City&Country: Fears of mall space oversupply in Klang Valley

Shopping, or rather visiting the malls, is a favourite Malaysian pastime, but there is rising concern that there could be too many shopping malls in the Klang Valley.

According to Allan Soo, managing director of CB Richard Ellis Malaysia, there is an oversupply of net lettable area (NLA). “There is an oversupply in terms of total square feet as we now have 7.1 sq ft of mall space per person in the Klang Valley, which is the same as in Singapore and higher than in Bangkok [6.5].”

Soo bases this calculation on the estimated 6.1 million population of the Klang Valley in the 2010 population census and the total NLA in Klang Valley malls of about 43.73 million sq ft as at 3Q2011, gleaned from CBRE’s research data.

It should be noted that the population figures he uses for his calculation, while including all of the Federal Territory of KL, does not include rural areas like Sabak Bernam.

So what would be the ideal ratio? “There is no ideal although we feel that it should be nearer 5.5 sq ft per person,” Soo says. “We feel that there are too many malls and hypermarkets, but not enough good ones. Retail is about trends and change. Some of the malls were built speculatively and are irrelevant now. There is therefore a replacement opportunity.”

Moreover, Soo believes there is opportunity for upgrading the malls as suburbs grow. “As suburbs grow in affluence, we see an opportunity for scaling up too,” he says. “That is what you can see in Mid Valley. They started with a middle mass market in Mid Valley City. Then they felt, after eight years, that it was possible to bring in luxury brands and built the Gardens to cater for the higher income groups within that catchment area. High fashion is normally only possible in the city centre.”

Soo says less than half of the malls in the Klang Valley are doing well. “Only 45 of the 133 malls and hypermarkets there are performing, while the rest are underperforming. The problem is that we have a number of poorly located and poorly designed malls and even hypermarkets. Many are either too small or too large for the customer catchment they are serving.”

The oversupply stems from the push to build more hotels, office buildings and shopping malls back in the late 1990s, says Soo. “The oversupply really started in 1998 when retailer demand could not keep up with the supply that was coming in. Since 2007, it has become even worse because just as the retailers started to think they were doing well, more supply came in and diluted the market,” he adds.

Retailers became even more cautious about opening new outlets in newer centres, says Soo. As a result, they would only open in malls that had potential for success. Timing was also critical.
“[Retailers] will expand when the market is buoyant, but not when the going looks murky,” Soo says. “2008 was a good year, but 2009 was bad; there was no expansion then.”

The impact of this oversupply situation will translate into a slower pace of growth, says Soo, adding this will also impact rental rates. He points out that 2010 was the review period for rents, which were raised to RM100 psf for the best shops. “On average, rental growth in the Klang Valley had been between 15% and 20% over the three-year review period. The next review is in 2015. Will it see the same rate of increase? We don’t know.”

According to CBRE, the retail mall space supply coming onstream from 2012 to 2015 is about 7.7 million sq ft of NLA. In 2012, over two million sq ft will come onstream via Paradigm, Kelana Jaya; Setia City Mall, Shah Alam; and Nu Sentral, KL Sentral (see table). This will add to the current supply of 43.73 million sq ft in the Klang Valley as at 3Q2011.

Moratorium the solution?
One solution to the oversupply problem, proposed by the Malaysian Association for Shopping and Highrise Complex Management (PPK), says president H C Chan, is to impose a moratorium on the development of new malls in high-growth areas such as KL and Selangor to ensure equilibrium between supply and demand.

“The central region of Malaysia — KL and Selangor — has over 50% of the country’s NLA,” says Chan. “We have reached an oversupply situation.” On top of that, Chan says he has received feedback from retailers, both local and international, over too many malls coming onstream.

However, Chan stresses that the moratorium is just a proposal and discussions and dialogue are required between stakeholders, such as the Malaysian Retailers Association (MRA) and the Malaysian Retailer-Chains Association (MRCA), before that can be implemented. Also, he clarifies that he is not proposing that projects with all approvals in place, including the development order, be stopped but for new projects that have yet to be given approvals to be put on hold so that demand can catch up with supply.

Conversely, CBRE’s Soo suggests that instead of a moratorium, town planners should look into zoning areas for land use. “If there were to be any controls [on the building of retail spaces], it should have more to do with zoning and the overall control of the city and the environment as well,” he explains.

“It is important for town planners to have proper zoning of land use and ensure developments adhere to the land use so you don’t have a shopping centre next to residences, for example, which is not fair to residents.

