Time of reckoning for landlords

  • Property
  • Saturday, 11 Apr 2020

Condominiums in areas such as in the vicinity of Kuala Lumpur City Centre and KL Sentral used to command rentals of RM6,000 and above per month some five years ago. Now it has dropped by as much as 50% due to the over-supply and lack of tenants with means to pay high rents.

THE owner of a double-storey corner shoplot got the response he had just expected from his long-time tenant last week. The tenant, who runs a tyre-shop catering for cars and commercial vehicles, said he was unable to pay his monthly rental of RM6,500.

The tenant asked for a 50% discount on the account of business slowing down since March 18 after the imposition of the Movement Control Order (MCO).

The landlord balked. After some discussions, the tyre shop operator finally relented, giving RM5,000, meaning a discount of some 23%.

The situation is not unique to the tyre shop owner and the landlord. Businesses cutting across all segments of the economy are seeking lower rentals from landlords.

Rentals generally have not been going up over the past two years. As a result of Covid-19, there is pressure for landlords to bring it down, which goes against the norm, as they are used to seeing an increase in rentals.

Rents are probably stable for landed properties, especially those with monthly rentals of RM3,000 and below. This segment is largely unaffected by the current downturn in the economy. Rental rates have been coming down for a few years now due to an over-supply situation, which has been persistently dampening the market since 2016. The decline in rates is especially profound for segments of the housing market that is over-built such as high-end condominiums above RM800,000, office space and retail malls.

According to statistics that Bank Negara compiled from leading property agencies, the rate of increase in rentals for prime office space has on average declined from 5.2% between the years 2014 and 2018 to 4.9% in 2018.

In the third quarter of 2019, average rental rates of office space in prime areas did not increase but instead reduced by 1.3%, according to the study. Prime areas are defined as properties located in Kuala Lumpur, Selangor, Johor and Penang.In the retail space segment, the average increase in rental rates was 5.5% between the years 2014 and 2018. In 2018, the rates came down to an average of 1.3% and was a mere 0.9% in the third quarter last year. (See chart).

Condominiums in areas such as in the vicinity of Kuala Lumpur City Centre and KL Sentral used to command rentals of RM6,000 and above per month some five years ago. Now it has dropped by as much as 50% due to the over-supply and lack of tenants with means to pay high rents.

The trend cuts across almost all areas in Petaling Jaya and Kuala Lumpur where tenancy is being renewed at lower rates.

Fortunately, most of the purchasers of the condominiums are foreigners or locals with a disposable income of more than RM10,000 per month. The local purchasers also are backed by a fairly sizeable amount of liquid financial assets such as investments in unit trust, shares and even their savings in the Employees Provident Fund (EPF).

This segment of people can afford to hold on to their high end condominiums or apartments and hope that demand would come back when the economy recovers, more jobs are created in urban areas and expatriates return to work for the oil and gas industry.

The oil and gas industry used to take up a lot of office space and employ many expatriates, who were tenants of high end condominiums. They also drove the sales in retail markets.

Unlike Singapore or Hong Kong, Malaysia is unable to attract a vast number of expatriates because our economy is not diversified. We do not have a financial centre that attracts financial institutions and other related services that employ highly paid expatriates.

The worst affected segments of the property market are in the areas of office and retail spaces where the incoming supply is huge in a market where rentals are already depressed due to the over-supply.

As of the third quarter of 2019,36.2 million square feet of office space, which is equivalent to 30% of existing supply, will come into the market.

According to Bank Negara, 5.5 million square feet of office space will be completed each year until 2021, far exceeding the average annual demand of 2.3 million square feet. To get an idea of how much retail space is coming into the market, it effectively means that every year, a development that is about 20% bigger than the Mega Mall and The Gardens in Mid Valley is coming into the market.

The central bank also stated that the number of completed and planned shopping complexes in Kuala Lumpur, Selangor, Johor and Penang increased to 373 in the third quarter of 2019 compared with 372 in the first quarter of that year.

Even before Covid-19 pandemic, landlords of shopping malls used to give discounts such as free rent for six months, free parking lots and no service fees for the first few years due to the stiff competition. The growing e-commerce business has also affected the demand for space in retail malls.

The fallout from Covid-19 has already caused ripples in the overseas rental markets. Large chains such as H&M, Cheesecake Factory and Mattress Firm have gave notices to their landlords that they could stop paying rent or terminate leases as it cuts back on operations due to the drop in demand from Covid-19 pandemic.

It is likely to be the same here. The rental market, especially for offices and malls are in for a rough ride. The question is whether the landlords would be prepared to absorb the potential loss in income or evict the tenants.

The views expressed are the writer’s own.

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