THE Malaysian economy beat forecasts with its gross domestic product (GDP) growing at 6.2% in the first quarter of 2014 (1Q14), thanks to sustained domestic demand and recovering net exports.
Services and manufacturing sectors contributed to the growth with 6.6% and 6.8% increases year-on-year (y-o-y) respectively.
The trade surplus rose to RM26.4 billion for 1Q14 compared with RM16.4 billion a year ago. Gross exports increased by 10.9% year-on-year while gross imports grew moderately at 5.5%. This highlights the continued strength of global trade activity which will benefit Malaysia’s exports and manufacturing sector.
Malaysia’s economy is expected to continue to expand, driven by sustained growth in private investment activities, whose positive contribution may prove to be the saviour for the economy in 2014 as the pace of private consumption may moderate due to rising consumer prices.
Private investment expected to support economic growth
Private investment continued to rise by 14.1% in 1Q14 (1Q13: 10%) as a result of higher capital spending in the services and manufacturing sectors, while public investments continued to fall, declining 6.4% y-o-y in 1Q14 from 18.4% increase a year ago.
Private investment is expected to remain a big contributor to GDP for years to come, driven by the implementation of the Economic Transformation Programme (ETP) projects and relatively low borrowing costs. Overall, gross fixed capital formation grew 6.3% in 1Q14 versus 13% in 1Q13.
Private consumption edged up to 7.1% in 1Q14 (1Q13: 6.4%), while public consumption’s growth of 11.2% y-o-y was fuelled by spending on supplies and services.
2014 is expected to be a year of robust GDP growth, although contribution to growth will likely shift towards investment and away from consumption.
Significant changes expected in KL city in 2014 after a quiet 2013
KL city recorded its first office completion during the first quarter of 2014 since 2012.
The first quarter of 2014 saw the completion of two blocks of offices.
One of them, Lembaga Tabung Haji Tower @ Platinum Park, is located in KL’s Golden Triangle and represents the first completion in the area since Integra Tower’s completion at end of 2012. The other completion, Menara TSR, is located in Mutiara Damansara.
While Menara TSR is already enjoying a good occupancy rate, Lembaga Tabung Haji Tower has not actively been put on the market yet.
As a result of these two completions, the total supply of office space in Greater KL stood at 94 million sq ft as at 1Q14, up by 0.52 million sq ft over the quarter and up 5.4% on a y-o-y basis.
Several of 2014’s expected completions likely to be delayed
Some 6.10 million sq ft of new office space is expected to be completed in Greater KL in 2014, 4.17 million in 2015, and 5.88 million in 2016, with several completions to be in the form of stratified offices. With several other projects being planned in addition to those under construction and for which details have not been announced yet, the office market will not see any slowdown anytime soon.
Significant completions expected in 2014 include IB Tower, Menara Bangkok Bank and Menara Hap Seng 2, all located within Kuala Lumpur’s Golden Triangle.
The latest update regarding the long-awaited 118-storey Warisan Merdeka shows that foundation works have recently started and it should be completed in 2015. The tower will finally be located where it was initially intended to be built, and not at Bandar Malaysia. The building will cost between RM2.5 billion and RM3 billion and is expected to be completed in 2020.
Rents continue going up at a slow and steady pace
Passing rents slightly increased to RM7.64 per sq ft (psf) as at 1Q14 from RM7.61 psf in 4Q13, based on a basket of selected high-quality offices buildings in KL City.
Very few offices breach the RM10 psf per month mark and the trend of rents going up significantly is unlikely given the risk of oversupply ahead. At the same time, in the context of inflation, it is probable that the best quality buildings will still be able to increase their rents by 3% on average this year.
Vacancy rates in KL City slightly up q-o-q and likely to further increase in 2014
The consequence of the significant office supply in 2013, particularly at the end of that year, was still felt during 1Q14 for vacancy rates of Selangor and KL suburban areas.
Vacancy rate of KL suburban marginally improved from 20.9% as at 4Q13 down to 20.2% as at 1Q14. In the case of Selangor, vacancy rate did better but remained high at 18.4% as at 1Q14 (4Q13: 20.1%).
In the case of KL City, there was some stability in vacancy rate despite a new completion as the rate remained at 11.3%, only 10 basis points up from 4Q13.
Overall, the Greater KL vacancy rate improved quarter-on-quarter (q-o-q) at 14.6%, but was slightly higher than a year ago (1Q13: 14.4%).
