From New York, London, Paris, Tokyo to Sydney, coping with the Covid-19 cases is a tough balancing act between keeping people safe and opening the doors to the economy. Which do you prioritise as the infectious virus keeps rearing its ugly head after rounds of affirmative actions like Movement Control Order (MCO), Standard Operating Procedures (SOP) and state of emergencies? It's a tough call and there will be casualties when SOPs or people's discipline are weakened by flimsy enforcement and questionable agendas.
In Klang Valley, the resurgence of Covid-19 cases since the Sabah State Election on 26 September has left the medical system reeling to its knees. Into its third wave now, the capital city of Kuala Lumpur and the Selangor state that form Klang Valley have been the epicenter of the outbreak after cases in Sabah were more contained. The challenge is more pronounced here because it is the country's most populous and her most important commercial hub. With these characteristics, it is also where urbanisation goes full steam with most pioneering businesses, real estate and lifestyle factors all come into play here before they are expanded nationwide. And so with the estimated 8 million people living in Klang Valley, the acute need for housing and its supporting structures of amenities and facilities came under pressure when the unannounced threat of Covid-19 made its silent entry in 2020. So how did the Klang Valley property market fare during the pandemic year?
Residential - review 2020
The Covid-19 pandemic clearly had an adverse impact on the residential property market as property developers were forced to close sales galleries and show houses during the Movement Control Order (MCO) starting from 18 March 2020. The unfavourable conditions prevented many developers from launching new projects as news of the Novel Coronavirus 2019 was first detected in Malaysia on 26 January 2020. The unsettling atmosphere threw everyone off balance and it is no surprise that the entire property machinery was halted in its tracks when the situation worsened.
The startling truth however emerged from the subdued market when the MCO was relaxed in May 2020. Several new launches that made their way to the market surprised everyone with its commendable take-up rate that these well located and reasonably priced projects managed to achieve. Quite a few new projects launched in the second half of 2020 including Artoca @ Setia Alam by SP Setia Bhd, Elmina Green by Sime Darby Property Bhd, M Luna by Mah Sing Group Bhd and Miyu by Tropicana Corporation Bhd have reported very good sales responses. Potential buyers for a new condominium launched in the popular and much sought-after Desa ParkCity queued overnight to increase the chances of securing a unit of their choice, reminiscing the good old days before Covid-19. But the story is not quite the same in the secondary market because buyers, especially those buying for the first time, prefer the primary market to take advantage of the attractive discounts, freebies as well as the easy entry schemes offered by developers including the stamp duty savings extended by the government.
But even with the unexpected good news, there was a drop in both the volume and value of residential transactions in the first nine months of 2020. Both Selangor and Kuala Lumpur followed the national trend with Selangor recording a 19 per cent drop in the volume of transactions and a 17 per cent decline in the value of the transactions whereas Kuala Lumpur, which was also not spared, dipped in volume and value of transactions at 11.5 per cent and 10 per cent respectively.
In terms of the overhang residential properties, Selangor contributed 15.2 per cent whilst Kuala Lumpur accounted for 10.1 per cent of the overall stock in the country, which stood at 30,926 units worth RM19.99 billion in Q3 2020. This is slightly less than the previous quarter's overhang stock in Q2 2020 which went up to 31,661 units valued at RM20.03 billion in the first two quarters of the year and of these, 45.1 per cent were priced above RM500,000 while 29.5 per cent were under RM300,000. The reduction moving into the third quarter was boosted by the sales recorded after the Home Ownership Campaign (HOC) was reinstated for 2020 to 2021 from June 2021 onwards as part of the PENJANA stimulus by the government.
Serviced apartments meanwhile saw the number of overhang units increasing from 21,683 units valued at RM18.64 billion in Q2 2020 to 24,267 units valued at RM21.33 billion in Q3 2020 nationwide. Kuala Lumpur was a major contributor to the stock of unsold serviced apartments with 18.3 per cent, behind Johor's 67.1 per cent.
On the whole, the year is still expected to end with a reduced volume and value of transactions compared to 2019 due to the three months loss of sales activities.
