THE WORLD IN 2016
LAST year was a tumultuous one, which saw the world economy experiencing a few upheavals and a number of twists and turns, ala Chubby Checker. The wealthy oil producing countries were shaken by a drastic fall in crude oil prices which hit a low of below US$27 (RM120.40) per barrel in February 2016 and some countries, including Malaysia, saw their currencies dip to record lows.
The world economy although not in crisis mode, was facing slower global economic growth amid a worrying slowdown of the Chinese economy, uncertainties resulting from the unexpected Brexit vote for the United Kingdom to leave the European Union and the stunning election of Donald Trump as the 45th president of the United States, confounding most election pundits.
HOW FARED MALAYSIA?
On the local front, the country continued to be plagued by bad publicity over the 1Malaysia Development Bhd scandal that affected investors’ sentiments, a plunge in exports and a slowing economy caused in part by reduced income from oil exports as well as the plunge in the value of the ringgit against major currencies (the ringgit fell to a 17-year low against the US dollar and an all-time low against the Singapore dollar).
Overall, the property market registered a drop in the value of transactions for the first time in six years in 2015 and this trend continued into 2016 with both volume and value of overall, residential and commercial transactions declining for the first nine months of 2016 compared to the corresponding period in 2015.
RESIDENTIAL SECTOR
The residential property market was marked by slower sales take-up rates and reduced number of new launches. Although buying interest is still strong, the sector continued to be affected by high withdrawal rates as buyers faced difficulty in securing loans up to their required margins. Some well-located projects, especially landed homes and those which are priced competitively, still enjoyed strong sales take-up rates but the majority had to dig in for the long haul and had to produce irresistible offers and packages to tempt buyers.
Most developers including some of the major names in the business, revised their sales forecasts and targets downwards in line with the soft market conditions. Easy payment schemes including zero down-payment packages were commonly offered by developers while rebates, discounts and freebies like free legal fees on sale and purchase agreements and sometimes even on loan documents, kitchen cabinets and wardrobes, air-conditioning units, water heaters and electrical appliances were commonly made part of the sales package.
Condominiums/apartments with built-up areas of under 1,500 sq ft appeared to sell better than those with large built-up areas, especially those above 3,000 sq ft, as the higher absolute selling prices were a deterrent to many, even though the price on a per sq ft basis may appear to be reasonable. Landed homes enjoyed better demand but still, in many locations, semi-detached and detached houses priced above RM2 million took a longer time to sell. Property developers were willing to offer higher commissions to agents in order to push their sales.
The secondary market which typically makes up more than 80 per cent of residential transactions was also affected. Owners were more realistic in their asking prices and were prepared to negotiate to close a sale. The rental market was soft with owners of newly completed condominiums taking a longer time to secure a tenant. The auction market was also more subdued with reduced number of foreclosed properties put up by the banks for auction despite an increase in instructions for valuations for foreclosure purposes.
OFFICE SECTOR
For the office sector, the weakening of business sentiments, increased layoffs and a looming oversupply caused overall occupancy rates to decline, putting pressure on rental rates. The significant increase in the supply of office space over the past five years have begun to put pressure on occupancy rates and newly completed buildings are taking a longer time to fill up.
Nevertheless, the bulk of the existing supply of office space are located in old buildings of more than 10 years in age and some tenants are taking the opportunity to upgrade to better quality premises with improved infrastructure and facilities in the newer buildings especially those which are served by public transport such as the Light Rail Transit.
The trend of decentralisation is also continuing as better quality new buildings in city fringe areas like KL Sentral and Damansara are attracting companies to move out of the congested city centre. Buildings with MSC status and are green certified have an edge as they are preferred particularly by multinational companies. Syariah-compliant buildings have a harder time filling up the space in view of the restriction to take in only syariah-compliant tenants.
The supply of purpose built office space in Kuala Lumpur increased to approximately 90.95 million sq ft (8.449 million sqm) in the first half of 2016, up from the 89.2 million sq ft recorded as at end of 2015 based on the latest available statistics from NAPIC.
