Too much retail space? Klang Valley has 59 million sq ft but some small towns have only a single mall.

THERE are a few issues facing shopping mall space in the Klang Valley today. The first is the amount of space, the second is retail spending which has a direct effect on rental and yield.

The Klang Valley, which includes Selangor and Putrajaya, has a total of 59 million sq ft of mall space, according to statistics from the National Property Information Centre (Napic).

That is equivalent to 51 Suria KLCC malls, which has 1.14 million sq ft of net lettable area. Napic includes arcades and older buildings in the outskirts as shopping mall space.

If one were to consider non-government statistics, property consultancy CBRE says Greater Kuala Lumpur has a total retail space of 48 million sq ft, equivalent to 41 Suria KLCCs malls. This excludes arcades and retail space in older buildings in the Klang Valley outskirts. Greater KL has a population of 7.2 million, according to Economists Intelligence Unit.

Neighbouring Singapore in December 2012 has 56 million sq ft of retail space, of which 25 million sq ft (or 44%) are shopping floor space in the city state of 5.3 million people, according to CapitaMall Trust website. A local property consultant considers 25 million sq ft as rather low as Singapore thrives on shopping and tourism.

The question is… will retail spending continue to expand? As it is, retail rentals have not shot up but have only been maintained.

Retail sales in Malaysia are expected to grow at a faster rate this year – up 6.4% to RM94.4bil from a growth rate of 5.5% to RM88bil in 2012, driven by domestic demand, says RGM Retail Group (M) Sdn Bhd retail consultant and managing director Tan Hai Hsin. Tan is Henry Butcher Retail managing director.

He says the oversupply and overbuilding situation is only apparent in the city, but not in the smaller towns.

“This does not mean there is no room for growth,” he says in an email. He says the retail scene industry in Malaysia will remain healthy for the rest of this year, supported by sustainable domestic demand.

Although Klang Valley’s oversupply of mall space has been apparent 10 years ago, the drive to build is relentless.

Jordan Lee & Jaafar executive director Yap Kian Ann says developers like to go into mall developments because profits from malls tend to be higher than condominiums and offices generally. Average mall rental is RM12 per sq ft compared with RM7.50-RM8 for office space.

In August, Sunway REIT Management Sdn Bhd chief executive officer Datuk Jeffrey Ng hit the nail on the head when he said “there is no shortage of condominiums, office, retail and hotel space.”

The story of KL malls is not just oversupply but the disparity between the successful malls and the struggling ones.

The two main downtown malls are Suria KLCC and Pavilion KL. Both thrive on fashion. Then there is the big suburban malls like Mid Valley and Gardens, 1-Utama and Sunway Pyramid.

Then there are the smaller neighbourhood malls like Bangsar Village and Bangsar Shopping Centre. Each of them serves a certain niche market. Then there are newer malls like the SS2 Mall and Paradigm Mall.

Popular malls like Pavilion KL, Suria KLCC and 1-Utama enjoy nearly full occupancy while struggling ones suffer from poor visibility and anaemic traffic.

Mall focus

While the abundance of mall space and retail spending are important issues, the focus on mall space came about because there seems to be some interesting developments in this sub-segment of the property market.

In August, a Singapore-based fund, ARA Asset Management Ltd, linked to Hong Kong tycoon Li Ka-Shing said it would be divesting five neighbourhood malls in Malaysia.

These being Aeon Bandaraya in Malacca, Klang Parade, Ipoh Parade, 1MK in Mont’Kiara and Citta Mall in Ara Damansara. Granted, two of them are not in the Klang Valley, the sale of malls in today’s challenging and uncertain economic and financial environment only underscores the opacity of what lies ahead.

ARA Asset Management is one of the largest mall managers in Asia. One of its fund managers, ARA Managers (Asia Dragon) Pte Ltd’s director of portfolio investmentThomas Kong says it is divesting because the fund under which the malls are parked are winding down.

The five malls has a total built-up area exceeding 2.7 million sq ft. Kong says they would like to retain management rights for all five, which are part of a series of assets in Singapore, Hong Kong, China and Malaysia.

Malaysia has under a fifth of the whole fund’s portfolio.

Another mall for sale is Tropicana City Mall in Petaling Jaya. Tropicana Corp Bhd, its owner, offered the four-storey mall to CapitaMalls Malaysia REIT Management Sdn Bhd, which manages the Capitamalls Malaysia Trust (CMMT). The due diligence has just been completed, a source says.

Also on the grapevine are the possible sale of two other malls, Encorp Strand Mall in Kota Damansara and the Empire Shopping Gallery in Subang Jaya. There is a net lettable area of 750,000 sq ft between them. Attempts to get in touch with Encorp’s top management failed.

Mammoth Empire Holding Sdn Bhd (MEH) executive director Datuk Danny Cheah says he has no intention of selling Empire Shopping Gallery for the next one year.

