OVER the past few years, the Malaysian commercial property sub-sector has had to grapple with rising oversupply issues and more recently, the pandemic.
In spite of these challenges, however, many developers and players within the commercial property space are ready to tackle these hurdles head-on.
A property analyst says he expects more companies to leverage digitalisation as a means to do business.
“Owners and managers of commercial assets are also refurbishing their aging office buildings and even upgrading them with the latest technology.
“This is to ensure that they can remain competitive,” he says, adding that properties in good locations also tend to remain appealing to potential owner-occupiers and investors.
Tower Real Estate Investment Trust (Tower REIT) chairman Tang Hong Cheong says the current oversupply in the office building space, especially within the Klang Valley is expected to continue to dampen the market in the group’s current financial year ending June 30, 2022.
“Under such operating conditions, Tower REIT expects revenue and income growth to be pressured in the short-to-medium term,” he says in the group’s recently released annual report.
Nevertheless, Tang says the company has taken judicious measures in the past years to enhance and refurbish its property portfolio.
He emphasises that these measures will help improve the group’s offerings to its target markets, as well as help boost its service levels and cost efficiencies.
“The post-pandemic operating conditions will be challenging and the management will step up its efforts to fortify its competitive position. We are committed to create value with a view to maximise returns. Tower REIT will continue to seek investment opportunities that meet our objectives and yield strong returns on our investments.”
UOB Kay Hian says commercial property assets in strategic locations will continue to be resilient.
“Offices in strategic locations will continue to be resilient as evidenced by KLCC Stapled Group and Sentral REIT’s steady earnings throughout the pandemic. However, average rental rates in the Kuala Lumpur City Centre continue to remain under pressure at RM6.90 per sq ft.”
Although the industry is still grappling with oversupply, the research house says selected office REITs (located in strategic locations with good connectivity like KL Sentral) will benefit from higher demand, amid the need for physical distancing.“Moreover, the average rental rates in KL Sentral are attractive at RM6.46 per sq ft,” it says.
In its latest annual report, Tower REIT says business survivability issues and commercial property overhang are expected to weigh down the performance of the purpose-built office sub-segment moving forward, as a result of the Covid-19 pandemic.
“Furthermore, the additional supply of office space coming onto the market will create more competitive pressure among participants operating in this space. The National Property Information Centre (Napic) has already indicated that in the first quarter of 2021, out of 188 million sq ft of privately-owned purpose-built office space available, only 138 million sq ft are occupied.”
Whilst the outlook moving forward will remain challenging, Tower REIT says it aims to leverage on the prime locations of its newly refurbished assets to drive occupancies.“In addition, the manager is also looking to offer bespoke and innovative solutions that meet the needs of the new normal to companies and organisation.”
Tower REIT adds that flexibility will be an important element for tenants in the near future.
“As work-from-home protocols take hold, tenants need to be assured that their office can be easily adapted to dynamic changes in personnel size. Another key element critical to tenants is the safety and welfare of their employees.
“Propositions like good ventilation, advanced temperature monitoring devices, stringent standard operating procedure protocols will become key considerations of would-be occupiers.”
Tower REIT says office spaces that are cost effective will also be sought-after, as companies look at aggressive cost management to survive and rebuild.
Meanwhile, Deloitte in its 2021 Commercial Real Estate Outlook says digital transformation and tenant experience will become “a business imperative.”
“Covid-19 accelerated the use of technology in the commercial real estate industry. In a matter of weeks, most of the workforce moved to remote work, property tours turned virtual, most tenant communication converted to online channels and more technology was required to manage day-to-day operations.
“Some companies also increased their use of cloud-based collaboration and productivity tools to lower in-house technology costs and increase flexibility.”
While these measures may help improve tenant convenience and ensure business continuity, Deloitte says companies still struggle with defining digital workflows and digitising key business processes.
Citing an internal survey, Deloitte says most respondents (56%) believe the pandemic has uncovered shortcomings in their company’s digital capabilities and affected their plans to transform.
“Additionally, there are growing cybersecurity and data privacy concerns among those surveyed, due to the increase in virtualisation, data capture and data-sharing using cloud and digital tools.”
Additionally, Deloitte says the pandemic has made enhancing agility and nimbleness a top priority for commercial real estate organisations.“These goals require companies to focus on digitisation of key business processes and the tenant experience. While many companies have taken a reactive approach to digital transformation, developing a more structured plan, including the implementation of various technologies and data analytics, would likely yield more meaningful results.”
Deloitte says companies can significantly increase tenant engagement by optimising real-time updates about facilities and developing a sense of community using mobile apps.
“About half (48%) of respondents who said their company is using digital technologies, such as interactive mobile apps, to increase communication with tenants or end users, plan to increase investment on digital channels over the next year.”
Deloitte says cloud technology could be the backbone for many new capabilities as it offers scalability, data storage, and ubiquitous access.
“For instance, companies can leverage cloud-based tools for digital marketing and to connect virtually with tenants to build a digital tenant experience.”
To expedite implementation of a digital transformation road map, Deloitte says companies should look for strategic partnerships with technology providers or proptechs.
It says REIT respondents seem to acknowledge this and are being more open to collaborating with proptechs.
“On an average, 58% of REIT respondents have increased their intent to partner, compared with 45% of respondents who are developers.”According to Napic, there were 10,433 commercial property-related transactions worth RM10.93bil recorded in the first half of 2021.
Compared with the first half of 2020, transactions were up by 28.5% in volume and 28.4% in value.
“All states recorded more market activity in the review period except for Putrajaya and Pahang.”
Selangor contributed the highest volume and value to the national market share, with 26.3% in volume (2,741 transactions) and 30.8% in value (RM3.37bil).
This was followed by Kuala Lumpur with 13% in volume (1,359 transactions) and 28.2% in value (RM3.08bil); followed by Johor with 13.5% in volume (1,410 transactions) and 11.6% in value (RM1.27bil).
Serviced apartments, which are built on commercial land and therefore categorised as commercial property, recorded 1,912 transactions worth RM1.21bil in the first half of 2021.
Serviced apartments formed 18.3% of the commercial property transactions volume and 11% of the value during the period.
“Market performance recorded an increase of 33.4% in volume and 23.7% in value compared with the similar period last year,” Napic says.
Napic says the serviced apartment sub-sector recorded 24,064 overhang units with a value of RM20.41bil in the first half of 2021, indicating a marginal increase of 1.9% in volume but 10.2% decline in value compared with the preceding half.
Meanwhile, the unsold units under construction recorded 42,358 units, an increase of 20.1% during the period.
Separately, Napic says the overall performance of the purpose-built office sub-sector decreased to 78.5%, slightly lower than the first half of 2020’s 80.6%.
“The occupancy rate for private office buildings declined further to 71.7%, down from 74.3% recorded in the first half of 2020.
Penang secured a higher occupancy rate at 85.3%, while Kuala Lumpur, Selangor and Johor recorded lower than the national level at 73.8%, 68.4%, and 72.75%, respectively.