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New supply of malls puts pressure on retailers

KUALA LUMPUR: The strong supply of shopping mall space in the Klang Valley is inadvertently forcing existing retailers to open up additional stores, although this may fail to translate into high profits.

“We’ve reached a stage where it is an oversupply situation … whereby the opening of these stores does not translate into high profits,” said HC Chan, adviser and immediate past president of the Malaysia Association for Shopping and High Rise Complex Management, in an interview with The Edge Financial Daily.

According to Chan, retailers are forced to open up new stores to fend off competitors and the current situation is akin to a cycle consisting of developers, landlords and tenants, with consumers at the end of the cycle.

“Both the developers and retailers are taking up higher risks, but with lesser margins and higher operating costs. Who is going to carry this higher business risk?

“They will pass on the costs to consumers and it’s a vicious cycle — retailers incur higher operating costs and this will be reflected in the [final] sales price,” said Chan, who is chief executive officer of Sunway shopping malls and theme parks.

He said while there will be marginal incremental growth in Malaysia’s shopping mall industry, it may not be as strong as in previous years.

“The industry has felt a softening of sentiments. We can feel the pulse of the industry, especially this year, and I think that the market is softening,” Chan said.

“There will be marginal incremental growth — that is the sentiment. [Although] we are used to healthy growth, our growth will now perhaps be 5% to 6% instead of an 8% to 10% level,” he said, adding that the oversupply of shopping malls is one of the key factors contributing to the slowdown.

Chan said some RM50 billion worth of shopping malls are likely to be built in Asia before the end of the decade.

“I think it’s important that this capital-intensive industry must have some policy or strategy — capital is scarce and there is a need to have some sort of regulation,” he said, citing Jakarta, which has introduced a moratorium on the supply of new shopping malls in the capital city.

However, despite the increase in supply of shopping malls, overall yields and rentals are still high due to strong demand from consumers, according to some industry players.

“Oversupply must be mitigated by the right demand,” said Richard Chan, director of consulting firm RCMC Sdn Bhd.

“Today, shopping centre yields are the best among all the asset classes because they reflect demand. We still have a long way to go to build more shopping space so that rental rates and yields would be closer to other asset classes like offices and institutions. The fact that the yield is the best means that there is room for growth. Therefore, there is market for more space to be built,” said Datuk Teo Chiang Kok, director of See Hoy Chan Holdings Group.

According to Chan, the rapid growth in tourist spending in Malaysia has contributed substantially to the shopping mall industry.

“Out of every dollar spent by tourists today, about 35 sen goes to accommodation and 31 sen to shopping. What we are saying is that in the coming years, shopping will exceed and even hit the 40% mark because there is no limit to what you spend.

“This is one of the factors favouring the shopping mall industry and it’s very exciting,” he said.


This article first appeared in The Edge Financial Daily, on April 14, 2014.

 

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