Knight Frank Malaysia reviews the latest developments in the Klang Valley, Penang and Kota Kinabalu’s residential and commercial property market.
Kuala Lumpur High-End Condominium Market
Market sentiment for the high-end condominium remains cautious going forward, as it continues to be impacted by the various cooling measures, softening demand and a slowdown in the economy.
• Sluggish market with potential buyers and investors adopting a ‘wait and see’ approach.
• Transaction volume in the condominium/apartment segment continues to decline.
• Prices to remain flat generally with rentals expected to move south amid heightened competition between existing supply and new completions.
• A Greater level of product innovation and marketing strategies amid a challenging market with more projects offering leaseback arrangements and pool management programmes.
Supply & Demand
The cumulative supply of high-end condominiums in Kuala Lumpur stands at 42,749 units following the completion of 3,139 units in the second half of 2015. In terms of distribution, Mont’ Kiara / Sri Hartamas contribute about 48.0% (1,508 units), followed by KL City with 35.5% (1,113 units). The remaining units are located in Ampang Hilir / U-Thant area (518 units or 16.5%). Notable completions in 2H2015 are as shown below.
Prices & Rentals
In the primary market, developers are offering attractive home ownership packages and creative financial deals with guaranteed rental returns to boost sales while in the secondary market (sales and lettings); there are ample choices and opportunities for buyers and tenants looking for good buys / ‘bargain’.
In 3Q2015, Kuala Lumpur recorded 1,694 transactions in the condominium / apartment segment, 6.3% less than the preceding quarter (2Q2015: 1,808 transactions). The existing stringent lending guidelines continue to impact sales. During the review period, asking prices and rentals in most locations were generally flat.
The impending completions of new projects amid a weak market are expected to heighten competition in the rental market, in both KL City and its fringe locations. The competitive high-end condominium market is also driving developers to greater level of product innovation and marketing strategies.
There has been an increased trend of projects offering leaseback arrangements and pool management programmes with guaranteed rental returns (GRR) to boost sales and attract potential buyers and investors looking for long-term investment in terms of rental returns and potential capital appreciation.
Kuala Lumpur & Beyond (Selangor) Office Market
The office markets in Kuala Lumpur and Beyond Kuala Lumpur (Selangor) remained subdued in 2H2015 as domestic and external headwinds continue to weigh on the country’s economic outlook.
• Growing pressures on both rental and occupancy levels due to a high supply pipeline of existing and new stock amid a weaker leasing market with lesser enquiries.
• More aggressive marketing plans with attractive tenancy terms to retain and attract tenants in a highly competitive market.
• Despite a general slowdown, the investment market recorded several notable deals as savvy investors / funds seek quality assets for long-term returns.
• Rental and occupancy levels of well-located good grade dual compliant office space expected to remain resilient in the short term.
Supply & Demand
As of 2H2015, the cumulative supply of purpose built office space in KL and Beyond KL (Selangor) stood at circa 92.5 million sq ft. There were six completions during the review period, adding some 3.26 million sq ft of space to the existing stock.
In KL, the cumulative supply increased to 51.0 million sq ft following the completion of ILHAM Tower (394,000 sq ft NLA), Menara Bangkok Bank (475,000 sq ft NLA) and KL Trillion Office Tower (305,000 sq ft NLA).
Meanwhile, in KL Fringe, the completion of Q Sentral (1,004,000 sq ft NLA), The Vertical I & II (830,000 sq ft NLA) and Menara Guocoland (247,000 sq ft NLA) at Damansara City, brought the cumulative supply to 23.8 million sq ft.
With no completion of office buildings Beyond KL (Selangor), the cumulative office supply remained at circa 17.7 million sq ft.
Office buildings slated for completion by1H2016 include Public Mutual Tower in KL City; Menara Ken @ TTDI and Menara Hong Leong (Office Tower A – Damansara City) in KL Fringe and, Tower 2 of Mercu Mustapha Kamal at Neo Damansara and Iconic Tower – Block N at Empire City in Beyond KL (Selangor).
Collectively, the above impending completions will contribute an additional 1.9 million sq ft of space to the existing office stock. During this half, the average occupancy rate in KL City decreased marginally to record at 82.5% (1H2015: 84.8%) following the completions of Naza Tower and ILHAM Tower, which have yet to achieve significant occupancy levels.
In KL Fringe, however, the overall occupancy rate inched up marginally to record at 89.3% (1H2015: 87.9%) following improved occupancies in several office buildings that include Menara LGB and 1 Sentrum. The overall occupancy rate in Beyond KL (Selangor) remained flattish at 77.3% (1H2015: 76.0%).
