Impact of Budget 2017 on residential, commercial and retail properties
Real estate investments have always been perceived as somewhat a long-term investment. Trends from yesteryear, following the national budget, have always been maintained throughout subsequent years. The slow and stagnating economy has affected the local economy on all fronts, and the property sector is by no means exceptional. Compared to more rudimentary sectors such as mining and manufacturing, the property sector affects a greater part of the population due to its direct implications on the general populace. The property sector in particular residential and commercial real estate, as well as the retail property market, have consistently enjoyed robust growth and rapid development for the past decade. A swift recovery is unlikely to prevail next year amid current economic challenges, compounded by the escalating cost of living. Utmost concern should also be focused upon market sentiments as Malaysia’s biggest challenge lies with its increasing foreign debt or external deficit. Property consultants and valuers often play a crucial role in determining property pricing and upholding market integrity. Since property and banking are closely correlated, they constitute a critical part of the banking process itself. Proper market valuations and periodic system updates ensure a smooth transition throughout the transaction process.
Given its high demand as well as Malaysians’ plight when it comes to this issue, the property market has been pegged as a top priority in Budget 2017. With a target of building one million affordable homes by 2018, the Malaysian government remains committed to providing affordable and quality housing for citizens, . This is to battle the issues related to housing namely the shortfall in housing supply reflected with mismatch in supply and demand of houses, and the elevating home prices. We foresee it will allocate more funds for affordable housing to RM3.5 billion from RM2.96 billion in 2016 and compared to RM1.94 billion in 2015. The ‘First House Deposit Financing’ scheme introduced in 2016, with an allocation of RM200 million, is expected to make a comeback next year. To further boost home ownership, national housing agency PR1MA and real estate association REHDA will be launching more affordable home schemes and low-cost housing projects during the FY17, or financial year for 2017, period.
Residential property market
The consolidation of property prices with respect to property sales during previous years have seen modest sales and transaction losses, as prices continue to escalate through the rooftop. Property prices are often kept artificially high with lesser housing units being launched. Developers have also reached a compromise by reviewing the price of their respective properties in view of the lack of demand from the general public. The main argument and contention being affordability of housing needs to be balanced up with demand from property consumers. Needless to say, shelving out premium prices for properties will not necessarily guarantee premium returns. The current economic stagnation and financial doldrums have caused lower returns of investment (ROI) all across the property board. The residential segment continues to be the main driver in the property sector. As anticipated, trading volume and property sales will experience a slight drop up till the third quarter of 2017. Comparatively speaking, real estate trends for the upcoming year are expected to mirror that of the year before. As usual, property buyers are most likely to adopt a wait-and-see attitude as before.
The general decline in new property launches in major metropolitan cities such as Kuala Lumpur, Selangor and Johor as compared to the previous year by and large will not severely affect immediate as well as future launches. Housing activities for the New Year have been forecasted to drop in volume by some three percent, and almost six percent in terms of property value. The continued downtrend in real estate transactions will continue throughout 2017. The continual weakening of the ringgit, stemming from tumbling global oil prices as well as the US Federal Reserve not raising interest rates, have led to investors taking a proactive stance and cautiously optimistic approach towards their investments. Foreign investors will also be closely monitoring the local stock market and its investment climate.
Experience has often taught us that the glut and excesses pertaining to housing development will continue to bear economic consequences for the real estate market. Dishing out freebies, rebates and discounts have seemingly gone into overdrive as more and more completed projects and residences are handed over to prospective buyers. Owing to the popularity of condos and apartments, high-rise residential developments have sold more units compared with landed properties for many years. The landed property market, on the contrary, has sold greater number of units in the Klang Valley due to their market resiliency. High-rise developers will be monitoring this development with interest as the rising trend among millennials, and younger generations, is in owning their own landed first homes. Elsewhere nationwide, Johor Bahru will be increasing its housing supply to cope with rising demand from buyers in the southern state.
The state government of Johor has reportedly rejected new applications to build more serviced apartments, and implemented a single-percent property tax on all available serviced apartments. The prevalent property glut or oversupply of properties in Johor is also evident in Penang as well as Greater Kuala Lumpur. The fundamental issues encountered by home buyers these days are an oversupply of unaffordable homes, as well as the great mismatch between affordability and availability of affordable housing. Most developers traditionally cater for buyers in middle-income bracket to high-end market within urban communities and suburban neighbourhoods, leading to a stark depreciation in rental rates, often resulting in lower-priced residential units. The secondary residential market will also observe house buyers purchasing their homes directly from existing homeowners as a frantic or desperate measure to curb speculation on incumbent as well as future properties. The prevailing downward trend of urban homeownership will continue throughout the current financial year. Landed housing within gated and guarded communities has also skyrocketed beyond the reach of average households and middle-income groups. However, new property launches of affordably-priced landed units are situated too far away from the cities, and are quite inaccessible via standard transport modes or links to suburban residential townships located in the vicinity of Shah Alam, Kajang, Bangi, Semenyih, Rawang and Cyberjaya. Ultimately, market sentiments and perceptions will continue to drive, dictate and determine property transactions as well as the overall pricing of properties within Malaysia, specifically in Greater Klang Valley.
