This article first appeared in City & Country, The Edge Malaysia Weekly on September 2, 2024 - September 8, 2024

Kuala Lumpur’s retail sector growth was soft in 1H2024, reflecting moderate consumer spending, according to Savills Research’s Asian Cities 1H2024 report. Savills Malaysia group managing director Datuk Paul Khong says the reason for this is the uptick in the cost of living.

“In recent months, with the increase in food prices, general costs, and diesel and petrol prices, the middle-income groups are definitely feeling the pinch and becoming more disciplined in their overall spending patterns and are now more value-driven,” he says.

However, this is not across the board as Khong notes that luxury-end and premium categories are still trading relatively well and not seriously affected for the time being as these luxuries are still affordable to the top-end earners.

The report also states that Greater KL will soon receive more retail supply. “In 2024, Greater KL is expected to add approximately 1.1 million sq ft of retail space, bringing the total retail stock to an estimated 76.3 million sq ft, marking a 1.5% year-on-year growth.

“Notable additions include Elmina Lakeside Mall (214,000 sq ft) and 168 Park Selayang Mall (235,000 sq ft). These new malls will heighten competition for footfall and market share.

“Nevertheless, performing malls will sustain, but weaker or poorly managed ones will continue to struggle in this competitive environment due to their limited selection of retailers and product offerings,” the report says.

To Khong, this competition is pushing malls to be more creative. “The opening of new malls within the last 12 months showed that strong, good and established malls are still retaining their footfall and their retail sales are generally strong but more aggressive initiatives are undertaken in terms of marketing and sales events, exhibitions, and various advertising and promotional (A&P) activities.”

Occupancy rates, which experienced a declining trend from 2013 to 2021, are seeing a reversal of fortune. “A recovery began in 2023, with a gradual improvement to an average occupancy rate of 80.4% in 1Q2024. The pandemic also disrupted construction schedules, resulting in delays in completing several malls, thereby impeding the supply of retail spaces.

“This delay, in turn, has been advantageous for newer malls such as Pavilion Bukit Jalil, LaLaport Bukit Bintang City Centre and Tropicana Gardens Mall, which have witnessed a gradual increase in occupancy rates.

“While new malls typically opened with high occupancy rates in the past, intensified competition and oversupply have led to lower initial occupancy rates in recent years,” the report adds.

However, established malls such as Pavilion Kuala Lumpur, Suria KLCC, 1 Utama, Sunway Pyramid and IOI City Mall have maintained high occupancy rates of above 85%.

“This can be attributed to their strategic location in densely populated areas and diverse tenant mix. Regional and neighbourhood malls are also showing signs of improved occupancy rates in the post-pandemic period,” it says.

The report also reveals that first-time brands have entered the market via some of the new malls.

“The Exchange TRX has welcomed Chaumet, Drunk Elephant, Gentle Monster, Maison Kitsuné, Seibu, Ben’s Cookies, Makii-Makii, Mil Toast House and Shake Shack, among others. The presence of these renowned international brands has become a significant draw for The Exchange TRX, enhancing its attractiveness.”

Additionally, local and international food and beverage establishments are seeing strong growth. “Kenangan Coffee, which debuted in Malaysia in 2022 at Suria KLCC, now operates 48 outlets across the country, including Pavilion KL, Mid Valley Megamall and IOI City Mall. Similarly, Chase Coffee and Zus Coffee are rapidly expanding, with 92 and 330 outlets respectively, many of which are located in malls. Heytea, originating from China, opened its first outlet in The Exchange TRX and has since expanded to Mid Valley, 1 Utama, Sunway Pyramid and IOI City Mall.”

Meanwhile, the report highlights that prime malls are focusing on accommodating brand expansion, while suburban malls cater to the growing local brands and niche retailers. “This shift is largely driven by suburban shoppers who seek convenience.”

While mall space continues to rise, rents have tumbled slightly. The report notes: “Despite the growth in retail space, the prime retail index saw a slight increase to 218 points in 1Q2024 compared with 216 points in 2023. Prime rents for malls in KL city, such as Suria KLCC and Pavilion KL, have recorded the highest rents at RM200 and RM110 psf per month respectively.

“In the suburbs, 1 Utama and Sunway Pyramid have the highest average prime rent of approximately RM38 psf per month, while Mid Valley commands as high as RM66 psf per month.

“Nevertheless, the prime rent is still lower than its peak in 2019 with 229 points, mainly due to the pandemic impact, which has resulted in a reshuffling of tenant mixes. This involves replacing underperforming tenants with new, more popular brands, and incorporating lifestyle and experiential elements. Additionally, increased competition has also exerted downward pressure on rental rates.”

The report states that the retail sector is highly competitive and, as such, malls are reinventing themselves. “Malls are transforming into experiential centres, integrating entertainment and leisure components to attract sustained footfall amid the pressures of e-commerce. Retailers are under increasing pressure to innovate and differentiate themselves in response to changing consumer preferences and technological advancements.”

Adds Khong, “We are seeing initiatives by malls and other retail developments to allocate space for activity-oriented concepts, such as padel, pickleball, rooftop futsal and indoor golf, to attract more visitors and footfall with increasing numbers of repeat visits that will create sustainable synergy and pull to the malls.”

With the increasing retail supply coming onstream, Khong believes more effort is needed to draw customers.

“Developers and mall owners should both be more diligent in updating and undertaking consistent market studies of their own target catchments and understand the ever-changing demographics as well as size or positioning of retail offerings in the early planning stage, and also for mall owners, to continue performing well and stay relevant to stave off competition,” he says.

These strategies, according to the report, are to combat the increasing cost of living that is reducing the amount of disposable income consumers have to shop. “The prevailing market sentiment suggests a softer outlook for this year, driven by Malaysians grappling with a persistent increase in the cost of living. The increase in the sales and service tax (SST) from 6% to 8%, effective March 1, 2024, is expected to impact consumer spending.

“The government’s plan to rationalise subsidy schemes in the second half of 2024 may further trigger another round of inflation and reduce household expenditure.”

However, there are some positives. “The government has announced a salary hike for civil servants by the end of 2024, amounting to approximately RM10 billion annually, which may provide some support to the retail market,” the report says.

Additionally, the report highlights that the restructuring of Employees Provident Fund members’ accounts into three — which saw Account 3 (“Flexible” account) allowing unrestricted withdrawals from May to August 2024 — could lead to positive retail activity.

Furthermore, Khong says, the anticipated increase in tourist arrivals from China and the Middle East may have a positive impact on the retail landscape. “With the upcoming holiday season, retailers should show good results for Chinese New Year in 2025.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.