“If you talk about the future, we (will) never know,” he says. “Instead, we are building more malls. Empire City in Damansara Perdana will have a mall of about 2 million sq ft. We also have Remix Mall of about 1.5 million sq ft. We are gearing towards a REIT (real estate investment trust) and you need to be sizeable for that.

For a REIT to be successful, there must also be attractive yields. Mall rentals are not shooting up, they are being maintained currently, property professionals say.

Despite that, developers continue to have a penchant for malls. The Sime Darbygroup will be building its first mall in Melawati in a joint venture with CapitaMalls Asia Ltd. It will have a net lettable area (NLA) of about 620,000 sq ft.

Malton Bhd is said to be planning to replicate its success with Pavilion KL by building a mall in Pusat Bandar Damansara on a smaller scale and another larger one in Bukit Jalil.

Guocoland (M) Bhd, the developer of Damansara City in Pusat Bandar Damansara, is also building a mall there. That means within the triangular 46 acres known as Pusat Bandar Damansara, there will be two malls and possibly two hotels.

Another developer is planning to build a mall in Bukit Jalil, so they will be giving Malton a run for its money. Who opens first is important. This will be located between Overseas Union Garden and the Kesas Highway.

These are just some of the known projects in the pipeline.

Rent-free period
But even as developers plan for these future projects, some shopping centres are giving long rent-free period to their retailers, says Henry Butcher Retail managing director Tan Hai Hsin. Despite this, they still fail to attract sufficient retailers.

Tan says there is a clear disparity between successful malls and struggling ones. Tan says shopping centres that have been suffering from low shopping traffic will continue to face challenges in attracting crowds moving forward while the more successful ones will thrive with retailers waiting in line.

Jordan Lee & Jaafar executive director Yap Kian Ann says there are four criteria that help a mall to succeed. Those with 1 million sq ft of net lettable area seem to do better, although there is a place for neighbourhood malls as seen in Bangsar Village 1 and II and Bangsar Shopping Centre.

A second criteria is developer must retain control and must not sell the units individually. The mall owner will be able to control the tenant mix and management. The third criteria is location, says Yap.

He says the mall outlook will be challenging in the next two to three years when new malls are completed.

“We have not felt the full effect of it yet. But we will in another two to three years,” he says.

How did Kuala Lumpur come to a stage where is an abundant supply of office space, condominiums and retail space but affordable housing? The short answer is profitability. The long answer will take up more than these two pages.

If it is any indication, CBRE in a second quarter 2013 report said prime retail rents in the city centre was at RM155 per sq ft at the KLCC. Traffic flow is an important criteria.

“This is not average rental but the rental of the unit itself,” says a source. In the suburbs like Bangsar and Petaling Jaya, average prime retail rent is RM48 per sq ft.

The report says further increases are expected.

Routine selling?
The buying and selling of malls may well be routine by funds and developers. Or it could be an indication of something else brewing. Owners cash out, or monetise, due to expected weak yields going forward, or as in the case of the ARA Dragon Fund (ARA), a winding down of a fund.

Monetising is clearly the case with the Quill group who is building Quill City Mall in Jalan Sultan Ismail, Kuala Lumpur. The Employees Provident Fund is buying for RM1.2bil under certain conditions.

The number of For Sale signs is food for thought.

Ironically, despite the oversupply, more malls are built. Will there be takers for Malaysian malls?

Henry Butcher Retail MD Tan Hai Hsin says there will be local and foreign interested parties.

“Size of the mall, the current yield and potential for higher increment are the main considerations,” Tan says.

Which explains why millions are spent on enhancement and refurbishment. Klang Parade is being refurbished at a cost of RM120mil. Post refurbishment, rental will go up double-digit in percentage terms to provide a net yield of 8%. ARA owns it.

1MK in Mont’Kiaram, another ARA asset, is being enhanced at a cost of RM20mil. 1MK will be relaunched in April/May 2014 with an expected yield of 6%.

Citta Mall in Ara Damansara, which the fund purchased at about RM200mil or RM600 per sq ft is currently 58% leased versus 30% last November.

“We will sell our refurbishment plan to the next fund,” says Kong. The fund acquired the five malls for more than RM1.2bil.

The last and fifth mall it will be divesting is Aeon Bandaraya in Malacca, which it bought for less than RM400mil in 2010, giving it a yield of 7%.

Other mall owners are also investing in enhancements, the Sunway group being one of them. Going forward, Kong says selling the five malls collectively as a single portfolio will be of more value than individually as “it is difficult to assemble a portfolio of this size.”

There are other exit routes, but for the time being, divestment will be the most likely, says Kong.

“If you have great malls, there will be no lack of suitors,” he says.

The Star, 5/10/2013

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