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Malaysia Q1 2011-Economy slows but market remains steady [14-04-2011]  
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Economy slows but market remains steady

• The Malaysian economy in Q4 2010 expanded at a slower rate of 4.8% year-on-year (YOY) after growing 5.3% in Q3 2010 to end the year with growth of 7.2%. The slower growth in Q4 2010 was a result of lower external demand for Malaysian goods and services.

• Prime office rents moved upwards slightly in Q1 2011 but continue to be under pressure, with the anticipation of substantial developments in the supply pipeline (Figure 1).

• The retail market continues to be active but the increase in inflation could dampen consumer spending. Nevertheless, the sector remains optimistic with forecast retail sales growth of 11% in Q1 2011.

• The residential sector saw optimism reflected in higher prices, but also caution due to declining affordability. With prices and affordability moving in different directions, the sector may enter into an uncertain patch before settling into a more discernible trend.

• The investment market may be affected by political turmoil in the Middle East on certain proposed joint ventures involving funding from that region.

Economic overview

Malaysia’s economy registered slower growth of 4.8% year-on-year (YOY) in Q4 2010, after 5.3% and 8.9% growth in Q3 and Q2 2010 respectively (Figure 2). According to Bank Negara Malaysia (BNM), the growth in Q4 2010 was driven by expansion in domestic demand with slower growth in external demand.

In Q4 2010, most sectors maintained their positive growth with the manufacturing and service sectors continuing to be the drivers, both expanding by 6.2% YOY respectively. The agricultural sector registered a contraction of 4.3% due to a decline in the production of crude oil. The mining sector shrank by 1.3%.

Overall, the full year growth for 2010 is 7.2%, compared to the contraction of 1.7% in 2009.

The economy is expected to slow in 2011 to 5-6% in line with the global trend. The Malaysian Institute of Economic Research (MIER) has forecasted the economic growth for 2011 to be 5.2%.

With the recent reduction in subsidies for petrol and other essential goods, inflation is likely to increase this year although the improving strength of the Ringgit will moderate prices of imported goods. The inflation rate of Malaysia was last reported at 2.9% in February 2011.

Foreign Direct Investment for 2010 has improved with a total of RM21.4bn compared to RM5.7bn for the whole of 2009.

The Overnight Policy Rate (OPR) has remained at 2.75% since August 2010 but liquidity has been reduced. Bank Negara will continue to pursue an accommodative monetary policy so as to be appropriate and consistent with the assessment of growth and inflation prospects.

An additional nine Entry Point Projects (EPP) was implemented in March 2011 under the RM30bn Economic Transformation Plan (ETP).

In June, a new financial sector blueprint will enhance the capacity and capability of the sector to serve the needs of a high-income economy.

With the earthquake and tsunami disaster in Japan, and the current political turmoil in the Middle East, the Malaysian economy could see greater external uncertainty in manufacturing exports and tourism.


During the quarter, 240,000 sq ft was added to the office stock in Kuala Lumpur with the completion of Hampshire Place.

Enquires for office space in KL was buoyant in the quarter but it is still a tenant’s market. As a result, the overall occupancy rate of office buildings in Kuala Lumpur increased marginally from 86.4% in Q4 2010 to 86.9% in Q1 2011 (Figure 3).

Average prime office rents, however, increased from RM5.97 per sq ft per month in Q4 2010 to RM6.12 per sq ft per month in Q1 2011 as some existing prime buildings reported higher occupancies although this may be temporary with more new supply coming in the later part of the year (Figure 4).

There is approximately 13.24 million sq ft of new office space in the pipeline between 2011 and 2014, the majority of which is scheduled for completion in 2012 (Figure 5).

KL Eco City is expected to be launched for sale in early Q2 2011 with stratified boutique offices and office towers, bringing around two million sq ft of office space into the market in three to five years’ time.

The sale of strata titled office space seem to be picking up, both in the city centre as well as suburban projects, with strong response to launches and developers continuing to be optimistic. A major prime office, Q Sentral at KL Sentral, was soft launched for sale at an indicative price of RM1,400 per sq ft.

An immediate effect noted from the EPP under the oil and gas sector is tenants in this industry expanding their office space requirement.

The outlook for the sector is likely 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 coming up, most of which is of a speculative nature.


With consumer sentiment on a high over much of last year, retail sales for the whole of 2010 exceeded initial projections, with growth of 8.4% for the whole year and 8.5% for Q4 2010. Retailers remain optimistic that Q1 2011 sales will grow at about 11% with the Lunar New Year falling within this period.

Occupancy remains at a high and stable level of 87% whilst no substantial movement was noted for rental rates of most malls. However, Sunway Pyramid Shopping Mall reported a double-digit increase in rents of 17.1% on lease renewals in the Q4 2010 whilst Subang Parade reported a 2%decline over the same period.

