Leading malls expected to enjoy rental growth

SUNWAY REIT Management Sdn Bhd CEO Datuk Jeffrey Ng Tiong Lip says the company will remain focused on retail with at least 60% retail exposure as measured by asset size, revenue or net property income (NPI) over the long term. The company manages Sunway REIT.

Ng says they are mindful of the market cycle and impending oversupply of retail space.

“We have noted many sellers of assets entering the market,” he says in an email.

It bought the Yaohan Mall, later renamed Sunway Putra Mall, through a public auction in 2011. It has two shopping malls in the pipeline, namely Sunway Giza and Sunway VeloCity Shopping Mall but this depends on their financial performances and pricing by the vendor.

He shares his views on the retail and REIT industry:

What is your outlook for the retail and REIT industry? Is there any pressure on mall rentals today?

The market capitalisation of Malaysian REITs (M-REITs) has surged from RM25bil at the beginning of this year to RM36.3bil (as at Sept 30, 2013) following the listing ofKLCCP Stapled Group. We expect to see further growth with the emergence of more players in the next few years.

The trading performance of M-REITs went through a mild correction in July-August 2013 due to overall softer market sentiment and a spike in bond yields. Large-cap M-REITs were trading at highly compressed levels of below 5% prior to the correction.

By end-September 2013, distribution yields of large-cap M-REITs have moved closer to 5.5%-6%. While there has not been a drastic change in fundamentals of the large-cap M-REITs, the decompression of distribution yield is a healthy sign and offer value to investors.

In view of the higher yields, it will be difficult to make yield accretive acquisition especially in prime areas. Operation costs are expected to marginally increase over time due to higher fuel costs, potential electricity tariff increase and minimum wage. M-REITs will need to look into strategies to mitigate rising operation costs.

In the retail sector, leading malls are still enjoying strong occupancy of 95% and above. Retail space is expected to increase in the next one to two years. Although consumption is expected to remain buoyant, (there is a) possibility of slower growth in retail spending in view of the recent rise in fuel prices resulting in higher cost of living.

Leading malls should be able to continue to enjoy rental growth… average performing malls may be pressured to maintain their occupancy rates and rental rates.

What is the impact of a rise in interest rates?
Overnight policy rate is expected to remain steady for the rest of 2013… (but) long-term interest rate could trend up. It is a matter of time before short-term rates move in tandem with long-term rates.

With this in mind, Sunway REIT Management Sdn Bhd (the Manager) has converted a large portion of its debt into fixed rate. The fixed rate portion has increased from 20% in FY2012 to 81% in FY2013. The average debt maturity for the fixed portion debt is 3.6 years. By locking in the rates, this portion of the debt is not susceptible to interest rate movement and will not be affected by higher interest cost.

Please give a brief on Sunway Putra Mall.
The refurbishment period is over 22 months. The mall will resume business by first quarter of 2015 after a refurbishment cost of about RM300mil. Post-refurbishment, it will have a net lettable area (NLA) of just below 600,000 sq ft (compared with 500,000 sq ft before).

Who are the competitors of Sunway Putra Mall?
There are numerous shopping malls in Kuala Lumpur. New malls will enjoy the novelty factor in the short term. Being able to sustain the footfall over the longer term horizon (is important). Sunway Putra Mall has a captive market with the Umno headquarters,Putra World Trade Centre in the vicinity and a residential catchment within a 2.5 km radius.

What sort of rental do you expect for Sunway Putra Mall?

The rental rates will be in line with the market positioning of the mall (mid-to upper-mid customer segment) and comparable market rental rates. We expect a stabilised yield for the entire Sunway Putra Place, inclusive of Sunway Putra Mall, to be between 7% and 8%.

Will Sunway REIT be able to maintain its distribution per unit (DPU) in the next two years?
The manager endeavours to maintain or minimise the impact on DPU for the next two years despite the loss of income from Sunway Putra Mall. This is possible if the existing assets continue to perform. It is already a bonus to be able to maintain the DPU for FY2014.

Strategies to minimise impact on DPU for FY2014:
·A major rental reversion commenced last month at Sunway Pyramid Shopping Mall. About 54% (900,000 sq ft) was due for renewal.
·About RM38.4mil were invested to enhance assets. This was completed in the previous financial year and a 15% return on investment is expected. These include the retrofitting of chillers at Sunway Pyramid Shopping Mall, refurbishment of Sunway Hotel Seberang Jaya and a 14,193 sq ft expansion at Menara Sunway.
·Sunway Pyramid Shopping Mall’s NLA will expand by a further 20,362 sq ft and 23,432 sq ft of existing space will be reconfigured. This is expected to be completed by year-end and costing RM40.1mil.