“Since this is a free market, it should stay free but the town planners should be able to zone certain areas, say malls, to avoid problems to the community at large,” says Soo. “If we plan well, that should take care of how we segregate our commercial and retail within the entire landscape and thus how we balance the different user needs.”

KL Festival City Mall
Although the Klang Valley is experiencing an oversupply of NLA, there are submarkets within it that are ripe for a mall. One such area is Setapak in KL, where KL Festival City mall recently opened its doors to the public.

During the mall’s opening on Oct 20, the place was jam-packed with people, the car park was full and F&B area was busy, says Soo, who was the retail consultant for the mall. Retailers have taken up 97% of the mall, with only six of the 214 shops unoccupied. At press time, four of them were being considered by a major tenant.

Soo attributes the mall’s success to the detailed studies conducted prior to its development. The mall is owned by Festival City Sdn Bhd, a wholly-owned subsidiary of Parkson Holdings Bhd. Notable tenants include supermarket Econsave, cineplex operator MBO and Parkson department store.

The three-level KL Festival City mall has a gross development value of over RM250 million, NLA of just under 470,000 sq ft, and sits on eight acres. It has 1,000 parking bays.

Besides consumers, retailers have also flocked to the mall, thanks to the mall’s design, says John Sigler, vice-president of retail consultancy at CBRE Malaysia. “KL Festival City is well received by retailers because it is well thought out and not too large,” he adds.

Sigler was previously with Arcadia Group Ltd, the owner of Top Shop, where he managed its property portfolio in London and the southeast of the UK, in areas such as lease restructuring, multiple property transactions and rent reviews.

The mall’s rents for prime spaces are more then RM15 psf while those of the anchor tenants are about RM4.50 psf. The average rents for anchor tenants usually range from RM1.50 to RM2.50 psf. Soo says these rental rates were achieved because of the change in perception.

“The market now perceives Setapak as a robust area,” he explains. “In the past it was seen as low-end area with a small catchment, but recently there has been a lot of frantic development activity, just like the rest of the Klang Valley, especially in the past two years, to the point that you can see quite a lot of high-rises and commercial property.”

Global brands to enter local market
In the coming months, some new international retailers will be making their presence felt on our shores. As negotiations are still ongoing, CBRE, which is representing these brands, would only divulge that the new brands are from China and Europe. Regional department stores are also making their way to Malaysia, says Soo.

“In the next decade, you will see a few changes, including more brands coming into this region,” he says. “Malaysia has only 60% of the top brands in the world. We still have a lot of room for growth for top brands.”

This can only bode well for the industry as international retailers see Malaysia as a good place to test their products before heading for the rest of Asia. Brands are coming to Malaysia, because those that are doing well in Europe and US are in dead markets,” says Sigler.

“Fashion brands live off young people and they realise Southeast Asia has a young population. Also, Malaysian retail rents are more affordable than places like Hong Kong or Singapore, so the consequence of failure in those place would be more significant,” he explains.

“I always say that if you truly want to know how your brand will trade in Asia, Malaysia makes a lot of sense because it is a good halfway house between Singapore, Vietnam, Thailand and the rest of the region. In Malaysia, mistakes made won’t impact overall growth and brand presence.”

Lack of knowledge transfer
While these new brands will spice up retail therapy, the need for better-designed malls remains an issue. “We have an industry where there is no dominant mall player,” says Soo.

“They don’t carry their education into the next-generation development of buildings. Every developer that comes in with a new mall is a new developer learning the whole process of building a mall from the beginning. The result is that they have not learnt from the mistakes made in the past. As an industry, there is no transfer of knowledge, pooling of talent or sharing of the lessons learnt. So, the same mistakes are made.”

However, Soo says this situation is changing as more developers are seeking consultants at the beginning of the mall design rather than after the design has been confirmed.

Fast fashion boost
As international brands seek out new opportunities here in Malaysia, local and international retailers should take note of a growth industry that is expanding its reach — fast fashion. Soo notices that fast fashion — fashion brands that are of decent quality, affordable and targeted at the young — is becoming a crowd-puller. Street brands like H&M and Zara are leading the pack in fast fashion and it looks like they are giving the department stores like Parkson, Metrojaya and Robinsons a run for their money.

Soo reveals that fast fashion brands take up spaces of 20,000 to 30,000 sq ft of NLA, so they are “virtually department stores in themselves and have the same kind of magic”, in that they pull in the crowds. With more of such tenants, it may provide the boost needed by the retail sector and alleviate the problem of oversupply of space.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 888, Dec 12-18, 2011