Pockets of opportunities

Alternative assets: Unlike conventional assets, healthcare and institutional real estate are alternative specialised asset classes that are less reliant on the economy.

AMID the current property backdrop, a common phrase among optimists is that the lacklustre market offers “pockets of opportunities”.

But does that adage hold true?

For most developers, the current property market slowdown has forced them to pull back or postpone their launches.

And for those not looking to rest on their laurels, it’s a time to tweak the various marketing strategies, push boundaries and find or make new ways to push sales.

“It’s time to get creative,” says an industry observer, who adds that the current six-month Home Ownership Campaign (HOC) 2019 is a “saving grace” for Malaysian property developers.

“The campaign sees developers offering all kinds of discounts and goodies to attract buyers. Everyone is in on it and competing with each other and trying to outdo each other. This is a great time to buy property – so long as you have the means,” he says.

At the 11th Malaysian Property Summit (MPS) 2019 earlier this year, Rahim & Co International Sdn Bhd research director Sulaiman Akhmady Mohd Saheh said while the number of launches and sales performance by developers have been declining, there are projects that are still performing well.

“This is due to product, concept, location, access and marketing strategies,” he says.

Some developers that have been leveraging on the HOC have been reporting good responses for their products.

In conjunction with the HOC, which kicked off in January, Sime Darby Property Bhd chief marketing and sales officer Gerard Yuen says the company recently kicked off a campaign which is launching eight projects in eight weeks.

Comprising 1,200 units worth RM817mil, he says two of the projects launched have already been fully taken up.

Meanwhile, Valuation and Property Services Department director-general Ahmad Zailan Azizuddin says the property market is expected to stabilise this year.

“Unsold and overhang of properties have become hot issues and the government has taken steps to overcome them, such as the HOC.

“The overhang status needs attention and the government incentives help to sustain the property market,” he says in a presentation at MPS 2019.

Meanwhile, Knight Frank Malaysia valuation and advisory executive director Keith Ooi says that unlike the conventional assets, healthcare and institutional real estate are alternative specialised asset classes that is less reliant on the economy.

“From the investors’ point of view, this specialised asset class is attractive as it provides certainty, by offering long-term leases with step-up rental,” he says in a statement.

Citing Knight Frank’s Malaysia Commercial Real Estate Investment Sentiment Survey 2019, he says some respondents lamented the increased challenges in raising funds for commercial real estate, particularly the conventional assets.

“The healthcare and institutional assets will be somewhat insulated from this challenge as respondents among the lenders and fund/real estate investment trusts managers indicate that they may increase their exposure in the sub-sector in 2019.

“The healthcare and institutional sub-sector is truly a hidden gem as investors become more familiar with this asset class. I foresee there will be more real estate transactions in this sub-sector in 2019,” says Ooi.

Knight Frank Malaysia capital markets executive director James Buckley says in the same statement that market activities, especially in retail and office sub-sectors, had certainly slowed down in 2018.

“Investors have become increasingly cautious given the extent of the forthcoming new supply, decreasing occupancy and declining rentals. In 2019, we have already observed a rise in the number of owners wanting to sell their commercial property assets, but the bid-ask spread will need to narrow before we see more transactions successfully completing.

“Commercial properties in Malaysia do provide good yields relative to other markets in Asia Pacific, but higher relative borrowing costs, generally exceeding 5%, has lowered the cash-on-cash yield.”

He says this has reduced the attractiveness of Malaysia’s property market in the eyes of international investors who compare the returns they can achieve elsewhere in the region.

“Owners need to become more realistic about their price expectations given the market situation. Investing in the healthcare and institutional assets, such as education, is still a fairly new trend in Malaysia.”

However, Buckley adds that it is possible that more deals will come to fruition from this sub-sector, with investors being attracted by its defensive qualities as it is less reliant on the general state of the economy, offers long leases and often comes with fixed increases in rent throughout the duration of the lease.

“The logistics and industrial sub-sector have in the past been the poor relation to offices and retail malls, but investors are increasingly seeing the benefits. It offers higher yields, often with great covenants and the construction is simple and fast.