Residential outlook 2021
While the uncertainty surrounding Covid-19 had initially caused alarm in the market, data from NAPIC showed improvement in Klang Valley's residential sub-sector after MCO was lifted in May and the HOC reintroduced. These supporting factors should see the second half of 2020 outperforming the first half of the year although the overall scorecard for 2020 is expected to decline compared to 2019 due to the muted activities during MCO and the cautious sentiments arising from the weakened economy and job insecurities.
As the world's economies are also reliant on an effective Covid-19 vaccine becoming available, the news of Malaysia receiving it in early 2021 shall help to mitigate the cases and with it restoring investors confidence once again in the country. The market will nevertheless take some time before it can regain the kind of pace and momentum seen before the pandemic. Another vital factor is the country's political uncertainty which may have dampened investor sentiments as reflected by Fitch's downgrade of Malaysia's ratings. If the government is able to nurse the battered economy back on track to a healthy growth path, we should see the residential property market recover in the second half of 2021 provided no new wave of Covid-19 is reported domestically and the pandemic is brought under control in major international economies like the US, Europe, China and Japan.
Unfortunately, the beginning of 2021 inherited a spillover of the third wave of Covid-19 sweeping the country, resulting in a rise of positive cases as well as deaths to record highs. To combat this, the Prime Minister re-imposed MCO (MCO 2.0) on six states including Kuala Lumpur and Selangor, and immediately the day after, the Prime Minister also received assent of the Agong and declared an emergency order over the whole nation until 1 August 2021. This unexpected development resulted in the crash of the KLCI as well as a softening of the Ringgit. As MCO 2.0 will restrict interstate and inter-district travel including stifling business operations, this second coming will inevitably result in the loss of income and additional business closures, ultimately affecting investors' confidence.
Property developers are also not allowed to open their sales galleries under MCO 2.0 and sales volume will undoubtedly be affected. Depending on how long MCO 2.0 and the emergency order will run, the residential market recovery could likely be delayed to 2022 with 2021 looking flattish.
Residential - factors to watch In 2021
● Buyers may take advantage of the current low interest rates to buy their dream homes.
● HOC 2020-2021 will help sustain demand for residential properties.
● Foreign investors may return once international borders are lifted.
● Developers will be making use of online marketing programmes to reach out to overseas markets.
● The MCO 2.0 and emergency order will affect property sales and cause a delay in the recovery of the market.
Residential bright spots for 2021
● Landed residential properties should remain in demand.
● More developers have re-focussed their attention on affordable homes priced under RM500,000 and this has increased the supply of such properties.
● EKVE (East Klang Valley Expressway), scheduled for completion in Q3 2021, will boost demand for properties located near the interchanges of the highway.
● Developer of Bandar Malaysia announced the commencement of Phase 1 construction in 2021.
● DBKL is offering a 50 per cent discount on development charges for projects commencing between 1 June 2020 and 31 May 2021 to spur development during the pandemic.
Purpose-built office overview
The supply of purpose-built office space (PBO) in Klang Valley (both government and privately owned buildings) increased to 170.3 million sq ft (15.8225 million sqm) at the end of 2019 with Kuala Lumpur's stock increased to approximately 100 million sq ft (9.266 million sqm) and anticipating an incoming supply of 15.77 million sq ft (1.465 million sqm) which will significantly add to the stock when completed.
The administrative capital of Putrajaya which has 27.2 million sq ft (2.525 million sqm) will add another 816,000 sq ft (75,816 sqm) whilst the state of Selangor will be contributing approximately 2.24 million sq ft (208,391 sqm) to the existing stock of 43.4 million sq ft (4.03 million sqm). The bulk of the existing supply of the privately owned PBO (79 per cent) is located within Kuala Lumpur city centre.
A look at the Klang Valley's city skyline will reveal that there are a number of new office building projects currently under construction and due for completion in 2020 and beyond. In addition to that, a number of proposed office developments have also been announced which if launched and completed, will dramatically add to the future supply of office space in Kuala Lumpur. Some of these are redevelopment projects where the existing buildings have been or will soon be torn down. But in view of the slowdown in the economy, poor demand for office space especially after businesses have been badly hit by the pandemic, and the current oversupply situation, it is likely some of these projects will not be launched in the immediate future or will be deferred to a time when market conditions become more benign.
