• The Malaysian economy continued to grow in Q3 2010, but at a lower rate of 5.3% after growth of 8.9% in Q2 2010. This was due to lower external demand for Malaysian goods and services.
• Prime office rents fell slightly in Q4 2010 and continue to be under pressure, with the anticipation of substantial developments in the pipeline supply (Figure 1).
• The retail market remains active not just with new centres being completed but also with new retailers such as Uniqlo at Fahrenheit 88 attracting strong crowds during its opening.
• There were more launches in the residential sector as confidence in the economic recovery improved. However the new ruling in November which imposes a margin of finance of 70% on the purchase of a third home will have some negative impact on high end home sales.
• The investment market was less active but we expect to see more deals in 2011 which will be dominated by existing REITs, mainly acquiring prime properties to be injected into their portfolios.
• Malaysia’s economy registered slower growth of 5.3% year-on-year (YOY) in Q3 2010, after expanding b y8.9% and 10.1% in Q2 and Q1 2010 respectively (Figure 2). Overall, the average growth for the first three quarters of 2010 is 8.1%, compared to the contraction of 3.8% over the same period in 2009. According to Bank Negara Malaysia (BNM), the growth in Q3 2010 was driven by expansion in domestic demand with slower growth in external demand.
• In Q3 2010, most sectors maintained their positive growth with the manufacturing and service sectors continuing to be the drivers, expanding by 7.5% and 5.4% YOY respectively. The only sector that contracted was mining & quarrying due to a decline in the production of crude oil and condensate.
• The Malaysian Institute of Economic Research (MIER) has forecasted the economic growth for the whole of 2010 to be 6.5%.
• The inflation rate is expected to be between 2% - 2.5% for the whole year. With the recent reduction in subsidies and petrol prices, inflation is likely to increase next year although the improving strength of the Ringgit will moderate prices of imported goods.
• Foreign Direct Investment for the year up to September 2010 has improved with a total of RM17.1bn compared to RM5bn for the whole of 2009.
• The Overnight Policy Rate (OPR) has remained at 2.75% since August 2010 and Bank Negara will continue to pursue an accommodative monetary policy taking into consideration the inflation and exchange rates, as well as external conditions.
• The Economic Transformation Plan (ETP) will commence with nine Entry Point Projects of RM30bn with another 53 projects in various stages of implementation.
• The country has strengthened its position as a global hub for Islamic finance with two new conditional mega Islamic bank licences issued as part of the financial liberalization plan.
• The economy is expected to slow down next year in line with the global trend. Barring uncertainties, it is expected to grow at a rate of between 5% - 6% assuming that the forthcoming General Election does not create political uncertainties amongst investors.
• During the quarter, there were no new additions to the office stock in Kuala Lumpur as some of the expected completions were delayed until 2011. There was however a reduction in total stock of 500,000 sq ft due to the demolition of two old office buildings for redevelopment.
• The office market continued to experience active enquiries but the take-up of space declined due to relocations outside the city and consolidations.
• As a result, the overall occupancy rate of office buildings in Kuala Lumpur decreased from 87.1% in Q3 2010 to 86.4% in Q4 2010 (Figure 3).
• Office rents continued to face downward pressure over the quarter. Average prime office rents dropped marginally from RM5.98 per sq ft per month in Q3 2010 to RM5.97 per sq ft per month in Q4 2010 (Figure 4).
• There are about 13.23 million sq ft of new office space in the pipeline between 2011 and 2013, the majority of which is scheduled for completion in 2012 (Figure 5). In addition, there was an announcement for a proposed 100-storey office building to be developed by Pemodalan Nasional Berhad (PNB) of 2 million sq ft.
• The effort to target 100 multinational companies to have a presence in Malaysia and the proposed commencement of high impact infrastructure projects such as the MRT and the extension of the LRT lines will spur growth in office demand in the long term.
• However, the outlook for the sector is expected to remain soft in the next few years as it will take time to increase demand with these new initiatives while there is a substantial amount of new supply , most of which is of a speculative nature.
• The expected forthcoming general election may cause a short period of uncertainty as companies may want to remain uncommitted until the political situation is clearer.
• The Consumer Sentiment Index surged to a two and a half year high of 115.8 points in Q3 2010, notwithstanding that the economy has is slowed in the second half of the year and external economic uncertainties continue to be a concern.
• The projected retail sales growth for the whole year has been revised upward by The Malaysian Retailers Association to 6.1% from 5.5%, due to stronger growth of 7.1% during the first half of the year. Retail sales are estimated to have grown by 6.8% in Q3 2010, but to slow to 3.5% in Q4 2010. The Q3 2010 figure was boosted by the annual Malaysia Mega Sale Carnival and festive spending to celebrate Hari Raya.
