
As at the third quarter of last year (3Q2018), the decline in total transaction volume had slowed further to 0.3% while value had dropped 1.4%.
Prices in the residential segment have consolidated and there has been some growth. But, generally, a price correction can be seen in the market. According to the Malaysian House Price Index, the
All-House Price Index for 3Q2018 rose 1.1%, compared with 6.5% in 3Q2017.
With the decline in house prices and slowdown in the number of transactions, residential overhang, including serviced apartments and small office/home office (SoHo) units, is still a major concern. At the end of 3Q2018, the overhang had increased to 43,219 from 31,665 in 3Q2017.
Johor has the highest overhang at 13,767, followed by Selangor with 7,233 and Kuala Lumpur’s 5,114.
“Slow market conditions will continue for another one to two years and growth in transactions is going to be more dependent on the effective income growth of the population,” said Rahim & Co director of research Sulaiman Saheh.
To overcome the overhang, Sulaiman sees more developers adopting rent-to-own schemes.
“It does not make the house cheaper, but makes it easier for buyers to have the option of owning it. It is a more sustainable option than multi-generational loans,” he said.
Abdul Rahim said the government has taken this initiative, and he believes it is a good way to get these properties occupied, either by purchasers or those who cannot afford the 10% down payment.
“This is a scheme whereby you wait for an increase in your income and you are able to save to pay for the down payment. Sometimes, a purchaser’s credit worthiness is okay but they are unable to procure the 10% required. This is one of the biggest problems we have to solve,” he added.
At the end of 3Q2017, there was 136 million sq ft of purpose-built office space in the Klang Valley with an incoming supply of 18 million to 20 million sq ft.
Based on the historical average annual take-up of three million sq ft per annum, it will take about six years for the market to absorb the incoming supply. This will put more pressure on the average occupancy and rental rates.
“It will take more than one year for the office market to recover because of incoming supply as well as the global economic situation,” said Sulaiman.
Rental rates for older buildings are seen dipping in order to maintain tenancies while rents at Grade A buildings will remain stable due to their up-to-date facilities and modern façades.
Overall, Sulaiman said the asking rental rate has dropped 20% while the effective rent declined 10% last year, compared with 2017.
Abdul Rahim said the overall impact of the incoming supply will put a lot of pressure on landlords to bring down their rents.
“Depending on the strength of the owners, they do not want to bring down the prices. In view of the present glut and the incoming supply, landlords should start thinking of reducing rental rates,” he said.
Similar to the commercial segment, the retail segment is also at risk of an oversupply situation with 11 million sq ft of incoming retail space in the Klang Valley. The current supply is 71.5 million sq ft.
Malls that are scheduled to be completed this year include TRX Lifestyle Quarter Mall, The Linc, Datum Jelatek Mall, Tropicana Gardens Mall and Central i-City.
E-commerce has been seen as a threat to bricks-and-mortar malls, but Malaysia’s overall occupancy rates are above 80% despite the increase in space in the past few years.
Mall operators are realising that rather than being at risk of closure due to irrelevance the retail experience has evolved into an entertainment and social experience. Non-shopping elements, such as food and beverage and leisure entertainment, and customer service have not been replaced by e-commerce.
The rise of e-commerce has triggered a rise in logistics businesses, creating a demand for warehousing to keep up with consumer demand, making warehouses a viable option for investment.
“The Digital Free Trade Zone has not really taken off, but there is a lot of potential, especially since it is close to the Kuala Lumpur International Airport (KLIA). The repositioning exercise of KLIA is going to have a positive impact on the logistics market,” said Sulaiman.
In terms of yields, director of estate agency Robert Ang said the industrial segment has been the best performer.
“Rental yield, especially in prime areas, has gone down to 3% to 4%. Office and retail is about 5% to 6%. Industrial gives the highest yield of about 6% to 7%,” he said.
He said that manufacturing activity, which is one of the country’s GDP pillars, has been on the decline but the gap is being filled by logistics and warehousing.
Industrial hot spots include Shah Alam, which is serviced by a good highway network, he said. “Other hot spots include areas that are closer to the ports and KLIA. There are also new areas serviced by the West Coast Expressway.”
Many players, local and international, are coming into the market to build industrial properties, he added.
However, he warned of an oversupply. “These properties will take two to three years to build. We will probably come to a situation where there is too much space and facilities in the coming years.”
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