PETALING JAYA: With the economy back on the recovery path, commercial real estate, which took a beating during the pandemic, is back on the radar for investors.
Savills Malaysia Sdn Bhd group managing director Datuk Paul Khong said he expects commercial properties to make “a reasonable comeback” in terms of yields and returns for 2022 and 2023.
“This is because demand for retail space is slowly recovering – the retail businesses, especially the food and beverage sector like the semi/fine-dining restaurants.
“Also, luxury segments, including luxury watches and premium fashion and accessories, seem to have fared relatively well and many retailers are relooking into selective and careful expansion plans,” he told StarBiz.
Khong said market sentiment in the retail segment had improved substantially with the reopening of borders on April 1.
“However, we are not completely out of the woods yet. Shoppers are still carefully holding on to their cash and selective with their spending habits.
“With the Ukraine war adding fuel to the fire, all costs of goods and logistics are rapidly escalating, whilst the markets are just exiting from a two-year battle on losses caused by Covid-19. Recovery and normalcy will now take more time.”
Khong noted that commercial properties are “becoming popular again”.
“We expect capital values will continue to escalate northwards slowly into 2022 and 2023, especially with improved market sentiment in the retail segment and the substantial cost-push in the current construction climate.”
Moving into the second half of 2022, Khong said the market will continue to rely on the forward guidance and fiscal measures from policymakers.
“Mitigation of inflationary risks are critical, especially as the economy is just recovering from Covid-19, but now globally impacted by the Ukrainian war.”
At current market conditions, Khong said he expects a slight increase in new businesses entering the market, adding that rentals will be relatively flat for now in many locations and sectors.
“Prime shoplots will always be a top investor’s choice and now that retail sentiment is up and businesses are back again, property prices will be escalating, in tandem with actual demand after taking a dip in value during the pandemic.”
Meanwhile, Knight Frank Malaysia in its Commercial Real Estate Investment Sentiment Survey for 2022 revealed that respondents were very keen to explore commercial investment opportunities in the logistics, industrial and healthcare sub-sectors within the next 12 months.
“In the medium term, respondents feel that the market will be in a more favourable position to explore the overall commercial property investment sector.
“Respondents also generally feel that the hotel/leisure, office and retail sub-sectors will be a long-term play.”
Knight Frank Malaysia noted that there is keen interest to sell or buy existing commercial assets (land or buildings) in Sabah, Johor and the Klang Valley.
“Whether it is to take advantage of bargains for good quality assets or to implement a rationalisation exercise for a portfolio of assets. Respondents also appear to have a better risk appetite for alternative investments in the next two-to-three years.”
The survey also revealed almost equal interest by all respondents to participate in serviced residences/hotels, co-working/flexible offices, senior living/retirement homes and data centres.
“There is also marked interest in other alternative sub-sectors like workers’ accommodation, wellness centre/hub, co-living/students’ accommodation and themed/recreational parks,” said Knight Frank Malaysia.
Amidst the Russia-Ukraine crisis that has dragged on since the end of February 2022, Knight Frank Malaysia said only 34% of respondents thought that Malaysia’s economic figures (such as gross domestic product, inflation and unemployment rate) were favourable.
However, it said 47% of respondents felt that Malaysia’s foreign direct investments were favourable and encouraging.
“Political stability and certainty of governmental policies remain crucial and key to a staggering 88%, who feel that this needs to be improved for commercial property market sentiments to pick up.”
Knight Frank Malaysia said that 41% and 44% of respondents felt that Budget 2022 and the 12th Malaysia Plan, respectively, were favourable for the commercial property market. It added that 51% of respondents felt that the ongoing mega-projects will have a positive multiplier effect for the commercial property market.
Separately, Knight Frank Malaysia said 51% of respondents thought that the country’s Covid-19 containment measures were favourable. “A staggering 84% feel that the potential for future Covid-19 variants remains an unfavourable factor, while 74% feel that the present overnight policy rate is extremely favourable. Although, 62% feel that the rising commodity prices will be a bane.”
Meanwhile, UOA Real Estate Investment Trust (UOA-REIT), which owns and invests in commercial real estate, said economic growth continued to impact the occupancy rates and rental rates of its properties.
“It will take time for consumer sentiment to be restored to pre-pandemic levels and the real estate industry to see recovery,” it said in a filing with Bursa Malaysia in conjunction with its first-quarter earnings performance.
Despite the prevailing subdued market sentiment, the company said it is hopeful of the outlook of the property market, given the resumption of economic activities and reopening of national borders.
“The manager will continue to actively manage the portfolio of properties and enhance the performance of properties via active operating strategies, to maximise the yield for unitholders and to source for opportune acquisitions that meet the objectives of UOA-REIT.”
UOA-REIT’s portfolio of properties include UOA Centre, UOA 2, UOA Damansara, UOA Damansara 2, Parcel B at Menara UOA Bangsar and UOA Corporate Tower.
For its first quarter ended March 31, 2022, UOA-REIT reported a net profit of RM16.02mil compared with RM16.17mil in the previous corresponding period, while revenue was at RM29.22mil compared with RM29.60mil a year earlier.
Despite the resumption of economic activities and reopening of national borders, Hong Leong Investment Bank Research said it expects earnings to remain stable for UOA-REIT, given the company’s minimal retail exposure unlike mall-based REITs.
“Besides, UOA-REIT will be focusing on prudent capital management and enhancing the performance of its properties,” it said.
According to PwC in its paper “Emerging Trends in Real Estate in Asia Pacific for 2022,” commercial real estate is no longer regarded as a “plain-vanilla” investment that’s held over time.
“With yields continuing to compress and occupiers demanding more, landlords are becoming more proactive in asset management, either by providing new amenities for tenants or by investing in operationally intensive asset classes such as data centres.”
As markets evolve, PwC said many existing buildings were becoming inefficient.
“Buying to renovate has become one way to arbitrage those inefficiencies, whether through the use of technology, changing building usage, or upgrading to a higher environmental standard.”
PwC added that central business districts (CBDs) have traditionally represented the biggest store of wealth in real estate terms, adding however that the primacy of the CBD was no longer secure.
“Not only do secondary business hubs offer cheaper rents, but with many employees now working at least part-time from their homes, employers are responding by providing workplaces nearer to where they live.”
Companies focused on the growing digitisation of the economy, which are less inclined to locate in CBDs, are also driving this trend,” said PwC.
“This includes both out-and-out technology companies as well as traditional businesses that are digitally based, such as online education, eCommerce retailing or even logistics companies that serve demand from internet-based businesses.” PwC said investors have been buying niche assets for years as a way to eke out higher returns.