AN undersupply of affordable housing, particularly in major urban areas, coupled with an oversupply of office and retail spaces, may lead to deeper imbalances in the property market, says Bank Negara Malaysia in its 2015 annual report, which was released recently. Despite a 35% increase in housing stock since 2005, the gap between the housing stock and the number of households widened from 2.1 million units in 2005 to 2.5 million in 2015. Annual housing completion has declined considerably in the past five years as the number of households continued to grow. There was an estimated average shortage of 85,911 housing units per year between 2011 and 2015.

Bank Negara says the most acute shortage has been in affordable housing. Half of Malaysian households earned RM4,585 per month and below in 2014. According to the Median Multiple, a methodology recommended by the World Bank and the United Nations to evaluate urban housing markets, a house is considered affordable if a household can finance it with less than three times its annual household income. This suggests that houses priced up to RM165,060 would be affordable to a median Malaysian household. Only 21% of new residential launches in 2014 were priced below RM250,000, says Bank Negara.

While affordable housing initiatives have gathered momentum, they are still not enough to meet the demand. The rapid increase in house prices has been partly attributed to the imbalance between supply and demand, particularly in the affordable housing segment. Using the Median Multiple methodology, Bank Negara found that houses in Malaysia, on aggregate, were considered “seriously unaffordable” in 2014. In Kuala Lumpur and Penang, houses were “severely unaffordable”, while those in Johor and Selangor were “seriously unaffordable” and “moderately unaffordable” respectively.

Moving forward, an estimated 202,571 new houses will be needed every year from 2016 to 2020 to match the estimated growth in the number of households. This is 2.5 times the number of houses being built annually. Bank Negara says a comprehensive and carefully designed national planning policy is needed for the property market to support the government’s aim to deliver more housing. It notes that the government needs to commit to and support the private sector to ensure the low and middle-income groups have access to quality, affordable housing.

Meanwhile, Bank Negara says there is an oversupply of office and retail space. Office space in the Klang Valley recorded a vacancy rate of 20.4% in 2015, compared with the regional average of 6.6% and national level of 16.3%.

“In tandem with the high level of vacancy in the Klang Valley, monthly rent for prime office space in Kuala Lumpur is the lowest among regional cities at only US$2.60 psf,” says Bank Negara.

Yet, despite the low rents, Savills Research, in its May 2015 Property Market Overview, says several Grade A office buildings, completed between 2011 and 2014, have occupancy rates of only 50% to 75%. The situation could be aggravated by an incoming supply of large projects in the next few years. According to Jones Lang Wootton’s 4Q2015 Quarterly Property Market report, an average of 4.9 million sq ft of new office space will be added to the market each year for the next three years.

Similarly, signs of oversupply are emerging in the retail sector in major urban areas, particularly in Penang, Johor and the Klang Valley.

“Although vacancy rates in some of these areas have been improving in recent years, rates of 12.4% in the Klang Valley and 28.2% in Pulau Pinang remain relatively high compared with other regional economies,” says Bank Negara.

Read on to see what property experts have to say about these trends.

Retail segment

Bank Negara1. Allan Soo, managing director of Savills (M) Sdn Bhd

In 2016, we have some anecdotal evidence that the situation will be carried through from 2015, when retail turnover dropped 20% across the board. This was the result of many negative factors such as the Goods and Services Tax and the rising cost of living in terms of utilities, tolls, petrol and so on. There has been a reduction in disposable income and very negative economic factors.

The prognosis for 2016 is equally bad. In fact, the general opinion for 2016 is that it will perhaps be worse than 2015 — simply because there is no good news in sight. In 2016, there are stronger headwinds in terms of petrol prices as well as the overall global climate [which hasn’t been very positive].

There have been signs of oversupply in the retail segment. Occupancy rates have generally dropped to below 90%. For the past 20 years, occupancy has been consistently over 90%, so this is obviously a concern. However, this also marks a consolidation period. Perhaps the industry needed this because it was growing too fast, without any regard to how it would pan out when things turned bad. It is important for the industry to adjust.

Many retailers didn’t quite adjust to the drop of the ringgit, even though they import a lot of merchandise from overseas. It is only this year that they are beginning to adjust. The adverse impact becomes more prominent in the market when you see the adjustments coming through. Retailers would have to raise prices and this would reduce sales even more. At this point, it is hard to say whether 2017 will be a turnaround for us, but it looks quite likely to be negative as well.

Having said that, with the weakening of the ringgit and the removal of the visa requirement for tourists from China, we will see an influx of visitors, which will help boost the retail industry. When the ringgit went down last year, it actually boosted retail sales in Johor and Melaka because Singaporeans would flock in during the weekends to enjoy the lower ringgit. I think these two states and the outlet malls will see quite a lot of improvements in 2016 and 2017, simply because the shrinkage of disposable income will mean that people will look for bargains, which means they will shop in discount places, especially outlet malls. The bright spots are the outlet malls and Melaka and Johor.

The retail segment today is an open market. The banks are the first to not support commercial developments as they are quite rigorous in approving loans to major developments. And so, by themselves, the banks will control the market quite well and at the same time, developers are also beginning to realise that the cost of construction and land have become so high that the rental returns cannot justify building more malls.

All in all, the market will definitely correct itself because some projects are being shelved or delayed, so I think the market itself will take care of the oversupply.

Bank Negara2. Lou Minn Yian, head of commercial real estate at Laurelcap Sdn Bhd

The retail segment has shown a significant drop. In the worst cases, some retail businesses have dropped to 70%. Furthermore with all the new malls, such as Empire Damansara, coming up, on a supply and demand basis, there is definitely an oversupply. In fact, a lot of retailers have moved out of the country.

The openings of some new malls have been delayed, but it is a good thing for them to wait because the sentiment is not so good this year. The dampening last year was blamed on the Goods and Services Tax, but things haven’t improved since then. Perhaps, 2017 will be a better year for retail. However, from the looks of it, I think the retail sector will remain stagnant for the next three years. There is still good demand for established malls such as Mid Valley Megamall and 1 Utama, but the newer malls are experiencing lower occupancies.

In order to reduce the oversupply, developers would have to figure out [the right formula] and the right location for their malls. Because the mix of retailers is too similar, you tend to see crowds moving from one mall to another. And most malls are too close together.

Market research is important [to differentiate] the malls from each other and to find the right kind of businesses that would suit the market situation. As far as retailers are concerned, the general consensus is that there is still demand for high-end and low-end brands, while the middle brands are taking a hit.

This article first appeared in City & Country, a pullout of The Edge Malaysia Weekly, on April 4, 2016. Subscribe here for your personal copy.

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