“The rising demand for good quality warehousing and distribution hubs and an undersupply bodes well for future rental growth.”

In general, while the commercial real estate market remains challenging, Buckley says this also presents a good opportunity for well-capitalised key players to acquire suitable assets at reasonable prices.”

Retail evolution

On the retail front, it has been forecast that some 40 malls are slated to enter Greater Kuala Lumpur by 2020. There are already about 250 malls in the Klang Valley currently.

With competition intensifying among bricks-and-mortar malls and online retail creating a structural shift both locally and globally, many shopping complexes (not all) are fighting to remain competitive.

The International Council of Shopping Centers (ICSC) in its research note “The Halo Effect – How Bricks Impact Clicks,” says an important “must-do” for retailers is to compete with consumers’ shrinking attention spans.

The report, citing Green Street Advisors retail lead analyst DJ Busch, acknowledges that retailers are already taking a number of steps to enhance the in-store experience, so customers show up and stick around.

“Landlords are making investments in food and beverage offerings. Retailers are also ensuring they have the right merchandise mix to cater to today’s well-informed consumers. Busch sees pragmatic reasons for investing in physical stores.

“For one, digitally native retailers are discovering that they can operate more efficiently by being closer to their customers. The acquisition cost of customers by having a physical location is much lower and more efficient than online.”

The report adds that personalisation should be another data-driven area of focus.

“One tactic includes loyalty programs that capture individual shoppers’ preferences across multiple points of sale. Based on that intelligence, retailers can target consumers’ desire for customisation, down to the color, design, or monogram.”

Seamless shopping, or in other words, ‘convenience,’ is also another important element for retailers, says ICSC.

“As traditional retailers work to erase walls between offline and online shopping and digitally native brands explore physical channels, the ultimate goal is a seamless experience in which barriers between consumers and products continue to come down.

“Consumers expect the store experience to become more frictionless, from the ease of checkout, leveraging technological advances such as being able to buy online and pick up in the stores, buying in-store with their own devices, or as we get further and further down the line, to walk into a store and grab and go.”

ICSC says points to Amazon’s acquisition of Whole Foods Market in 2017 as a prominent example of the surge in seamless shopping.

“Amazon’s investment in physical stores demonstrates its commitment to omni-channel shopping, even as retailers decide on the right format, store size, and product mix to keep customers engaged.

“The expectations of the store are higher. Sometimes shoppers may want a purchase delivered to their home. Sometimes they’re going to pick it up. Sometimes that means they’re going to shop in your store. You have to meet the consumer where and when they want.”

In its latest retail industry report, Retail Group Malaysia (RGM) says it expects a 4.5% growth in retail sales to RM108.30bil in 2019 for the local market.

For the first quarter, it expects the retail industry to recover and expand by 3.1%, with pharmacy and personal care expanding the fastest by 12.7%, followed by department stores at 7.6%.

RGM says the overall retail industry is expected to recover and grow at an estimated 4.8%, underpinned by the Hari Raya festival taking place during this period.

During the third quarter of this year, retail sales are expected to expand by 3.9%. More activities during the second half of this year should boost retail sales during the final quarter of this year. During the year-end period, retail sales should rise by 5.8%,” it says.

ICSC meanwhile believes that a bright future lies ahead for physical retail stores.

“When retailers invest in brick-and-mortar locations, their online presence thrives. What’s more, retailers with physical stores perform better on measures of brand awareness and consumer perceptions than in markets where those brands lack physical locations.

“As the findings, examples, and insights in this report reveal, physical stores matter, but retailers must continue to innovate in order to flourish in today’s environment.”

The report cautioned however that just because physical stores remain relevant, that does not mean that they can “coast on past successes.”

“Consumers are fickle, customer expectations continue to rise, and new brands and products continue to change the trajectory of retail. As the analysts in this report suggest, integrating digital and physical experiences will inspire shoppers.

“Today’s digitally empowered consumers may enjoy an increasing array of methods to buy what they need, but physical stores remain the dominant channel for building, growing, and sustaining brands.”


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