The drastic drop of crude oil prices since end-2014 that has significantly reduced the federal government’s collectible revenue, the continuous weakening of the ringgit, and the current political situation in Malaysia have all contributed to the slowing economic growth of the country in recent years. The effects of these factors have been more pronounced in Malaysia last year and have dampened the country’s economic outlook for 2016.
Apart from local and global economic conditions taking a hit to the real estate market in Malaysia, another thing that has affected sentiments for the property market is the implementation of the Goods and Services Tax (GST) last year. True to form, the property sector has begun to feel the pinch of the GST since its implementation, an effect that is more evident in the industrial and commercial property sectors.
“The implementation of the GST paired with a weak Ringgit has had a huge impact on the retail sector,” said Savills Malaysia. “Retailers’ margins have been squeezed, in order to remain in this highly competitive market, especially in the fashion industry.”
With the current market conditions and a lukewarm property market outlook, what can we expect in the country’s retail market? We set sights on Malaysia – as we take a look back at how the retail market has performed last year and see what’s in store for the segment in the months to come.
Similar to the overall property market, the retail market in Klang Valley—particularly in Kuala Lumpur—was generally soft in 2015 due to the weakened consumer sentiment following the government’s implementation of the GST on 1 April 2015.
What is being argued to be a “supply-heavy” situation also didn’t help the planning region as occupancy rates were dragged slightly downward by new retail spaces that entered the market.
“Klang Valley is facing a somewhat oversupply of retail malls,” said property investor and Alpha Marketing co-founder Ryan Khoo. “Other than the superstar malls of KLCC, Pavilion, One Utama, MidValley, and Sunway Pyramid, other retail malls had an average year. New malls that have just entered the market without much differentiation have struggled.”
Savills highlights that the key to a good performance is remaining competitive. It noted that while consumers can expect to be spoilt for choice with retail malls, shopper experience and compromising the quality of mall management is not ideal. “Pressure has already been felt by the older malls with the continuing dilution of shopper counts. It will be essential for mall owners to carry out asset enhancement initiatives in order to compete with the newer malls.”
In 2015, a number of mall operators were seen implementing asset enhancement initiatives to combat the competition. Atria Shopping Gallery at Damansara Jaya and Sunway Putra Mall (formerly known as The Mall) have undergone rejuvenation and added a combined 1.01 million sq ft of retail space into the market.
According to C H Williams Talhar & Wong’s (WTW) 2016 property market outlook report, cumulative supply of retail space in the area stood at approximately 51.27 million sq ft last year.
While the occupancy rates remained strong in the past years—hovering at 90 percent in average—the property consultancy said the completion of new malls, and the refurbishment and addition of retail spaces in the area in 2015 will “further compress the overall occupancy rate, to around 87.3 percent” in the near term.
Looking ahead, Savills said despite current market conditions, retail centres which are fundamentally strong and fulfil the basic requirements of good location and right trade mix will continue to perform well. “(The) best shopping malls will continue to perform well, and new mall openings will have to be distinctly conceptualised in order to compete in (this) retail market,” it added.
Compared with other states in Malaysia, analysts say that the Penang retail market is an emerging one, with many retailers from traditional locations such as Kuala Lumpur and Greater KL looking at the island-state to expand their presence in the country.
Given these positive movements, Savills said more development interest by local property developers have been seen in recent years. According to property services firms, among the 12 upcoming malls it identified, four malls are earmarked to be sized over a million sq ft. “While size does not dictate success as proven in past cases, what is in store for Penangites will certainly provide a greater, interesting and more varied retail experience,” it said.
A report by WTW said there are approximately 18.07 million sq ft of existing supply of retail space in Penang as of 2015.
Separately, data from Knight Frank Malaysia reveals occupancy rates for the prime shopping malls on the island range from 80 percent to 97.5 percent, whilst those for the secondary shopping malls generally range from 70 percent to 90 percent.
Knight Frank said that the market is going through a phase where the general outlook is a mixed one. “Due to numerous uncertainties, the outlook for some sectors is still one of caution as the market braces itself for a more challenging scenario… The retail scenario is one of caution as consumer sentiments are not optimistic leading to reduced spending and patronage of retail mall outlets,” it added.
However, WTW said Penang’s retail market occupancy and retail rates will stay firm in the next few years, given that the new malls that are to be completed in Penang are situated in locations that are still in demand.
Iskandar Malaysia and Johor Bahru
The retail scene in Iskandar Malaysia—which in comparison to other retail segments in Malaysia— is still small and relies mainly on Johor Bahru’s population and shoppers from Singapore.
Savills’s report last year revealed that Iskandar’s total retail space in 2014 stood at 12.34 million sq ft, which translates into an estimated retail space per capita of just 6.33 sq ft. While there are plans to build numerous megamalls in the area, these malls only form part of major township developments there. Savills also noted that the average occupancy rate of shopping malls in the planning region stood at 77 percent on average.
“Iskandar Malaysia has an under-supply of retail malls with limited choices for shoppers,” Khoo said.
And this is likely to remain that way in the near term as only a few of the planned malls have started construction. Already underway are Southkey Megamall by IGB Corporation, Capital 21 by the Hatten Group and Paradigm JB (1.3 million sq ft) by WCT Holdings Bhd.
But market experts feel that the broad prospects for Iskandar Malaysia remain promising given the continued local and foreign investments committed into the area. Market watchers also noted on the upside of the weakening ringgit over the Singapore dollar that boosts Singaporean consumers’ spending in Johor.
According to Savills, as more economic activity such as the High Speed Rail, the Inter-city Rail and the Rapid Transit System progresses, Iskandar’s overall property market is expected to flourish.
Going forward, the retail property outlook for Johor remains cautiously optimistic.
The near term
2015 has been a period of consolidation for the retail sector, and according to market experts, retailers have adopted a cautious approach such as delaying expansion plans or postponing sign-ups until closer to the mall’s opening date, pushing mall owners to offer rent incentives and capex contributions to tenants.
So given the current market conditions, internal and external factors contributing to slower economic growth and steadily rising competition in the retail market locally and regionally, experts believe that Malaysia’s property sector—particularly retail—is expected to remain generally flat this year.