Commercial real estate
Corporate restructuring and tax reforms have led to many companies downsizing their staff count and personnel size. This is partly due to the fact that rental space is exorbitantly-priced as well as the redundancy of office spaces in the age of social media and digital marketing. Corporations nowadays operate with ease from web portals and internet marketplace. Landlords and landowners no longer maintain a grip over pricing or call the shots in leasing agreement and transaction. A new leasing trend has also emerged with average space required per staff being slashed to below 100 sq. ft. from over 200 sq. ft. a few years back. The office space glut in Klang Valley is more severe than in Johor or Penang, with some nine million sq. ft. of purpose-built office space, comparable to about 100 mil sq. ft. in the Klang Valley. On average, the rental rate in Penang is about RM2.80 psf. The average rental in Johor is approx. RM3.50, with an occupancy rate of under 80%.
Although office rental space is abundant in the cities, the surge in office rentals over the past few years have created an unattractive scenario for MNCs (i.e. multinational companies) to continue to operate within the city centre. Of course, Johor Bahru could provide alternative office spaces which are reputably much cheaper compared to its counterpart in Kuala Lumpur. Low-rise CBDs (i.e. central business districts) in Medini, starting at a bargain RM5 psf, could offer some solace for investors and developers who are looking for much cheaper options. Within Klang Valley itself, some 4.1 million sq. ft. of office space scheduled for completion in 2015, and additional 1.25 million sq. ft. scheduled to be completed by the fourth quarter of 2016. Rentals and occupancy rates are on a downward trend, whilst rental levels witness marginal movements due to oversupply and a general lack of demand. Prime office spaces can command gross rentals in the region of RM8 psf. At the higher end of the spectrum, KLCC offices at the iconic Petronas Twin Towers may fetch up to RM13 psf in premium office rentals!
Local retail market
Potential tenants and mall retailers seeking optimal pricing and rental rates are faced with constant challenges from the overall higher cost of doing business. Despite a deteriorating economy, mall operators and landlords continue to entice retailers with various incentives such as rebates and rent-free periods in order to establish a viable tenancy as well as profitable business relationship. Top-grade office space rental is expected to come under pressure amid rising costs of construction material and general hikes in property prices. Incidentally, the banking sector and financial institutions occupy the majority of office spaces in Putrajaya, Kuala Lumpur, Petaling Jaya and Shah Alam. The general consensus is that MSC-status projects and GBI-certified buildings would remain rather resilient. As a matter of fact, fringe areas such as Bangsar South, KL Sentral, Mid Valley and KL Eco City generally offer prime land developments at premium property prices.
The repercussions and effects of the GST since its implementation, have greatly impacted the overall retail market, with many retailers witnessing a drop in sales, as prices of goods and services continue to rise, compounded by the weakening ringgit. Some segments of food and beverage outlets have also been hit hard by a sharp increase in material expenditure and other overhead costs. Numerous retail outlets are feeling the heat from the slow and sluggish market with most offering fire-sale discounts of between 50%-70%. Smaller retailers are also expected to downsize as they attempt to sustain themselves in order to stay financially afloat. The scheduled openings of seventeen new shopping malls by 2016/2017 in the Klang Valley is expected to impact occupancy and rent even further. Consumers are more selective and prudent in their spending, whilst general consumption will veer towards basic necessities. The ringgit’s slump has also attracted foreign buyers and tourists, especially from Singapore, who have been flocking to Johor in the hope of purchasing relatively cheaper merchandise, products and services.
A total retail space of approx. 51 million sq. ft. has already been launched, with an estimated 7.65 million sq. ft. set to open in 2016/2017. An additional 2 million sq. ft. is bound to fill the Cheras market with the opening of Sunway Velocity and MyTown Shopping Centre. Utilizing vacant retail spaces will be a real challenge indeed during the upcoming year. Several malls in Petaling Jaya are also feeling the pinch and pressure, as mall retailers and anchor tenants move out due to low shopper traffic. On the other hand, the extensive renovation of BB Plaza, in conjunction with groundworks on the Bukit Bintang MRT station, has also forced its tenants to take up temporary residency at Ampang Park Shopping Complex. Comparatively, in Johor Bahru and Pulau Pinang, the prevailing trend is that more malls are being built within the two metropoles. With approximately 13.3 million sq. ft. and 18 million sq. ft. of retail space respectively, JB and Penang will pave the way for greater mall development, particularly in the Southern and Northern regional states. Mainstay developments to watch will be Batu Kawan and Kota Tinggi in Penang; meanwhile Johor Bahru’s flagship projects involve Johor Bahru City Centre (JBCC), Medini Iskandar Puteri and Iskandar Malaysia. Two completed signature mall developments under Medini are ‘The Pulse’ and ‘Mall of Medini’.