The best offices in the market continue to enjoy strong demand with 1Q14 a continuation of 4Q13 with moderate leasing activity. As most of the best offices in Greater KL already enjoy good occupancy rates, no significant change was observed among prime buildings.
As previously mentioned, Menara TSR has already achieved an excellent occupancy rate, reaching 70%. Completed in 4Q13, Pinnacle Sunway is estimated to be 40% occupied while Menara LGB is also doing well with a 70% occupancy rate.
Transaction of Platinum Sentral is one of the most prominent in KL’s office market
Malaysian Resources Corp Bhd (MRCB) sold its Platinum Sentral office building in KL Sentral to Quill Capita Trust on Jan 29 through a transaction which is said to be the first of its kind in the country (brokered by CBRE).
Indeed, MRCB has become the single largest shareholder of Quill Capita Trust as well as the owner of its management vehicle as a consequence of the deal. Quill Capita Trust is paying RM486 million in cash and RM264 million in new Quill Capita Trust units at RM1.32 each.
Platinum Sentral is a commercial development consisting of five blocks of four to seven storeys each with office and retail components, a multi-purpose hall, and two levels of parking bays. The office component offers 450,000 sq ft of net lettable area and is fully occupied, with major tenants such as SME Corp, the Land Public Transport Commission, and SBM Malaysia Sdn Bhd.
Concentration of retail malls in suburban areas on the rise
The retail market saw two additional completions this quarter, totalling close to 0.9 million sq ft. These completions are Main Place @ USJ21 (237,000 sq ft) and Nu Sentral (650,000 sq ft) which opened their doors in March 2014.
Twelve malls are projected to be completed in 2014, with a total of approximately 3.6 million sq ft, and exclusively located in KL suburban and Selangor. Among these malls are IOI City Mall (1,350,000 sq ft), Atria Shopping Gallery (500,000 sq ft), and Encorp Strand Mall (300,000 sq ft).
Stagnant occupancy rates and prime rents
As of 1Q 2014, the occupancy rate of retail malls achieved an average 91%, marginally down compared with the previous quarter. This is attributable to the slight drop seen in Pavilion KL, The Gardens, and Sunway Pyramid. Despite the decline, the continued steady occupancy rates were supported by the stable demand in other retail malls.
Prime rents have remained unchanged since 2Q 2013 at RM55 psf in KL city centre and RM31 psf in KL suburban areas, after a Q-o-Q growth of 2.8% and 1.4% respectively in 2Q 2013. These retail malls are categorised as established malls, which have been in the market for more than 10 years.
Challenging year ahead for retailers
The implementation of new policies by Bank Negara Malaysia (BNM) on bank borrowings to control household debt has led to a lower loan tenure of 10 years from 25 years for personal loans. This may reduce the purchasing power of Malaysian households on big–ticket items, particularly furniture and electrical and electronics goods. Regular discounts have to be offered by retailers to attract more shoppers whose purchasing power has been severely affected.
Rising cost of living for the average Malaysian has been felt since the final quarter of 2013 and is expected to be more apparent in the first six months of this year.
Despite the current festive season, the overall retail sales may not improve as the season will only have a significant impact on retailers selling festive goods. However, 2014 is expected to see overall sales growth of 6%, according to Malaysia Retailers Association.
Pressure on tenancies and rents to be felt
The incoming supply of retail space into the market is expected to create pressure on existing outlets to maintain tenancy and rental rates. Retail space is expected to increase by 3.6 million sq ft this year, which will put pressure on existing retail malls to keep tenants and will likely lead to higher vacancy rates.
BLR to be replaced by Base Rate in 2015
BNM decided to maintain the Overnight Policy Rate (OPR) at 3% at its meeting on March 6, which means that the Base Lending Rate (BLR) remains at 6.53%, with a typical mortgage rate of BLR minus 2.2%-2.5%.
On March 19, BNM announced a new reference rate framework; the Base Rate is to replace the current Base Lending Rate (BLR) as the main reference rate for new retail floating rate loans effectively on 2 Jan 2015. Nonetheless, the shift to the new Reference Rate Framework should have no impact on the effective lending rates charged to retail borrowers which are determined by various factors, including a financial institution’s assessment of a borrower’s credit standing, market funding rates and competitive considerations.
Total loans applied for purchase of residential property was RM47.81 billion in 1Q 2014, down 7.1% from 1Q 2013.