How did we come to this stage where there is an abundance of office, retail and hotel space?
This is due to the overbuilding of investment properties. Landowners wanted to create value by building a portfolio of investment properties for investment purpose. The overbuilding phenomenon eventually led to (the current) oversupply situation. In today’s scenario, there will be a demand for new buildings due to migration of tenants from the older properties.

The Star, 5/10/2013

Greater KL residential market expected to consolidate

THE Greater Kuala Lumpur residential property market is poised for some consolidation after recording breathtaking growth in terms of price hikes and transaction volume over the last three years, property consultants observe.

CBRE’s latest Greater Kuala Lumpur MarketView says a period of stabilisation is in order, with the period of significant growth in capital values seen since 2009 being replaced by an era of more gradual increases.

“The rapid growth in Kuala Lumpur and its suburbs has resulted in a scarcity in development land that drove up capital values for many areas in Selangor.

“About 75.7% of all residential units in Greater KL are located in Selangor, with the remaining 24% and 0.3% in Kuala Lumpur and Putrajaya respectively. Putrajaya, the country’s administrative capital, accounted for just over 4,740 units which are primarily for housing of civil servants,” the report adds.

New residential developments are being located further and further away from the city centre, with an increasing level of development seen in the southern portion of Greater KL, forming a growth corridor linking the city with Putrajaya/Cyberjaya and down to KLIA.

The CBRE report points out that previously overlooked areas, including Semenyih, are poised to see a marked increase in development activities in the near future.

As of quarter two (2Q) 2013, 196,092 units were classified as incoming supply, defined as units for which construction permits have been approved (whether or not construction has begun). Of this, 186,581 units were deemed to be under construction, implying that construction work has begun on 95.1% of the units with construction permits.

Total existing supply of residential properties stood at about 1.77 million units as at end-2Q 2013, with landed units accounting for 43.5% of total stock, non-landed properties made up 34.9% and low-cost housing was at 21.6%.

It notes that supply growth since end-2012 has been minimal at less than 1%, part of a wider slowdown in supply increase since 2006 that contributed to a rise in capital values in many areas of Greater KL since 2009.

Although the number of new starts has rebounded since 2011, it remained below levels seen during 2003 to 2007.

DTZ Nawawi Tie Leung executive director Brian Koh says that going forward, a slower but more sustainable growth in terms of new launches and take-up rate can be expected.Koh says that in the last quarter of 2013, the things to look out for in the property market include a potential hike in bank interest rates as Bank Negara is expected to introduce further measures to rein in household debts. Higher borrowing rates may also affect mortgage loan rates that may mean higher borrowing cost to housebuyers.

“Buying interest from foreign buyers, especially from Singapore, Hong Kong, China and Japan could cushion the softer domestic demand going forward,” Koh observes.

Meanwhile, Knight Frank’s First Half 2013 Real Estate Highlights says while prices have flattened over the past 12 months as a result of government cooling measures, more activities are expected post-election as additional cooling measures implemented in competing Asian markets such as Singapore, Hong Kong and China, may lead to greater interest in the Kuala Lumpur, Penang and Iskandar Malaysia property markets.

“Malaysia is an attractive alternative investment destination due to its stable property market and relative housing affordability that offers reasonable returns in terms of capital appreciation/rental income.

“New launches featuring a good mix of unit sizing, particularly those located near high-level infrastructure projects, are expected to attract strong take-up as they appeal to a wider market of buyers and investors,” the Knight Frank report says.

In the luxurious condominium sector, CBRE estimates 6,484 units to be completed in Kuala Lumpur during the second half of 2013.

Of the 42,979 units of high-rise development (condominiums and serviced residences) in Kuala Lumpur valued at or above RM500 per sq ft (psf), it says about 35% are considered to be “luxury” (valued at RM800 psf and above).

Knight Frank says that with prices of high-end condominiums expected to remain flat for the remainder of this year, investors and purchasers will have the choice of opting for more bargain condominiums in the city and its immediate neighbourhood of Ampang Hilir/ U-Thant as the price per sq ft narrows between city and suburban living.

New completions

While the majority of new launches are in the suburban areas, there are also a number of upcoming new developments in the KLCC vicinity, including projects such as KL Trillion Serviced Apartments and Verve Suites @ KLCC among others.

The Mont’Kiara vicinity is also seeing an increase in new launches, with projects such as Pavilion Hilltop, Residensi 22 @ Mont’Kiara, Sun Kiara Condominium, Kiara 163 Serviced Residence, Weida Mont’Kiara and others to be launched in the near future.

During the review period, there were two new completions in Mont’Kiara – Kiaramas Danai (287 units) and 28 Mont’Kiara (460 units).

Knight Frank says the office market is expected to remain challenging as supply continues to outstrip demand.

