Although not obvious, housing transactions saw a drop in volume by 2.6% and in value by 5.7% for the first half of 2015 against the first half of 2014, according to NAPIC. The higher decline in value against volume suggests that there was a drop in prices in general in 2015 because the second half continued to trend down.
The weak ringgit against other currencies led to active monitoring by foreign investors. They are, however, not committing themselves because as in any investments, any further fall in the ringgit means an erosion of the value of their investments. Therefore, the ringgit need to stabilise before foreign investors will enter the market.
The effects of the accesses of the past - freebies, rebates and developers’ interest bearing schemes - are expected to culminate in 2016 and 2017 as more projects are handed over to buyers. Thousands of high-rise residentials were sold compared with landed units the last several years. The landed market will, therefore, be more resilient than high-rise segment, which were sold by the tens of thousands, in the Klang Valley, Penang and Johor.
Johor Baru alone has an existing stock of 41,000 units compared to about 2,000 units in 2011/2012, with an occupancy of between 80% and 90% then. There will be an incoming supply of about 14,000 units, bringing its stock to about 55,000 units. In 2017, Johor Baru will have an incoming supply of about 26,000 units, bringing its stock to about 81,000 units. This avalanche has promoted a go-slow among high-rise developers.
The Johor government has rejected new applications to build serviced apartments and implemented a 1% property tax on serviced apartments. The oversupply is evidenced in Penang and the Klang Valley also.
There are two issues here – an oversupply of a particular product and a huge mismatch between what people can afford and what’s available for sale. Developers have been catering for buyers in middle high-end and above income bracket in urbanized localities the last several years, leading to a decrease in rentals and prices.
In the Klang Valley, about 13,500 units will be entering the market, of which 75% will be shoebox-sized units of about 500 sq ft. The challenge going forward is how to fill them. It will take more than one year to fill them.
Overall, the secondary market where buyers buy directly from house owners will be impacted. NAPIC data show that between the first and third quarter of 2015, the number of transactions dropped in number and value by 4.77% and 8.26% respectively compared to the corresponding period in 2014. This falling trend – both value and number of transactions – will continue this year.
The scarcity of landed units will give it a degree of resilience, particularly with the gated and guarded communities. Landed housing has gone beyond the reach of the lower-middle income group. New launches of landed units are further away from the city with little or no public transport links like Shah Alam, Rawang, Cyberjaya, Semenyih, Kajang and Bangi.
The situation in the Klang Valley is more pressing than in Johor and Penang with about 9 million sq ft of purpose-built office space each compared to about 100mil sq ft in the Klang Valley.
Average rental in Penang is about RM2.80 psf (occupancy: 88%) but some landlords are asking for more to cover rising costs. In Johor, average rental is between RM2.80 and RM3.30psf, with occupancy rate of 75%.
Over the past two years, multi-national companies have unsuccessfully searched for suitable office space in Johor Baru, prompting developers to look into this segment. Some have offered low-rise office space in Medini for RM4.50per sq ft and this has been snapped up.
In the Klang Valley, with at least 4.1 million sq ft scheduled to be completed by end of 2015 and another 1.25 million sq ft scheduled to be completed by 2016, rentals and occupancy rates are expected to move downwards. Rental levels saw marginal movement the last three years due to over supply and incoming stock. Prime office commands gross rental of between RM7.50 and RM8 psf, some asking RM6.80psf. At the higher end is RM11psf; Petronas Tower 3 is at RM13psf.
Effective rental rates, however, have been gradually declining as more incentives are given with longer rent-free periods. Klang Valley landlords are innovative, they maintain the rental rate but give tenants one month free rent and other incentives. Tenants pay 11 instead of 12 months rent. The rationale is that when the good times return, landlord can move up the scale instead of agreeing to a drop in rates now.
Top grade office space rental, collectively known as Grade A (includes Grade A+ and A), is expected to come under pressure as oil and gas (O&G) sector takes a drubbing from continuing low oil prices. The banking sector occupies a third of Grade A office space in KL, O&G sector at 26%.
The general opinion in early December was that the limited supply of existing Grade A+ office featuring MSC status and Green Building Index (less than 10% of the total supply) would remain resilient. However, with the current oil price volatility, from hopes of it reaching US$50 a barrel in early December to about US$30 per barrel in just six weeks, does not bode well for the global economy.
Opinions differ whether city fringe areas enjoy better demand. Some consultants like the city while others champion prime fringe areas like Bangsar South, KL Sentral, Mid Valley and KL Eco City.
Year-on-year growth was lower in 2015, compared with 2014, mainly due to the implementation of the goods and services tax (GST). The overall retail market has reported a drop by a third in spending and this is likely to continue as rising prices and a weaker ringgit begin to bite.
Some segments of food and beverage outlets should still be relatively stable or even strong for now, but may be hit as the year unfolds. Other retail outlets are feeling the pinch with most offering sales of 50%-70%. Smaller retailers are expected to downsize as they try to sustain themselves in order to stay afloat.
The scheduled openings of 10 new shopping malls by 2015/2016 in the Klang Valley is expected to impact occupancy and rent further. Consumers will be more selective in their spending and consumption will trend towards needs more than wants.
Weakening ringgit may attract foreign buyers and tourists, especially from Singapore into Johor. Price correction to occur in specific market segments.
Total retail stock is about 51 million sq ft with another 7.65 mil sq ft to open in 2016/17. About 2 million sq ft is expected to enter the Cheras market with the opening of Sunway Velocity and MyTown shopping centre .
It will be a challenge to fill up the space. Some malls in Petaling Jaya are feeling the pressure as tenants leave.
Johor Baru and Penang have about 13.3 million sq ft and 18 million sq ft of retail space respectively. Penang’s retail scene is expected to remain healthy in the near future. Interest is shifting to Batu Kawan. Johor’s retail scene is stable.
Among all the sectors, industrial space seems to have a better prognosis. There is the view that rental rates for smaller industrial lots within the Klang Valley to hold steady with industrial lots below 100,000 sq ft expected to retain their rates as companies downtrend their businesses and become more cost conscious in light of the challenging economic conditions.
The introduction of incentives for industrial estates by the Government is expected to enable industrial estate operators to enjoy 100% tax exemption on statutory income for five years. This is likely to interest more developers to develop industrial estates in the Klang Valley.
As of the third quarter of 2015, industrial supply in the Klang Valley remained unchanged, with most of the incoming supply in Klang.
However, this sense of optimism does not bear out in the rental market. Going into specific locations, rental rates of old buildings in Shah Alam have dropped to RM1.40 per sq ft from RM1.60 per sq ft previously, while prices of new buildings hovered around the RM1.80-mark towards the end of 2015. In Klang, old factory space have gone to about 88 sen from 98 sen previously while the new ones are down to RM1.15 per sq ft from RM1.30 per sq ft initially.
This drop in rental rates notwithstanding, the general view is that there will be demand for industrial space in the country going forward due to the ongoing and upcoming infrastructure projects.
There is a lot of optimism for example in Sabah and Sarawak due to the various infrastructure projects there.
Among the notable highlights is the RM12.8bil funding for the Pan Borneo Highway, beginning with the construction of the route linking Sindumin in the west coast of Sabah to the east coast of Tawau.
A proposed rapid bus transit system was also announced for Kota Kinabalu. Also outlined were the proposed highways of Dash and West Coast and light rapid transit line 3.
Note: CH Williams Talhar & Wong, VPC Alliance (KL), PPC International, Knight Frank Malaysia, JLL Malaysia, Henry Butcher Malaysia and an analyst contributed to this 2016 outlook.