In terms of occupancy, privately owned PBOs within KL city centre recorded 77.3 per cent as at Q2 2020, down from 81.5 per cent in Q2 2019. PBOs located outside the city centre have a marginally lower occupancy of 70.1 per cent.
For the privately owned PBOs in Putrajaya, occupancy is only 39.1 per cent (the majority of the office buildings in Putrajaya are owned and occupied by government departments). In Selangor, occupancy rate is lower than Kuala Lumpur at 69.8 per cent, down from 73.1 per cent in Q2 2019.
Although there is concern pertaining to the oversupply of office space and the consequential decline in occupancy rates, NAPIC's PBO rental index did not show any drastic changes. Nevertheless, Henry Butcher has been made aware of landlords offering improved rental terms to tenants who were able to renew their leases and extending the same to new tenants. Further, with most businesses adopting WFH practices and putting off expansion plans, demand for office space is expected to be curtailed, especially with increased business closures and staff layoffs resultant from the economic slowdown.
The marked increase in office space over the past few years is expected to worsen with the big jump in supply as completion of a number of mega office projects undertaken by several GLCs loom closer. This massive addition is anticipated to exert downward pressure on occupancy rates and consequently affect rental rates going forward (see Overall Range of Office Rentals (2020)).
Office outlook 2021
The multi-pronged impact of Covid-19 on the office sub-sector has created a wave of ripple effects that is not going to dissipate anytime soon. Firstly, the fright of the pandemic has forced most companies to lower operating costs by either deferring expansion plans, reducing headcount or winding up their businesses if they were severely hit. Secondly, as companies comply with the SOP to WFH, demand for office space has dwindled, shooting vacancy rates up, more so in older buildings which may not have upgraded their technical infrastructure or are inferior when compared to the newer ones. With the completion and commissioning of newer buildings equipped with more sophisticated specifications, it is not uncommon for tenants to be attracted and relocate. This flight to quality for the equal or better rental terms will reduce occupancy rates in older premises unless building owners are able to upgrade and/or offer even more attractive terms to retain tenants.
Thirdly, the completion of the GLC/GLIC-owned mega office building projects in the next few years is expected to reduce the overall occupancy rates and put pressure on rental rates. To avert the perfect storm, the country's economic health must head for a recovery in 2021 as projected so it can spur business activities and prevent further erosion of occupancy and rents, setting the stage for a proper recovery in the office subsector, provided also that the economic recoveries of the world and Malaysia are sustained.
Again, the key factor rests in the availability of an effective and mass-produced vaccine for the Malaysian public so that risks of getting infected can be substantially mitigated if not eliminated altogether. This shall pave the way for life and business to revert to some sense of normalcy and giving businesses the opportunity to once again grow. A domino effect will ensue should this happen where rising demand, stability in occupancy and robust rental will all occur to shape up for an office sub-sector recovery.
Supposed however the vaccine is yet to be found, the only saving grace is that as time passes, there is already experience accumulated in the workforce in the way workspaces can be managed safely amid the pandemic. This shall birth new ideas in workstations layout and office operations, and perhaps with roomier space to observe physical distancing regulations while safeguarding everyone including business productivity. A hybrid model between on-site and WFH may also be adopted since companies are unlikely to extend the WFH-measure permanently post-pandemic.
Another model to control cost is for companies to adopt a hub and spoke concept whereby the size of the head office for the core team located within the more expensive and prime city centre locations can be reduced and one or several sub-offices outside the city and closer to where the staff live can be acquired for the rest of the team. Trends such as these will unquestionably have an impact on future demand for office space, not forgetting designs for office buildings and floor layouts.
Office - Factors to watch in 2021
● The completion of a number of mega office projects currently being built by GLCs eg. Merdeka 118 by PNB and a few other private developments will substantially add to the supply of office space in Kuala Lumpur, putting additional pressure on overall occupancy and rental rates.
● Companies are not expected to immediately discontinue their work from home (WFH) practices especially if the Covid-19 virus has not been totally eliminated. The demand for office space is therefore not expected to increase significantly.
● The government's economic recovery programmes may spur business activities and generate additional demand for office space.
Office bright apots for 2021
● The increase in vacancy rates of office buildings in Klang Valley may lead to developers shelving or deferring office developments and this will ease the pressure on the oversupply situation.
