Recovery of local property market weighed down by new supply, says DTZ

KUALA LUMPUR: The recovery of Malaysia’s property market is weighed down by new supply, according to DTZ’s research report, Malaysia Property Times 1Q2010.

In the office sector, rents continue to experience downward pressure as companies remain cautious about expansion amid substantial new supply. The average prime office rent fell to RM6.02 psf in 1Q2010 from RM6.08 psf in 4Q2009. With significant levels of new supply, 2.06 million sq ft scheduled for 2010 and 14.90 million sq ft in the pipeline between 2010 and 2014, office rents will continue to face downward pressure in the next few years.

The overall occupancy rate of office buildings in Kuala Lumpur increased marginally from 87% in 4Q 2009 to 87.2% in 1Q2010 as there was no new addition of office space. Most leasing activities were mainly due to consolidations and relocations.

While the short-term outlook for the office sector has turned slightly more positive as the economy recovers and signs of foreign demand emerges, concern has been raised on whether the growth is sustainable.

DTZ noted that the New Economic Model (NEM) announced by the government on March 30 would augur well for the long-term growth prospects of the office market due to the services sector targeted growth of 8% compound annual growth rate (CAGR) over 2011 to 2020.

On the residential front, selective demand for niche residential properties was noted as shown by encouraging sales rate of recent launches in the Klang Valley. However, high-end condominiums in the city centre continue to face over-supply concerns.

Overall, the average rents of high-end condominiums in Kuala Lumpur remained at RM3.56 psf in 1Q2010 while average prices dipped 6.3% q-o-q to RM538 psf in 1Q2010.

“The downward trend in the number of expatriates has exerted pressure on rents. The lack of growing demand has created a competitive market, especially for larger units that are asking for rents of above RM10,000 per month,” said Eddy Wong, head of residential marketing, DTZ Malaysia.

The outlook for the sector remains challenging due to the large incoming supply, which will continue to exert downward pressure on both capital and rental value.

The retail market was resilient in 1Q2010, with shopping centres in Kuala Lumpur maintaining a 90% overall average occupancy rate while those outside Kuala Lumpur saw a marginal dip from 88% in 4Q2009 to an average of 87% in 1Q2010.

About 5.75 million sq ft of new retail space is in the pipeline between 2010 and 2013, of which an upcoming supply of 3 million sq ft is scheduled for 2010. The new supply will create a competitive environment. However, shopping centres under construction in the city centre with high visibility and accessibility continue to enjoy strong per-commitment interest. By comparison, incoming neighbourhood malls in less strategic locations in the suburbs are struggling to pre-let space.

According to DTZ, the future prospect of the sector will depend on the economic growth as projected under the NEM.

As for the investment market, no transactions were noted in 1Q2010, though several proposed acquisitions were made by REIT managers. Like the previous quarter, investment interest was dominated by domestic players, mainly government-linked companies and REITs.

Negative political developments have dampened the market sentiment with foreign investors remaining on the sideline. However, foreign investors are expected to return to the market in 2H2010 when economic recovery becomes firmer.

Net sellers are limited although buying interest has recovered. Available stock for sale are mainly properties under construction or recently completed but with low occupancy levels. With asking prices generally above valuation, it is difficult to conclude a sale despite intended buyers.

The recent increase in the overnight policy rate (OPR) by 25 basis points has signalled the end of cheap funding. The development is not likely to have any impact on overall market sentiment but could lead to a review of current entry yields for investors. And with the strengthening of ringgit against major currencies, the market could become less attractive from a foreign investor’s perspective.

“Without any selling pressure, prices are expected to remain stable but increasing cost of funds due to the normalisation of interest rates may lead to a review of entry yield further into the year,” said Brian Koh, executive director of Consultancy & Research DTZ Malaysia.