This was mainly due to lower loan applications during the first two months of the year. However, the loan approval rate recorded a higher amount of RM25.42 billion during the same period, an increase of 6% over 1Q 2013. Banks seemed to have been indulgent on residential mortgage approvals, with approval rate reaching 53.3% for 1Q 2014, compared with an approval rate of 47% during the same period in 2013.
Indirect impact of the implementation Goods & Services Tax (GST) to be felt
Under Budget 2014, the Government announced a GST to be implemented from April 1 next year at a fixed rate of 6%. The introduction of GST has been alerted by some developers as a factor of increase for property prices, even ahead of the implementation of GST.
Indeed, while the government announced that residential properties will be exempted from implementation of GST, it should be noted that there will be a rise in construction and service costs incurred that will in turn impact real properties’ prices in the near future.
Market outlook for 2014
A few launches were recorded during 1Q 2014, but we expect developers to advertise more projects in the next two quarters with the improvement of market sentiment. The end-user market should remain healthy, and we expect to see greater interest in both the primary and secondary markets especially for residences located in good locations.
In addition, we expect primary market projects that have certain USPs, such as good design and quality finishing, unique facilities and exceptional locations, to continue to do well, as these types of products are still somewhat limited.
1Q 2014 remains in continuity of previous quarters
As at 1Q 2014, for the entire Greater KL, which includes in the case of the residential market Kuala Lumpur, Selangor, and Putrajaya, the total existing supply of residential properties stood at about 1.79 million units.
The breakdown of residential supply shows the same predominance of landed residential properties as for the previous quarters, as they account for 43.6% of the total stock, followed by non-landed properties at 34.9%. The remaining 21.5% is represented by low-cost housing properties.
There is an on-going trend of slow supply growth since end-2012, with a growth rate of less than 2%. This is part of a wider slowdown in supply growth seen since 2006. Because of the measures announced in 2013 by the government and currently being implemented, there is an expectation that the housing market will be slow in 2014. Anecdotal evidence shows that some developers have been putting on hold some projects since the beginning of the year. But this may somehow lead to an increase in demand in the near future and further drive activity once launches resume.
Majority of Malaysians not willing to spend more than RM0.5mil for property
Location-wise, 75.9% of the total 1.79 million units are located in Selangor, 23.8% in Kuala Lumpur, and the remaining 0.3% in Putrajaya. This breakdown has not significantly changed for some time.
According to a recent study conducted by iProperty among 7,000 respondents from Malaysia, 68% of them have a budget of a maximum of RM500,000 to purchase a property while those who intend to buy a residential unit priced above RM1 million only account for 5% of the total respondents. Interestingly, 63% of the respondents favour terraced houses, possibly as the compromise between their preference for a landed property and for more affordable houses, than semi-detached and detached houses. Lastly, fewer respondents than a year ago are willing to purchase a property within six months to possibly see how the market evolves first.
Incoming supply edges up Q-o-Q
There was a total of 207,013 units classified as incoming supply as of 1Q 2014, up 4.4% Q-o-Q. Incoming supply is defined as units for which construction permits have already been approved but for which construction has not necessarily already started. In terms of breakdown, the pattern is very similar to the existing Greater Kuala Lumpur unit distribution. In terms of units under construction, 196,528 units have been classified as such, which means that construction works have begun on 94.9% of the units granted a construction permit.
Fewer launches of high-end condominiums
There was only a total pool of approximately 1,500 new units launched during the review period, including TWY Mont’ Kiara, Vortex (KLCC), The Ritz Carlton Residences Berjaya Park (KLCC), and the Expressionz Professional Suites (KLCC).
Take-up rates for these new launches remain strong despite the ban of DIBS schemes from Jan 1.
Other upcoming new developments in Kuala Lumpur include projects such as Serviced Apartments @ Bangsar South (YNH Property Berhad), Anjali (North Kiara), Phase 2 of Residensi 22 (Mont’Kiara), Kiara 163 Serviced Residence (Mont’Kiara), Weida Mont’Kiara, Verve Suites (KLCC), The Ambangan (Embassy Row), Lidcol Garden (KLCC), and Angkasa Raya Serviced Residence (KLCC) among others.
Moreover, during the review period, there was a total of five new completions with a total of 1,090 units, including Westside One (Desa Park City), Camelia Serviced Apartment (Bangsar South) and Vue Residence. Projects completed during 1Q 2014 but with expected full vacant possession in 2Q 2014 include Kenny Hills Residence, Glomac Damansara Residential Tower 1, The Elements (Ampang) and Nobleton Crest (U-Thant), while completion of others has been pushed to a later date.