Retail overview
Klang Valley has the largest number of shopping centres in Malaysia supporting the retail demand of the metropolitan city folks. They range from mass market neighbourhood malls, hypermarkets, big box retail to large scale multi-mix shopping centres complete with F&B, entertainment, fitness and sometimes flanked by new and old wing adjoining premises as well as listed in the public stocks exchange in a Real Estate Investment Trusts (REITs).
The various lockdown measures imposed in 2020 have unintentionally affected occupancy rates of many shopping centres and as a result, the average rental income dropped by about 30 per cent. It's safe to say that aside from retailers in the essential goods businesses such as grocery stores and pharmacies who enjoyed brisk business, the rest have fallen victim to Covid-19 with muted sales and when reopened struggled to find a footing.
Retail outlook 2021
As the construction of malls and retail outlets big and small are no overnight endeavours, the ones planned and already underway before the pandemic have continued to lay the bricks and erect the walls. As such, when SOPs were being rolled out around the country, more testing and disinfecting have also been carried out at sites detected with Covid-19.
In 2021, at least seven new shopping centres and two mall extensions are scheduled to open. With a total nett floor area of 5.5 million sq ft, some of the major malls earmarked for opening include Mitsui Shopping Park Lalaport, Pavilion Bukit Jalil, KSL Esplanade Mall, Setia City Mall Phase 2 and IOI City Mall Phase 2. This new supply will put more pressure on the occupancy and rental rates of existing shopping centres.
As have been seen in 2020, the future of the Klang Valley shopping centre market is highly dependent on the development and availability of the Covid-19 vaccines so malls can once again be a safe haven for shoppers to return to. The Malaysian government policies on lockdown and physical distancing guidelines are also equally important so the retailers are not overburdened with reduced footfalls which directly impacts their bottomline.
Industrial Overview in 2020
The volume of industrial property transactions in Selangor for the first nine months of 2020 dropped 18 per cent compared to the corresponding period in 2018 and 32 per cent against the same period in 2019. The decline was higher for Kuala Lumpur at 42 per cent and 44 per cent against 2018 and 2019 respectively.
In terms of value, Selangor slid 18 per cent compared to 2018 and a marginal 0.3 per cent compared to 2019 whilst the decline for Kuala Lumpur were 30 per cent (against 2018) and 42 per cent (against 2019). It has to be pointed out however that the number of industrial property transactions in Kuala Lumpur is insignificant because Selangor has a far larger number of industrial grade properties like warehouses and factories. In Selangor, most of the transacted properties were terraced factories/warehouses followed by semi-detached factories/warehouses and vacant industrial plots.
Popular areas where industrial properties are still much sought after such as Shah Alam, Subang and Port Klang, as they continued to attract interest for either industrial land or warehousing. However, the lack of supply to suit specific business requirements of the end users still remains a challenge and resulted in escalation of prices for industrial land and warehouses in these preferred areas in spite of the pandemic. Thanks to the heightened e-commerce activities, rentals for warehousing have registered an increase and besides Klang Valley, areas such as Johor and Penang are still popular and very much sought after as well.
Several large industrial developments that have recently been developed or are being developed in Klang Valley include AREA's logistics facility in Ampang, Galaxy Logistics Hub in Kuala Selangor, Hap Seng Industrial Hub in Shah Alam, Ikea Distribution Centre in Pulau Indah and the KLIA Aeropolis Digital Free Trade Zone.
Although the market has not returned to pre-Covid-19 levels, the e-commerce sector has nevertheless galloped away to raise demand for warehousing and sorting facilities. The relaxation of mobility under the CMCO (Conditional MCO) has granted most manufacturing businesses the opportunity to carry on operations towards the second half of 2020. As such, demand for industrial properties in the near term will still remain stable especially for companies requiring specific industrial properties to match with their business needs.
Retail - Factors to watch in 2021
● New shopping centres will face challenges in filling up space and some may defer opening if they are unable to open at satisfactory level of occupancy.
● The retail sector in Klang Valley will continue to see a shakeout where the poorly designed and inferiorly located malls will be forced to close or be converted to some other alternative uses.
Retail bright spots for 2021
● New malls with foreign retailers making their debut in Malaysia will offer shoppers new
choices and different shopping experiences which will help draw customers.