In KL city, demand for good grade dual-compliant office space is expected to remain resilient in the short term. Owners of old and dated office buildings are proactively seeking to upgrade and enhance their assets in a bid to remain competitive and retain tenants (and to attract new ones) amid a challenging leasing market.

The decentralised office location of KL Sentral, however, is expected to face further pressure on its occupancy and rental rates due to the recent completion of some 1.9 million sq ft and impending completion of some 1.7 million sq ft by year-end.

The short-term threat from these completions may, however, be mitigated as several buildings have secured anchor tenants.

Knight Frank says the impending opening of Nu Sentral later this year is expected to improve integration between the various completed components within KL Sentral and add further appeal to the transportation hub as a popular alternative office location, thus leading to improved demand and absorption rates in the medium to longer term.

With rapid developments of public transportation links (LRT extension and MRT lines), accessibility and connectivity between KL City and its fringe locations will be greatly enhanced. Coupled with the availability of good grade office space at competitive rental rates, this will accelerate the decentralisation process.

CBRE says some 6.27 million sq ft of new office space will be completed in the Greater KL region next year, although a considerable amount of this supply is located in strata-title or secondary buildings. Nevertheless, the market is set to remain poised in favour of tenants for the near future.

The KL city that constitutes the capital city’s golden triangle and central business district’s office market showed encouraging signs of life during the review quarter as vacancy rates fell to 12.7% (13.2% as at 1Q), on the back of some notable leasing activities.

Continued evidence of the ongoing flight to quality came in the form of an oil and gas major leasing over 200,000 sq ft of office space in Integra Tower, the recently completed prime office building within MGPA’s Intermark integrated development.

Overall, there was no change in average gross asking and passing rents for selected Grade A office space in the city, at RM8.10 psf and RM7.10 psf respectively.

As at the second quarter this year, the total supply of office space in Greater KL stood at about 91.1 million sq ft, 5% higher than the 89.2 million sq ft and up 5% year-on-year.

The second quarter of 2013 witnessed the completion of four developments, all located outside Kuala Lumpur city – Menara D’Damansara (253,000 sq ft of net lettable area), Plaza33 (530,840 sq ft), and Menara CIMB (609,000 sq ft) as well as Menara Shell (538,617 sq ft) located in KL Sentral.

The Star, 5/10/2013

UOA Development acquired 6 parcels of freehold land at Jalan Ipoh for RM130.33mil

The land to be bought by UOA's unit Tiarawoods Sdn Bhd will be an addition to the group's existing land of 16.8 acres in the same area. Once the purchase is completed, UOA will collectively own about 28 acres of prime development land there.

The Land measures in total approximately 483,322.71 square feet (11.1 acres) and is presently free from encumbrances save and except for the followings:

(i) portion of the land held under GM5909 Lot 950, Mukim Batu, Daerah and Negeri Wilayah Persekutuan Kuala Lumpur (“Lot 950”) are occupied by 3 tenants (“Lot 950 Tenants”);

(ii) the land held under GM1173, Lot 4052, Mukim Batu, Daerah and Negeri Wilayah Persekutuan Kuala Lumpur (“Lot 4052”) is occupied by a tenant (“Lot 4052 Tenant”);

(iii) registrar caveat(s) registered on the Land (“Registrar’s Caveats”);

(iv) squatters (“Squatters”); and



UOA Development acquired 6 parcels of freehold land at Jalan Ipoh for RM130.33mil

(v) use of way granted on Lot 4052 to Ng Beh Leow Sdn Bhd (“NBL”) and Lot 950 Tenants (“Use of Way”).

Rational for the acquisition

UOA is committed to continue its fast turnaround development strategy that focuses in the Klang Valley. The Proposed Acquisition is in line with UOA’s strategy and will further grow its development activities within Klang Valley.

The Jalan Ipoh Land is strategically located at Jalan Ipoh, less than 10 kilometres from Kuala Lumpur City Centre. The location is surrounded by densely populated residential areas such as Taman Kok Lian, Taman Impian, Taman Sri Kuching and Taman Rainbow. The Proposed Acquisition will be an addition to UOA’s existing land of approximately 16.8 acres, owned by the Purchaser. On completion of this Proposed Acquisition, the Purchaser will collectively own approximately 28 acres of prime development land in this location. The development will be highly accessible via major highways such as Duta-Ulu Klang Expressway (DUKE) and Jalan Kuching.

UOA is proposing to develop the Jalan Ipoh Land, combined with the existing land, into an integrated mixed development and is expected to commence in the year 2014.

The total development costs for and the expected profits to be derived from the development of the Jalan Ipoh Land have yet to be ascertained at this juncture as the detailed development plan is pending finalisation.

The proposed acquisition is expected to be completed by the second quarter of 2014.