No new space was added in the quarter with the existing stock staying at around 41.64 million for Klang Valley (Table 1) and the potential supply remaining the same as in the previous quarter with most them coming in 2011 (Figure 6 & Table 2).

Inflation continued to be a concern with the Consumer Price Index increasing to 2.4% in January, and will have an impact on the real disposal
income of households. With a higher global inflationary rate as a phenomenon, the appreciation of the Ringgit may not be able to mitigate rising the cost of imports.

The continued Governmental efforts to control credit card delinquency and tighten issuance will also impose a negative impact on retail sales, whilst slower tourist inflows from the Middle East and Japan given recent events will have an adverse impact in the coming months.

The performance of malls is likely to be mixed going forward, with selective prime malls continuing to out-perform although at a slower pace than before. The rest, especially suburban malls, will be subject to stronger competitive forces fragmenting their market shares and resulting in flat rental growth.


The residential market entered the new year with both optimism as well as caution, with escalating prices for new launches but declining affordability, at least for the average house buyer. Developers are generally optimistic with planned new launches. With prices and affordability moving in different directions, the market may enter into an uncertain patch before settling into a more discernible trend.

Higher land prices and construction cost escalations are major drivers of higher prices supported by the continued ample liquidity and low interest environment. It remains to be seen if the latest revisions on finance margin on third property and a reduction in banking liquidity through the increase in statutory reserve will rein in runaway prices.

With more completions of condominiums in the KLCC area, the situation is turning into a tenant’s market, especially for the larger units. There is also ample supply of units available in the secondary market with owners now able to transact freely unlike when the projects are under construction. A recent survey of completed projects around the KLCC area revealed that occupancy ranged from a low of about 10% to a high of 80%, with an average of 56%, an issue that investors should be wary of.

Capital values are relatively stable at an average of RM603 per sq ft with KLCC properties averaging RM910 per sq ft (Figure 7). The Caper at Sentul, an old suburb being rejuvenated, was soft launched by YTL Land late in March at an average price of RM600 per sq ft. It set a new benchmark for Sentul and was reported to have good response.

Amongst the expected completions for first half of 2011 include 1 Sentul, Clearwater Residences and Kiara 3 (Table 3) and the future supply are mostly outside the city centre in 2011 (Figure 8).

Demand will continue to be relatively selective, with strong latent demand building up for more affordable properties in the more established suburbs. The proposed billion ringgit Mass Rapid Transit (MRT) project would hopefully enable sites located further off the city centre to benefit by offering affordable homes, given their lower land costs.


Investment volumes dropped marginally by 2%from Q4 2010 to RM1.4bn in Q1 2011. Q4 2010 saw a major deal of RM651.8m when CapitaMall Asia Limited announced the purchase of Queenbay Mall, Penang from the CP Group (Figure 9). With this acquisition, CapitaLand and its related entities now control the two major retail centres in Penang, which include the Gurney Plaza.

Reflecting a retail focus in recent months, IGB announced that it will inject The Gardens @ Midvalley into KrisAsset, a majority controlled entity at an indicative price of RM820m or approximately RM998 per sq ft, whilst Pramerica is looking to exit the market for one of its older retail funds, and inviting offers on its three malls located in Klang, Ipoh and Seremban. We also noted the purchase of 72 strata retail lots within a proposed mixed development, One South, for RM105m at Sungei Besi by South Crest Synergy (Table 4).

Two office buildings were reported to be sold during the quarter, with prices achieved at between RM550-650 per sq ft. One of them is the proposed Oilcorp Amanah Tower, which was sold to Tenaga Nasional Berhad (TNB), the national electricity company, for RM554 per sq ft. The yield achieved is estimated to be in the range of 6.4-7.0%.

The Government Linked Investment Companies continue to be hungry for domestic real estate assets that meet their investment criteria for longer term leases and to utilise allocated funds for the real estate sector.

With several major greenfield projects being implemented in the near future, which include KL Eco-City, redevelopment of the former Pudu Jail, KL International Financial Centre (KLIFC), and Sungai

Besi Airport, there will be opportunities for development joint ventures for foreign investors which in the past were relatively scarce, given
developers’ access to ample liquidity.

Given the political turmoil in the Middle East, the impact on Malaysia is still uncertain. Some major announced or committed deals may be aborted or delayed, whilst there could be a greater flow of hot money toward Malaysia as a safe haven. However, this event will add more uncertainties, and with the recent earthquake in Japan, add more challenges to the local economic growth which still depends on exports to a large extent.

Nevertheless, under the ETP, domestic investment is expected to drive the projects. Thus implementation of the EPPs is not expected to be affected at this point in time.

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