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Knight Frank: Recent spike in Covid-19 cases may derail the property market in the short term

PETALING JAYA (Jan 18): Although the residential market showed a slight recovery post-Movement Control Order (MCO) 1.0, with selected developers reporting improved bookings, supported by the low-interest-rate environment and pent-up demand and reintroduction of the Home Ownership Campaign, the recent spike of Covid-19 cases, leading to the reimplementation of MCO till Jan 26, 2021, will likely derail market recovery in the short term, said Knight Frank Malaysia managing director Sarkunan Subramaniam.

He said that the performance of the residential market is very much dependent on how the economy moves forward.

“The anticipated commercial rollout of the Covid-19 vaccine by 1H2021 will certainly boost the hopes for the country’s economic recovery and lift overall consumer sentiment. However, the current ongoing political uncertainties amid the worsening Covid-19 crisis, has led property buyers as well as developers to rethink their future plans and strategies. The residential market is expected to remain challenging in the first half of 2021,” Sarkunan added.

His commentary is part of the firm’s research report launched today titled Real Estate Highlights 2nd Half of 2020 highlighting the property trends and outlook in key markets of Malaysia.

The report also pointed out that the hospitality and retail industries continue to face disruptions and challenges amid the unprecedented crisis with transactional activity remaining lacklustre as investor confidence and sentiment continue to be undermined by the pandemic.

Knight Frank Malaysia deputy managing director Keith Ooi said that with Covid-19 remaining as a key concern heading into 2021, occupancies and rents for the retail sector are expected to decline moderately in the coming year.

“However, we anticipate that values of prime-grade retail assets should remain relatively stable despite the rental decline, given their more resilient tenant and lease profiles, and the fact that yields will be buffered by the existing low interest rate environment,” he added.

As for the office market, the report highlighted that demand has weakened as more companies and corporations review or postpone their real estate decisions to strike a balance between driving growth while maintaining operational and cost-efficiency.

Knight Frank Malaysia executive director of corporate service Teh Young Khean commented that the pandemic will potentially switch the workplace trend from a centralised model to a virtual model in the future.

“Organisations that have been adopting hybrid working models since the start of MCO may find this model beneficial and consider it as a go-to model moving forward. The office space function may change to support this arrangement by providing a ground for physical interaction and collaboration among the employees when required. The office is here to stay with a tweak to its purpose. We will also see enhanced office quality and better floor configuration where health and safety will remain top-of-mind for occupiers,” said Teh.

Meanwhile, Knight Frank Malaysia executive director of capital markets James Buckley observed a noticeable trend in the two-tier office market and a difference in the performance of new office space compared to “second-hand” office space (existing buildings which have not undergone major refurbishment before being marketed, of which there is a lot in city).

“Investors have shied away from buying second-hand space which comes with more risk as tenants relocate to better quality new office accommodations. These second-hand buildings are finding it hard to compete for tenants who are upgrading to new offices in KL City and KL Fringe locations. Older office buildings will see their prices continue to soften and, in some cases, will need to be repurposed into other uses. For those investors looking to acquire institutional quality income producing office assets, there are few good options to choose from,” Buckey commented.

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