DTZ: All property sectors held steady in 4Q

KUALA LUMPUR (Jan 12): The different market sectors held steady over 4Q2011 according to DTZ Research's Property Times Kuala Lumpur 4Q2011 quarterly report.

Released on Wednesday, the report highlighted that for 2011 Real Estate Investment Trusts (REITs) boosted the investment market, while other sectors — namely, office, retail and high-end condominium residentials — all held steady in 4Q. However, downward pressures may be seen as 2012 rolls along.

DTZ said that the investment sector was very active in 2011 with 31 done deals worth RM7.62 billion where REITs and real estate funds dominated.

"4Q activities noted a strong jump of 3.6 times in investment value totaling RM4.8 billion in 4Q2011 against the RM1.35 billion recorded in 3Q2011 involving 10 assets with the biggest deal accounted by the listing of Pavilion REIT with an asset value of RM3.54 billion," DTZ said.

Most of the assets transacted were located within the Klang Valley, with a single deal involving a warehouse in Penang and two retail centres in Kedah. Other assets include a 130-bed private hospital, DEMC Hospital, which was sold on a sale and leaseback basis to PHB Bhd, a Government linked investment agency and Menara Multipurpose sold to the Malaysian Chinese Association (MCA).

According to DTZ executive director and author of the report, Brian Koh said that "more deals can be done but for the lack of stock available in the market, as investors' appetites remain at a fairly strong level."

Moving forward, DTZ highlights the upcoming election, the projected slower GDP growth and the weakening property market across most segments will result in a cautious market.

Office
The office sector in KL, with the completion of new office space in 2011 saw stock increase by 4.2 million sq ft bringing the total office space to 64.5 million sq ft. In 4Q alone there were six new completions which totaled 2.97 million sq ft. Some of the completed project included Menara 3 Petronas and Menara Prestij — both in KLCC, Lot E@KL Sentral and The Horizon Phase 2 in Bangsar South.

However, downward pressures have been the norm of late. "The [fourth] quarter saw the continued downward trend in the office market as the overall vacancy rate of office buildings in KL rose to 14.2% from 13.1% despite a significant increase in absorption rates on Q-o-Q basis and is expected to rise in tandem with more incoming new office supply," DTZ said.

Rental of the office space was stable but demand was driven by the oil and gas industry. "The newly completed Menara 3 Petronas [building] has a high pre-commited level," DTZ said. "Some 70% of its space will be occupied by tenants relocating from Petronas Tower 2, which will be then be occupied by Carigali, a Petronas subsidiary, making KLCC a hub for the oil and gas industry."

Rents for office space have remained steady with prime buildings being leased at RM6.25 psf, an increase of 0.5% quarter-on-quarter (q-o-q) and 4.7% year-on-year (y-o-y). DTZ highlighted that city centre buildings such as Menara IMC and Menara Dion have a gross asking price of RM8 psf, while Menara Maxis and Menara 3 Petronas are in the RM10 psf range or above.

In the future, DTZ highlighted that landlords will have limited leverage to raise rents as new supply of 13.4 million sq ft by 2014 softens the market

Retail
The retail sector remains positive with sales growth forecasted to move upwards to 6.5% in 2012 from 6% for 2011, notwithstanding cautious consumer spending, said DTZ based on the predictions by Retail Group Malaysia Sdn Bhd.

With the completion of six malls in 2011, which included KL Festival City Mall, the total retail stock in KL stands at 23.7 million sq ft, "an increase of 7.4% from the preceding year". Outside of KL within the Klang Valley area, the total stock stands at 22.5 million sq ft, a 3.7% increase from last year.

According to DTZ , retail centres in Kuala Lumpur recorded a slight decrease in the average occupancy rate by 0.3 percentage points in q-o-q and 1.3 percentage points in y-o-y to 90.7%. Retails centres outside KL also saw a decline of 1.1 percentage points q-o-q and 0.1 percentage points y-o-y in the occupancy rate to 86.9%. The decline was largely due to slow leasing rate in the newly completed centres.

"Despite a marginal decline in the occupancy rate, major developers showed optimism in the market by announcing expansion plans," said DTZ. Some of the upcoming retail centres in Klang Valley for 2012 include Nu Sentral, KL; The Paradigm, Kelana Jaya; Setia Alam Mall, Shah Alam and KLIA2, KLIA. In 2013 there will be IOI City Mall Putrajaya, Putrajaya; Sunway Velocity, KL; and The Strand Mall, Kota Damansara. All this will add to the market just under four million sq ft.

Moreover, Pavilion REIT will be adding another 300,000 sq ft to its existing Pavilion shopping mall; KLCC Property Holdings Bhd, owner of Suria KLCC announced it will build an extension of 300,000 sq ft to be integrated with Suria KLCC mall; and NAZA Group will develop two retail centres with over 2 million sq ft as part of its RM15 billion KL Metropolis development at Jalan Duta.

"Looking forward, the retail sector will be challenging as consumers continue to be prudent in their spending and retailers are facing continuous surges in both cost of goods and cost of operations," DTZ said. "This will affect the rents they can afford with consequential effects on occupancy and future rental growth."

Residential: High end condos
According to DTZ, "prices and rentals of high-end condominiums in Kuala Lumpur were noted to be stable in the [fourth] quarter with the average capital value and rental value maintained at RM626 psf and RM3.50 psf/month respectively." DTZ also noted that average capital value increased by 4.5% y-o-y and rental value dropped 1.8% y-o-y.

The rental market will continue to feel the pressure from new supply entering the market in the next two years, DTZ highlighted.

Overall, 2011 saw the completion of 4,072 units, with 1,151 units located in the city centre and 2,921 units outside. In the next two years, DTZ highlighted that about 5,004 units will enter the market in 2012 and another 4,502 units in 2013. "This is expected to put downward pressure on the rental market especially in the city centre as a majority of them are in this location," DTZ said. "In addition, the economic uncertainty and tightening of credit by banks will contribute to the cautious demand for luxury residential properties."