Trend of activity in the secondary market remained moderate during 1Q 2014. We continue to see a slight increase in the average price for secondary transactions of condominiums in the study areas of KLCC, Bangsar and Mont’Kiara (up 0.97% Q-o-Q to RM826 psf).
Price movements during the period were the most significant in Mont’ Kiara (up 1.95% to RM634 psf), followed by KLCC (up 0.71% to RM1,033 psf) and Bangsar (up 0.56% to RM812 psf). Capital values in Mont’Kiara and Bangsar have climbed by 14% and 15.63% respectively since the beginning of 2011.
This suggests that investors continue to view opportunities in the secondary market of these prime markets as they can offer good value deals, especially compared to rising prices in the primary market; however, the challenging rental market remains a concern.
Average asking rentals in KLCC are approximately RM3.96 psf per month, while the rents in Bangsar and Mont’Kiara are RM3.27 psf per month and RM2.93 psf per month, respectively.
Wolo Hotel opens after several quarters of delay
As of 1Q 2014, our figures show a total supply of 3- to 5- star hotel rooms in Kuala Lumpur of 27,162 rooms, representing an increase of 168 rooms from Q4 2013. The quarter witnessed the opening of the much anticipated 168-room boutique Wolo Hotel. The hotel expects to obtain a 4-star rating from the Malaysian Ministry of Tourism and Culture.
Of the existing 3- to 5-star hotel supply, the majority of existing hotel rooms are located within the Kuala Lumpur’s Golden Triangle (GT) at 12,268 rooms or 45.2%. This is followed by Decentralised Areas (DA) at 8,279 rooms or 30.5% and the Central Business District (CBD) at 6,615 rooms or 24.3% of the total supply.
Hotels expected to be completed by the end of 2014 include the 4-star 198-room Allson Capital Hotel and 203-room Holiday Villa Kuala Lumpur. These 401 rooms will add 1.5% to the existing stock. Looking further, an expected 1,249 rooms within six hotel developments will be added to the market by end-2016, assuming all projects are completed as scheduled. This will increase the hotel supply by 4.6%.
Major hotel developments expected to be completed in 2015 include the 5-star 208-room St Regis Hotel and Residences, KL Sentral, the 4-star 200-room Holiday Inn Express located along Jalan Sultan Ismail, the 3-star 216-room Best Western Bangsar located in Plaza Pantai, Bangsar and the 5-star 50-room Banyan Tree @ Banyan Tree Signatures Kuala Lumpur. 2016 meanwhile will witness the expected completion of the 4-star 275-room Arcoris Mont Kiara and the 5-star Clermont Hotel Damansara. The majority of future supply will be located in DA, followed by GT locations.
Hotel occupancy rates down due to seasonal factors, but up on a yearly basis
The hotel market saw a dip in occupancy rates across the board, but this was widely anticipated as the first quarter of the year is traditionally a subdued period. Average occupancy rates saw a decrease from 76.4% in 4Q 2013 to 68.5% in 1Q 2014. However, this was an increase on a year-on-year basis for the three hotel segments, as average occupancy rate in 1Q 2013 was 67.4%.
ARRs meanwhile saw an increase to RM272 (US$83) per night, up from RM271 per night from the previous quarter.
However, ARRs have been generally flat, growing a steady 2.5% year-on-year over the past seven years.
This article first appeared in The Edge Financial Daily, on July 30, 2014.
TOP PICKS BY EDGEPROP
FREEHOLD SEMI-D @ RAWANG [NEXT TO AEON]
BUNGALOW 3 PINTU, KG. SUNGAI BUAH DALAM, DENGKIL,
Passive Income RM1,800 Below Market Price | Cheras
Cheras, Kuala Lumpur
Banglo Besar 2 Tingkat Seksyen 6, Shah Alam Nego
Shah Alam, Selangor
(CMCO Offer) 5R6B Villa Style Super Link, Puchong
Rimbun Ara 22x65 MCO 2 storey house SALE
Seremban, Negeri Sembilan
NEW 1 Sty SEMI D Seksyen U14 Booking RM500 Only
Shah Alam, Selangor
Invest Dual Key Unit GRR 9 years RM280k
COVID AFFORDABLE SALE 2-storey terraced house
Seremban, Negeri Sembilan
SEPANG / NILAI [Monthly Installment RM1600 Only]
2.5 Storey Bungalow House Kg Kubu Gajah
Sungai Buloh, Selangor