Commercial sector clouded by uncertainties

Consultancy expects softer climate for first 10 months

Predictions are never easy, and today’s current property market is more difficult to fathom with several national and global wild cards on the table.

This confluence of factors are expected to impact the property market this year. On the national front, there is the weak ringgit/weak oil price, the April 1 implementation of the Goods & Services Tax (GST) and the unravelling 1MDB issue.

Globally, sources of uncertainty include the European Central Bank’s (ECB) expanded asset purchases which started this week with more countries cutting interest rates.

According to property consultancy Knight Frank’s inaugural Malaysia Commercial Real Estate Sentiment Survey 2015, “there is so much uncertainty surrounding the Malaysian commercial real estate’s likely performance.”

The survey was concluded in the second week of January, before the ECB’s 1.1 trillion-euro (US$1.2 trillion) or 60 billion euro-a-month bond-buying programme which started earlier this week and before the fast-unravelling 1MDB issue.

In his opening address, Knight Frank Malaysia’s managing director Sarkunan Subramaniam predicted that “at least for the first 10 months of this year, the commercial investment market will see a softer subdued climate.”

“The healthcare/institutional and hotel/leisure sectors are likely to be more resilient while the office sector seems likely to see some strain. The retail sector will have a slightly poorer year but certainly better than offices,” says Sarkunan.

The logistics/industrial sector may actually turn up to be “a good surprise” for investors, he says.

“But do remember while sentiments do drive the market, hard facts determine said sentiments,” he says. The commercial sector is affected by the GST, while the residential sector to a much lesser degree, says Sarkunan.

Given time to adjust, there may be more clarity by October/November, he says.

About half (48%) of the Knight Frank survey which concluded in January comprised developers, a third of them fund/Reit managers and a fifth of them (19%) commercial lenders.

Salvation of KL

More than 80% of the respondents are less optimistic about the overall economic scenario this year while the rest believe that the market will be unchanged from 2014. None of the respondents believe the market this year will be better than 2014.

But all is not doom and gloom. The mass rapid transit (MRT) and infrastructure improvement is seen as the salvation of the Klang Valley.

The MRT development is deemed “the most important factor” currently in favour of the commercial property market with more than 80% of respondents in agreement. On the other hand, “the poor yield/return” is the primary risk/hurdle that could “hinder investment” in the commercial property market this year (74%).

“The yield is greatly affected by overambitious pricing on office and retail sectors. The commercial real state market may still present great opportunity for investment if prices adjust accordingly to the rising cost of construction and borrowing.

“However, vendors tend to be a little too assertive on their prices, making yields unattractive,” says BlackRock Property Malaysia Sdn Bhd director Patrick Liau in the Knight Frank survey.

While the office sector may be a strain in the Klang Valley, Sarkunan says the office possibility in Iskandar is tremendous, especially for shared services (backroom services).

“It makes sense for Singapore to have their shared services in Johor. Many of those who work in Singapore are Malaysians. When they move their shared services – essentially supportive services – they save a lot,” he says.

He says Medini is looking at launching office projects but there is a difference between building offices for sale and building them to let with a specific purpose in mind.

Inflation vs price

In residential report “Kuala Lumpur Residential: An Opportunistic Market” (March 6) by Rahim & Co Real Estate Agents Sdn Bhd managing director Robert Ang and head of residential sales and lettings Guy Major say the key takeaway is the decreasing volume of transactions coupled with the increasing transaction value.

When volume goes down and value goes up, it indicates that the market is heading towards a problematic phase, says Major.

Extrapolating that further, Major says the condominium sub-segment priced between RM500,000 and RM1mil saw an increase of 33% in transacted volume for the first half of 2014 compared with the same period a year ago amid an overall falling residential market. As at the third quarter of 2014, condominiums account for more than half (53%) of total Kuala Lumpur residential transactions.

On a ringgit value basis, as at the third quarter, condominiums account for 47% of total value of Kuala Lumpur residential transactions with total value of residential sales increasing 13.8% for the first nine months of 2014 compared with a year ago.

Prices are still on the rise, says Major.

Both Major and Sarkunan concur that the residential market – not as much impacted by the GST as the commercial sub-segment – are attracting a lot of attention.

Rightly or wrongly, Major juxtaposed the interest in condominiums in places like KLCC against the landed situation in Damansara Heights.

“Damansara Heights is an owner occupier market and the general (price trend) is up. But in the KLCC market, 70% to 80% of the market are investors,” says Major.

As for the Mont’Kiara market, Major says while that location is popular among the Gen Y (aged between 21 and 34) who aspire to live there, it remains unaffordable for them.

“Inflation presses down debt value and in time to come, property prices will improve. So in some ways, inflation works in the favour for them if one were to consider the 15 to 20-year scenario,” he says. - By The Star