• Three new projects were completed in the quarter, which added 758,000 sq ft to the total stock. Amongst these are Aeon Makhota Cheras, a neighbourhood mall on the southern fringe outside Kuala Lumpur and The Intermark, which is a refurbishment of the old City Square and part of an ongoing major mixed use redevelopment. A few projects which were planned for completion this year have been delayed (Table 1 and Figure 6).
• The opening of the latest Uniqlo outlet at Fahrenheit 88 was the highlight of the retail fashion scene. It was successfully launched with a long queue of shoppers on the first day.
• The occupancy rate remains stable with an average of 92% in the city and 87% outside of Kuala Lumpur.
• The proposed sale of Carrefour’s operation in Malaysia was aborted as the offers did not match with the seller’s expectation. Carrefour has since announced that they will continue their previous plan to expand the business and to catch up with their competitors i.e. Dairy Farm which operates Giant, and Tesco.
• Rising inflation and the staged removal of subsidies on basic food items (sugar, flour, and cooking oil) will bite into household disposal income. On the positive side, the proposed sale of goods tax has not been implemented due to political reasons. The October Budget provided for the abolishment of import duties for tourism products such as handbags, suitcases, apparel, footwear and jewellery which can boost tourist sales.
• Increasing tourist arrivals, population growth and the ETP to increase average disposal income will support a steady growth in future retail sales.
• The residential market continues to see active new launches and previews of high-end condominiums in the established neighbourhoods of KLCC, Jalan Ampang and U Thant. Some of these projects are M Suites, Dedaun, Vipod, and Quartro.
• To push sales, developers are now selling smaller units in line with market demand, especially aiming at the investment segment of the market which is still relatively strong.
• Capital values are stable in most locations with an average of RM599 per sq ft, but rental rates continue to experience deterioration as new completions add competitive pressures to existing projects (Figure 7).
• Amongst the expected completions in 2011 include 1 Sentul, Clearwater Residences and Kiara 3 and 2011 will see around 5,610 units of condominiums being completed (Table
3 and Figure 8).
• The latest launches at KLCC are at a shade below the RM1,000 per sq ft mark but units at the more established Marc Residences were recently achieving about RM1,400 per sq ft with a guaranteed return of 6% for two years from the developer. Average rents for prime condominiums declined by about 2% from the previous quarter to RM3.58 per sq ft per month.
• In response to concerns of a property bubble, Bank Negara in November reduced the loan to value ratio for the third residential property from 80%-90% to 70%. This will have some negative impact on the high-end segment where buying has been concentrated.
• With concern on the pricing of homes going beyond the affordability of most households, the Government intends to put more effort in providing subsidized housing under the 10th Malaysia Plan, especially in urban locations. The National Economic Advisory Council has suggested that more low cost accommodation for lease should be provided for the lowest 40% of the population.
• Prospects for 2011 remain positive as the economy is expected to maintain growth, albeit at a slower pace than 2010, and the proposed investments announced under the Economic Transformation Plan get underway.
• Compared to the previous quarter, transaction activities have slowed significantly in both value and volume in the absence of new REIT listings which boosted last quarter’s figures. A total of 12 deals were noted in Q4 2010, with an estimated value of RM731m down by about 90% QOQ (Figure 9).
• Starhill REIT transferred three of their Malaysian hotel properties into their Singapore listed entity, Starhill Global REIT at the end of the year. The pricing for the 2 business class hotels under the Vistana brand in Penang and Kuala Lumpur were at RM234,000-274,000 per room respectively (Table 4).
• The Penang market saw another retail deal which is the sale of the Gurney Plaza extension. The sale which is subject to a put and call option with CapitaMall Malaysia Trust was sold at a price of RM1,536 per sq ft and a net yield of 7.1%.
• A major announcement for a new proposed 100- storey office at the Stadium Rakyat’s site to be developed by PNB met with adverse public response and political objection in view of the pending oversupply in the office market, notwithstanding that PNB will be occupying the majority of the space. The proposed office will exceed the height of the national icon, Petronas Twin Towers, by 12 storeys. This development could affect investment sentiment and yield on office assets due to the significant amount of space that it will add on to the market.
• A few Malaysian investors, namely The Employees Provident Fund (EPF) and PNB, are making news off-shore with their maiden acquisitions in the London and Australian markets. EPF has allocated £1bn for its planned acquisition in the UK. Selective major corporations and developers may also be following suit to take advantage of potential opportunities overseas with the strengthening of the Ringgit vis-à-vis key currencies.
• The overall macro environment continues to be supportive of deals notwithstanding an increase in funding cost as the year ended with a 75 bps increase in the benchmark Overnight Policy Rate to 2.75% in August.
• There are not many assets for sale but going forward, there may be a few major deals to be announced early next year depending on the possible injection of The Garden into Kris Asset by IGB Bhd, and the divestment of a minority share in a prime retail mall in the city centre. Domestic investors continue to seek suitable assets but there are limited net sellers.