● Some of the new retailers/restaurants opening in Kuala Lumpur are Taco Bell (Cyberjaya), Tom Ford (KLCC), Five Guys (Genting Highlands), David Rocco (Suria KLCC), Don Don Donki (Lot 10) etc.
Industrial outlook for 2021
As vaccination against Covid-19 has commenced in several countries since late last year and in Malaysia targeted for early 2021, the hope is that the pandemic will come under control so that the world economy can begin its recovery process. This will be a much needed shot in the arm for Malaysia's manufacturing sector and those involved in the export business because a recovering economy can re-instill confidence back to the consumers which in turn will improve market demand for crude oil, manufactured goods and drive towards the projected seven per cent growth in the manufacturing sector in 2021 after a three per cent drop in 2020.
Singling out the positive influence of the vaccine, a strong and sustained economic recovery is on the cards and this augurs well for the industrial sub-sector that continues to see rising demand to support expansionary business activities. With the industrial sub-sector holding strong, an economic recovery will be imminent.
Hospitality overview in 2020
Most hotels, except those which were designated as quarantine centres for overseas returnees, had to temporarily shut down operations during the MCO. The affected hotels continued to close for most of the year as some also permanently shut its doors due to the deplorable state of touristy activities. Based on the records of the Companies Commission of Malaysia (SSM), a growing number of hotels have closed since March 2020 and some of the major ones which have closed are as follows:
● GTower Hotel Kuala Lumpur
● Swiss-Inn Chinatown Kuala Lumpur
● Kinta Riverfront Hotel & Suites Ipoh
● Tower Regency Hotel Ipoh
● Jazz Hotel Penang
● Penaga Hotel Penang
● Jerejak Island Resort Penang
● Holiday-Inn Resort Penang
● Ramada Plaza Melaka
● Berjaya Tioman Resort Tioman
● Swiss-Garden Resort Damai Laut
● Swiss-Inn Sungai Petani
● Four Points by Sheraton Sandakan
● Hotel Equatorial Penang
● Silka Maytower Kuala Lumpur
Hospitality outlook for 2021
The lifting of inter-district and interstate travel under the latest phase of CMCO in December 2020 has increased domestic tourism since the locals were unable to travel outside the country but attracted by the heavy discounts offered by the hotels and attractions. These domestic travellers have taken the opportunity to travel within the country to satisfy their vacation aspirations and popular destinations like Penang and Langkawi had somewhat shown streaks of its past glory. Some hotels have also innovatively introduced staycation and work-from-hotel packages to generate cash flow to keep the hotels afloat.
Under Budget 2021's Tourism Recovery Plan, the government has allocated a sum of RM50 million for training and placements for 8,000 employees of airline companies who would be made redundant, RM50 million for maintenance and repair of tourism facilities, RM20 million to improve the infrastructure in cultural villages and RM20 million for the conservation of national heritage buildings. The local medical tourism industry also received an allocated budget of RM35 million to promote this sector while companies in the tourism sector will receive Human Resource Development Fund (HRDF) levy exemptions for six months beginning January 2021.
From the Ministry of Tourism, Arts and Culture (MoTAC), it has announced a detailed recovery plan to revive the Malaysian tourism industry in 2021 and the ministry will be working with airlines, travel-related companies and travel-related associations to offer vouchers, discounts and cash rebates to encourage the locals to travel in a bid to improve domestic tourism activities. To that end, MoTAC is exploring the travel bubble arrangements with several adjacent countries and to reopen cross-border tourism activities to small groups such as for golf, diving, bird watching, hiking etc.
In September 2020, the government had also launched a Holiday Special Package for the civil servants to encourage them to travel domestically. This is on top of the PENJANA stimulus package released in June 2020 which also extended a personal tax relief of up to RM1,000 for any Malaysian travelling in the country.
With the relaxation of movement and travel under the latest phase of CMCO including the various initiatives undertaken by the government, the hospitality sector was set to see improvements in the near term only to be barred again with the reinstatement of the MCO to curb the rising cases. Recovery of the tourism sector will acrimoniously be affected and this time, it will take longer for the sub-sector to regain its glorious years. - Henry Butcher Malaysia