Challenges in property market to remain going into 2020

KNIGHT Frank Malaysia expects challenges from 2019 will remain for Malaysia’s commercial real estate market, putting a dampener on growth in 2020. However, there may be some cause for optimism in the coming year.

Knight Frank Malaysia executive director of capital markets James Buckley says: “Malaysian real estate will continue to be challenging in 2020, but there are still opportunities to be found.”

He points out that one of the interesting features in the local commercial real estate market is that values in different sectors are moving at different speeds and in some cases, sectors are fragmenting with the performance of transit-orientated developments performing stronger than stand-alone schemes which generally offer poor overall amenities.

On the face of it, the headline numbers look rosy with total real estate sales volume across the country in 2019 reaching RM20.3 bil, which is 23.1% above the long-term average. The star performers were the sale of development sites and industrial properties. Land sales accounted for 75% of all transactions and were 52% above the long-term average for the segment.

The industrial sector also had another strong year of sales, albeit from a low base, with investors snapping up RM2.6 bil of property, which was 149.4% above the long-term average.

“Investors continue to be attracted by the undersupply of good quality industrial property, the relatively higher returns, longer lease tenures, lower maintenance costs and relatively lower vacancy in the sector compared to others,” Buckley says.

The office, retail and hotel sectors all saw a drop in sales with the office sector 76% below the long-term average, and the retail sector 37% below. Transactions in hotels were 45% below the long-term average, although this was due to a lack of assets available for sale.

Buckley adds: “Investors are particularly concerned about the office and retail sectors, particularly in Kuala Lumpur where the level of new supply is at historical highs.”

The Kuala Lumpur office market remains competitive. There are few, large-scale, well-let, good quality Grade A institutional assets that come to the market.

Notable recent transactions are the Intermark (2017), Menara AIA Cap Square (2016) and Integra Tower in 2015. Malaysia has many large institutional investors with significant dry powder to invest, but the investment universe here is relatively small.

“Owners of Grade A office buildings need to become more creative in attracting tenants and institutionalising their buildings by securing longer lease terms. With few genuine new tenants entering the market, existing tenants in Grade B offices are being offered attractive packages to entice them to move to better Grade A office space. The real opportunity is to convert these redundant Grade B office buildings into other spaces including hotels, co-living and residential uses,” Buckley adds.

Recent examples include Wisma KFC and Wisma Megah, both old office buildings in strategic locations which will be converted to hotels, and Bangunan Yee Seng which will be converted to co-living.

The retail sector is expected to remain challenging. While the sector overall challenge is re-pricing, the current yield of 6.5-7% could quickly disappear as leases expire and retailers fall into insolvency.

“With so much incoming new supply, there will undoubtedly be opportunities to re-purpose redundant retail space into other uses including schools, medical centres, co-living, warehousing or even hotels,” Buckley says. – Dec 23, 2019

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