There is another 22.1 million sq ft (2.052 million sqm) supplied by buildings in Putrajaya while Selangor contributes another 35.6 million sq ft (3.307 million sqm). Overall, office occupancy rates in Kuala Lumpur eased marginally to 80 per cent as at end of 1H 2016 compared to 81.2 per cent the year before and 83.2 per cent in 2014.
For Selangor, occupancy rates went up slightly to 77 per cent compared to 75.7 per cent in 2015 and 76.4 per cent in 2014. The additional supply coming onto the market by the end of the year or early next year is expected to result in occupancy rates dipping further.
Rentals have been quite stable to date, registering only marginal declines, despite the significant increase in supply. Nevertheless, both occupancy rates and rentals could come down in the face of the huge supply of space which is expected to come onto the market from 2016.
The oil and gas and finance industries which have been the main sources of demand for office space over the past few years are no longer performing as well as before with crude oil prices having fallen to record lows and the country’s economic growth slowing down. A number of banks have carried out voluntary staff separation schemes and this would have meant a reduction of the office space needed by these banks.
Without additional stimulus measures by the government to boost the economy and demand for office space, the next few years look challenging for the office sector. Nevertheless the recent hefty decline of the ringgit against major currencies has made Malaysia a cheaper location and given a reason to multi-nationals operating in the region to relocate their regional offices, back offices or data centres to Kuala Lumpur, provided the overall economic and political climate and business and investment conditions remain stable and favourable.
RETAIL SECTOR
Similar to last year, the main challenges facing the retail sector and Klang Valley shopping centres in 2016 have been reduced consumer spending and rising costs. Shopping centre owners had to bear with higher operations costs (air-conditioning, security, cleaning and staff costs), but yet they were not able to recoup these costs by increasing their rental rates due to the weaker retail environment.
The current soft market conditions and weaker consumer sentiments deterred many national chain stores from opening additional outlets in the newly completed shopping centres. In fact, the Malaysian Retail Chain Association (MRCA) made a public appeal to the government to stop giving approvals for the building of more shopping centres in order to prevent an oversupply of shopping centres which will in turn hurt the retail industry. Shopping centre owners had to offer monetary incentives (including lower rental, longer rent free period, subsidised renovation costs, etc.) in order to attract reputable tenants to open shops in their shopping centres.
After being hit badly by the introduction of the Goods and Services Tax (GST) in April 2015, the retail industry continued to disappoint retailers in 2016 because of the weak domestic economy, lacklustre consumer spending, depreciated currency which resulted in higher cost of imported products as well as rising cost of retail operations.
For the first quarter of 2016, the Malaysian retail industry recorded a growth rate of -4.4 per cent in retail sales, as compared to the same period in 2015. A negative first quarter growth rate was expected taking into consideration the higher pre-GST sales during the same period a year ago (at 4.6 per cent).
The poor first quarterly growth rate was also due to weak Chinese New Year sales in February 2016. In addition, prices of retail goods and services had been increasing gradually since the beginning of this year, partly due to our weak Malaysian currency. This further affected the spending power of Malaysian consumers during the first quarter of this year.
Retailers continued to depend on heavy price discounts to attract Malaysian consumers to buy. As a result, their profits were eroded. For the second quarter of 2016, the Malaysian retail industry reported a lower-than-expected growth rate of 7.5 per cent in retail sales, as compared to the same period in 2015. This period marked the first anniversary of the implementation of GST in Malaysia.
For the third quarter of 2016, Malaysia’s retail industry reported another disappointing growth rate of 1.9 per cent in retail sales, as compared to the same period in 2015. The Hari Raya festival in early July did not lead to higher retail sales. Higher minimum wages from July 1 did not bring cheer to retailers as well. Malaysian consumers have yet to recover from the negative impact of GST.
As at December 2016, Klang Valley had 255 shopping centres with a total supply of about 68.2 million square feet in retail space. The average occupancy rate of these shopping centres during the year dropped slightly from 80.4 per cent in 2015 to 79.9 per cent. A number of new malls opened in 2016 with less than 30 per cent occupancy, casting doubt over their ability to survive.
*Story courtesy of Henry Butcher Malaysia