Prices & Rentals
During the review period, the average achieved rental rates in both KL City and KL Fringe remained flat at RM6.17 per sq ft and RM5.70 per sq ft respectively. Kuala Lumpur Grade A offices continue to command higher asking rents, ranging between RM7.00 and RM12.50 per sq ft per month despite further completions and weaker business sentiment.
Meanwhile, the average achieved rental rate Beyond KL (Selangor) remained stable at RM4.19 per sq ft.
In the coming quarters, with a high level of existing and impending supply coupled with a weaker leasing market (lesser inquiries) which is seeing more consolidation cum mergers & acquisitions (M&A) activities, competition among building owners are expected to heighten.
Overall, rental rates may dip over a period due to heightened competition in a tenant favoured environment. Coupled with a further slowdown in the country’s economy, with business confidence at a low, many businesses are freezing recruitment, reducing investment on staff and consolidating their positions – this will inevitably affect take-up rate and overall occupancy levels.
Nonetheless, rental rates of well-located good grade, dual-compliant office space are expected to remain resilient.
The overall outlook for Penang’s property market appears lackluster moving forward.
• The Penang State Government has awarded SRS Consortium, comprising Gamuda Bhd (60%), Ideal Property Development Sdn Bhd (20%) and Loh Phoy Yen Holdings Sdn Bhd (20%), to be the Project Delivery Partner (PDP) to implement the RM27 billion Penang Transport Master Plan (PTMP).
• Eastern & Oriental Bhd (E&O)’ s Letter of Award to China Communications Construction Co Ltd (CCCC) to undertake land reclamation works for its Seri Tanjung Pinang Phase 2 (STP2) comprises 2 packages. Award of Package 1 to reclaim Phase 2A, which comprises the 253-acre (102.4ha) STP2 Island and the 131-acre extension of Gurney Drive, for approximately RM1.035 billion, and the conditional award of Package 2 to reclaim a 507-acre STP2 island for approximately RM1.285 billion.
Ewein Bhd has launched its maiden property project, City of Dreams, in Bandar Tanjong Pinang, locally and overseas and is now fully sold out. Ewein Zenith Sdn Bhd in which Consortium Zenith BUCG Sdn Bhd (CZBUCG) holds a 40% stake, will develop the seafront project featuring two blocks of 38-storey towers comprising a total of 572 units, with built-up areas ranging from 1,100 sq ft to 2,350 sq ft.
The indicative price for the seafront serviced apartments with a total GDV of RM800 million is approximately RM1,500 per sq ft. The seafront development Bandar Tanjong Pinang is a 110-acre (44.5-hectare) parcel of reclaimed land in Tanjung Pinang that was given to CZBUCG by the Penang State Government as a compensation-in-kind for the construction of the RM6.3 billion Penang undersea tunnel and three bypass roads. The group will also be developing “Wellness City of Dreams”, a wellness hub with a reported GDV of RM13.89 billion on this same parcel.
Recorded transactions of newer larger sized condominiums with built-up areas from 3,500 sq ft to 6,000 sq ft in the secondary market in Tanjong Bungah in 2015, range from RM577 to RM896 per sq ft.
In Pulau Tikus / Gurney Drive, similar large size units of 4,200 sq ft sold for RM763 to RM958 per sq ft whilst smaller sized units at newer developments in Gurney Paragon and Seri Tanjung Pinang have been resold at prices ranging from RM830 to RM1,330 per sq ft.
Despite it being a tenants’ market with the increased supply following the completion of several new condominiums, some asking rents are still high. Landlords continue to ask RM8,000 to RM16,000 per month for fully furnished units in newer developments whilst for older condominiums, asking rentals generally range from RM4,000 to RM8,000 per month.
The existing supply of office space (buildings of 10-storey and above) on Penang Island remains unchanged at 1H2015’s level of 5.59 million sq ft. Straits Quay Commercial Suites, a 16-storey office block with retail space on the ground floor and multi-storey car parking on the 1st to the 4th floors and currently under construction, will contribute about 115,000 sq ft net lettable space of new supply when completed as scheduled in 2016.
The occupancy rates for the three prime office buildings monitored in Georgetown remains at 1H 2015’s level, ranging from 85% to 100%. Current asking rentals for the older buildings generally range from RM2.80 to RM3.00 per sq ft per month, the same level as 1H2015. The latest rents secured at the newer Hunza Tower over Gurney Paragon are about RM3.50 per sq ft per month and the occupancy rate is 100%.
