Occupancy, rents not keeping up with prices


The high-end condominium/apartment market in Kuala Lumpur City Centre (KLCC) is in a bit of a predicament. While prices have more or less bounced back after a drop of up to 30% during the global financial downturn, it is hardly what one would call a “traditional” market.

In most cases, capital appreciation is driven by demand, reflecting a strong leasing market, which is then followed by rising rental prices. “That is how the market is expected to behave but we are not seeing this in the KLCC high-end market. Here, you have prices rising but you don’t see the occupancy or rental rates to support the appreciation,” says Eddy Wong, head of Residential Marketing, DTZ Nawawi Tie Leung Property Consultants Sdn Bhd.

There are also lingering concerns about oversupply. While there have been few new launches within the KLCC area recently, new launches post-crisis around the KLCC area have generated strong take-up rates. Among them are St Mary Residences, a joint venture between E&O Development and the Lion Group, and more recently, ViPod Residences by Monoland Corp Sdn Bhd and 188 Suites by YNH Property Bhd.

Wong believes investors in the luxury condo market — like those in Singapore and Hong Kong — look more for capital appreciation than rental income, and are less perturbed by the low occupancy. He estimates the overall occupancy rate to be around 60%.

“The KLCC residential market really kicked off in 2004, and in the past six to seven years, prices have been on an upward trend, except during the financial crisis. Investors think they do not need to worry about tenants as once the property is completed, they are going to sell and enjoy the capital appreciation,” he reasons.

He puts the rate of appreciation at about 20% to 30% over the past two years.

Terence Yap, head of Private Wealth, Zerin Properties, concurs: “The KLCC market is geared towards investment, not so much for staying in. I estimate those buying to sell make up more than 80% of the market.”

Yap notes that while the overall market is stable, buyers can find properties at below market rate in the secondary market.

“Back in 2007, buyers were willing to pay above market rate. Recently, we noticed that buyers weren’t even willing to buy at market rate. It’s only the new launches that are enjoying good sales,” he says.
Buyers are definitely looking for good buys and there is a very patient lot out there, says Saleha Yusoff, head of research, Rahim & Co.

She believes the primary market is faring better for a few reasons: a developer’s brand name, bigger margin for capital appreciation, and the recent trend of smaller units, making them more affordable and attractive, especially for young working couples and first-time investors.

“Other forms of investment, like shares for instance, are also less attractive at the moment so people are looking for other forms of investment,” she notes.

DTZ’s Wong agrees, saying there is still a lot of liquidity in the market and people need to park their money somewhere.

“Property will still be the favoured investment. When it comes to foreign investors, KLCC is still the main attraction and let’s not forget that compared to Hong Kong and Singapore, Malaysia property is grossly underpriced,” she says.

Bouncing back
The KLCC condo market, which was flying high in 2007, hit a bump at end-2008 due to the global financial crisis. DTZ’s Wong and Zerin’s Yap estimate that prices dropped 20% to 30% during this period but have since rebounded.

Wong cites the 233-unit Panorama, a joint venture between UOL — the property arm of Singapore-based UOB Bank — and General Corp Bhd, as an example in the primary market.

When Panorama was first launched in 1H2008, it was sold at RM1,100 to RM1,200 psf, with units ranging from 646 to 1,884 sq ft. Prices dropped in 2H2008, hitting below RM800 psf, but began to climb again in 2H2009.

“When the market dipped, Panorama was still under construction so there were no sub-sales. Now that it has been completed, the developer has released the last unsold 20 bumiputera units and transacted prices are now about 10% higher than they were in 1H2008,” says Wong. Since April, 50% of the newly released units have been sold.

The situation is the same in the secondary market. According to Yap, Marc Residence, which saw prices drop to RM900 psf during the downturn, has now climbed back to its peak price of RM1,300 psf.

Wong says for a lot of investors, the drop in value was more of a paper loss. “Most investors just hang on to their properties, and the market picked up really quickly, so not many were forced to sell at a loss during the downturn,” he adds.

The selling price for new launches now ranges from RM900 psf to RM1,500 psf, according to Yap and Wong.

YNH’s 188 Suites was priced at RM1,100 psf to RM1,200 psf, while Monoland’s ViPod Residences was sold for about RM900 psf. ViPod has achieved a take-up rate of 85% since its launch late last year while 60% of the units at 188 Suites, launched last March, have been sold.

“There is also the prime-prime category of developments, such as Binjai on The Park by KLCC Property Holdings and The Troika by Bandar Raya Developments Bhd, that are selling at a higher price of RM2,000 psf to RM2,500 psf,” says Wong.

Yap feels that larger-sized units and those with price tags above RM1,200 psf are facing slower take-up.
“The recent successful launch of ViPod, where the units range from 635 to 1,350 sq ft, was proof of that. It is much more affordable and therefore more appealing,” he says.

All three consultants agree that the KLCC market is still very much driven by domestic demand.
Nevertheless, Wong observes that there has been a growing number of investors from Asia in the past year, particularly from Korea, Hong Kong, Singapore and mainland China. Investors from the Middle East and Europe, however, have declined in number.

Occupier’s market
“With supply exceeding demand, tenants are spoilt for choice. Good developments with quality finishes, good neighbours, that are well managed and maintained, and offer good security are seeing high occupancy,” says Rahim & Co’s Saleha.

Among them, according to Zerin’s Yap, are Park Seven with 95% occupancy, Dua Residence with 90% and Stonor Park, also with 90% occupancy.

However, the overall occupancy rate is dragged down by lesser and older developments. Yap notices that there is a trend of tenants moving from older to newer developments.

But that’s not to say older developments do not have their share of tenants.

“Most of the tenants in KLCC are expatriates. After the crisis, a lot of them had their accommodation budgets slashed, so older developments with lower rents are well suited for them,” he says.

That, plus the decrease in the number of expatriates, have contributed to the popularity of smaller units.

DTZ’s Wong says it is difficult to find tenants for larger units, while two-bedroom units and studios are doing very well, especially with single expatriates.

“When it comes to leasing, the big units are not moving. That is why if you look at projects newly announced or launched in the past six months, most are two-bedroom or studio apartments. Nearly all are less than 1,200 sq ft,” he points out.

Unlike condominiums and apartments in Petaling Jaya where investors buy to stay or to rent to locals, the KLCC market caters mostly to foreigners and the occasional long-term tourist or business visitor from out of town.

“Inner city living is really more of a lifestyle and a fairly new trend that can been seen in cities like London and even Singapore. It is also not very family friendly as most good schools are located in the suburbs,” says Wong.

With rental rates not rising in tandem with selling prices, yields in the area are being compressed. Saleha estimates the rental rate at RM3.20 to RM6 psf, giving an average gross yield of 4% to 5.75%.

“Investors used to expect 8% returns, but now I think the market is beginning to accept yields of around 5% to 6%. If you can get 6%, you’d be very happy,” says Wong.

Despite the heavy speculation and compressed yields in the KLCC, Wong remains optimistic about the area’s future.

With the Economic Transformation Programme in place, the mass rapid transit line and efforts to woo more foreign direct investment, DTZ’s Wong believes investors are hopeful of a positive flowthrough impact on the property market.

“There is a lot of money being pumped into the system and it creates a feel-good effect which will boost market sentiment. The government is also recognising that we need foreign investment to grow and when that comes in, it will bring along more expatriates which will help occupancy in KLCC,” says Wong.

 

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 867, July 18-July 24, 2011

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