The average occupancy rate at Suntech and Menara IJM Land, both newer office buildings located outside the city, currently stands at 94%, a drop of about 3% compared to 1H2015. Asking rents at these two buildings range from RM2.60 to RM3.30 per sq ft per month, with one building recording slightly lower rents.
With the global and local economic and political uncertainties still looming over the nation, the challenging scenario continues.
The overall volume of transactions have dropped 11.3% in 1H2015 compared to 2H2014 and the trend is expected to continue. However, there has not been any recorded decrease in value as yet.
The consolidation of the residential subsector continues as evidenced by its drop of 17.5% in the volume of transactions, which is the highest drop among the property sub-sectors.
In the office sector, some pressure on rental rates will be expected as occupancies have decreased slightly and there is not much office formation or expansion.
With a lackluster year behind us, Kota Kinabalu is expected to regain development and growth momentum going forward.
• The Director of Town and Regional Planning Department (TRPD) has recently released “The Sabah Structure Plan 2033”.
• Sabah recorded a budget surplus of RM6.8 billion in August 2015.
• The opening of Plaza Shell sets a new benchmark for office sector in Kota Kinabalu.
• Developers with sizeable land banks in fringe areas are shifting focus to affordable and midrange housing developments to drive sales.
Due to uncertainties caused by the weakening of the ringgit and continued tight lending conditions, there have been no significant new launches of projects by developers in Kota Kinabalu in the second half of 2015. Instead, new phases and balance units in larger schemes and a few residential developments that are particularly focused on the affordable and mid-range price brackets. Updates on selected residential projects in Kota Kinabalu are as follows:
• Hap Seng Properties is making a strong comeback in Kota Kinabalu with two upcoming projects in both the northern (Kingfisher Inanam, a gated and guarded project) and southern corridors (Kingfisher Putatan, 15-storey condominium comprising 120 units) of the city.
• Mah Sing Group Berhad has launched another phase of its serviced apartment, Tower 3 of Sutera Residences that was held in May 2015. Tower 3 is the second tower launched following an encouraging response from the first launch of Tower 2.
• Jesselton View by Bina Puri Holdings Berhad, located at the suburb of Hilltop is a low-density apartment development offering 80 units housed in 5-storey and 11-storey blocks.
• One Jesselton @ Kepayan Ridge is a new proposed development by Bina Puri Holdings Berhad featuring a gated and guarded 12-storey condominium development conveniently located along Jalan Banjaran, Kepayan. The dual key and semi-eco environmental development comprise 125 exclusive units.
• Following solid take-up rates at the Bay 21 condominium project, Bay 21 TOO is the latest brainchild of Remajaya Sdn Bhd; with its ideal location along the picturesque Likas Bay. This 26-storey building consists of 286 luxurious furnished units ranging from one to three bedrooms.
The existing supply of office space has increased by 4.8% after 3 years of little addition to the sector, with the recent completions of Plaza Shell and Riverson Suites. The current supply stands at 6.22 million sq ft with the new influx of 289,740 sq ft of office space into the market. By the second half of 2015, the average occupancy rate of office space is peaking at 91.8%.
There is also a positive shift in average rental rates of office space in Kota Kinabalu, mainly attributed to the first Grade A Office Building in the state – Plaza Shell. Traditional rental rates have hovered around the RM2.00 to RM3.50 per sq ft range, however, the quality and standard of construction of Plaza Shell allowed it to achieve a rental rate of minimum RM4.50 per sq ft exclusive of service charges.
We expect developments, which were put on hold in 2015 to hit the market in 2016, however, we maintain that lending conditions need to improve in order for developers to achieve strong take-up rates. Property values are expected to maintain stability across all sectors in the secondary market supported by a rise in primary market launch prices. Land costs continue to increase and coupled with GST, minimum wage hikes, a weak ringgit and inflationary pressure; it is not possible for developers to lower their margins.
Foreign investment at an institutional and consumer level is highly anticipated for development investment opportunities and new launches, and we are optimistic that offshore take up rates for properties in sought after locations will be attractive in light of the currency situation.
Despite continued volatility in the global economy, Sabah is expected to weather the storm with its strong fundamentals in oil, gas and energy and the palm oil trade, albeit against commodity price and currency pressure. The tourism sector will play an important role in bolstering state coffers and we believe that there will be a greater focus on the development of tourism products and supporting infrastructure in the coming year.