Kuala Lumpur RetailAsian Cities Report – 1H 2019

REPORT

Savills Research

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Kuala Lumpur Retail

New megamalls to enter the market

MORE MALLS CONTINUE TO OPEN IN GREATER KL Total retail supply increased 3.1% year-on-year (YoY) in 2018, pushing up total retail stock to 64.3 million sq ft, with suburban areas maintaining the highest market share (82%) in Greater KL. New supply of retail space increased by 2.0 million sq ft in 2018, bolstered by seven new completions, fi ve of which are located in the suburbs, and the remaining two within KL City. These developments include Parkson M Square (350,000 sq ft), Evo Mall (240,000 sq ft), KL Eco City Mall (250,000 sq ft), Eko Cheras (600,000 sq ft), Kiara 163 (300,000 sq ft), Shoppes @ Four Season Place (200,000 sq ft) and GMBB (109,000 sq ft).

Incoming mall supply in Greater KL is projected to grow at a compound annual growth rate (CAGR) of 7.6% from 2018 to 2022. Despite consumers’ cautious approach to retail spending, new mall openings continue unabated. In 2019, Greater KL will see 4.8 million sq ft of lettable retail space completed; major projects are Tropicana Gardens Mall in Kota Damansara and Central i-City in Shah Alam (opened April 2019). At the end of 2022, existing stock could reach 78.4 million sq ft if all of the 18 projects under construction are completed on schedule. However, the issue of retail oversupply is usually location-specifi c, and does not aff ect less-affl uent suburbs.

The abundance of pipeline retail space has spurred retail mall owners to re-evaluate all of the vital factors which attract shopper traffi c: location, connectivity, concept, target market, tenant mix, car park spaces, security and cleanliness. Lendlease’s The Exchange Mall, Pavilion Damansara Heights, Mitsui Shopping Park Lalaport, and Pavilion Bukit Jalil are expected to greatly aff ect the performance of the older, less trendy retail malls. The current intense competition from new retail malls has already led to some older malls experiencing declines in footfall due to their limited selection of retailers and product off erings, and in some instances, poor management and maintenance.

RETAILERS ARE CAUTIOUS ABOUT THEIR BUSINESS EXPANSION PLANS, MINDFUL OF PIPELINE SUPPLY OF RETAIL MALLS The average occupancy rate of retail malls in Greater KL increased slightly to 87.8% in 2018 (87.6%: 2017), though it was still below the 90% mark set in 2015. Well-established, prime regional malls and megamalls have eff ectively maintained high footfall, sustaining average occupancy in excess of 90%. Neighbourhood malls and some recently opened malls have struggled to reach high occupancy rates on opening, mainly due to the large availability of locations for retailers to choose from. Retailers are taking this opportunity to carefully assess suitable timings and locations for new stores. Most of the new retail malls opened since 2017 have been slow in attracting a suffi cient number of retailers, resulting in an average occupancy of less than 80%.

Small and mid-sized neighbourhood malls which are more than 20 years old have been able to maintain solid occupancy of above 85%. Their strength lies in their locations, which are all in densely populated areas. These malls include Ampang Point, Cheras Leisure Mall, Bangsar Shopping Centre, IOI Mall Puchong, Subang Parade, Amcorp Mall and Plaza Alam Sentral. Tired-looking retail malls are stepping up by undergoing refurbishment and repositioning to meet ever-changing consumer behaviour and retailer requirements.

PRIME RENTS AND THE RETAIL INVESTMENT MARKETThe prime retail index remained unchanged at 227 points in 2018. Prime rents for malls in KL City such as Suria KLCC and Pavilion KL are said to have hit a high range of RM220 per sq ft per month and RM110 per sq ft per month, respectively. In the suburbs, 1Utama and Sunway Pyramid commanded the highest average prime rent of RM55 per sq ft per month whereas Mid Valley Megamall commanded rents as high as RM80 per sq ft per month. Given the large amount of retail supply, rental discounts in new projects have restricted rental growth in non-prime areas. Monetary incentives are often given to entice established tenants to open

GRAPH 1: Cumulative Retail Supply In Greater KL, 2008 to 2019E

39 40 4246 48 49

5457

61 62 6469

0%

2%

4%

6%

8%

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12%

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10

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40

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8

200

9

2010

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2019

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KL City KL Suburbs Greater KL Supply Growth (RHS)

RE

TA

IL S

PA

CE

(M

ILLI

ON

SQ

FT

)

Source Savills Malaysia Research

GRAPH 2: Average Occupancy Rates In Greater KL, 2008 to 2018

70%

75%

80%

85%

90%

95%

100%

200

8

200

9

2010

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2018

Source Savills Malaysia Research

4

Kuala Lumpur Retail

stores in their retail malls. Nevertheless, stable rental levels across all prime retail segments are anticipated despite the challenging retail environment.

Three transactions were recorded in Greater KL—the sale of the vacated SSTwo Mall, owned by Asia Retail Mall Fund II and managed by AsiaMalls Sdn Bhd. The mall was acquired by DK Group of Companies from the ultimate owner, PGIM Real Estate, at an estimated price of RM180 million. The mall operated for only 4½ years before it shut down in 2015. 2018 also saw Indonesia’s Riyadh Group announce that they will be investing approximately RM1.88 billion in Malaysia by acquiring a 65% stake each in Mainstay Properties Sdn Bhd (who own the existing Space U8 Mall) and Horizon KLPO Sdn Bhd (who developed Horizon Village Outlet).

OUTLOOKMillennial shoppers are poised to be the biggest spenders in the future.The millennial population in Malaysia (aged between 19 and 35 years) in their prime spending years is estimated to account for 29% (9.4 million people) of the total population in the country.

Retail is no longer solely about e-commerce versus physical stores. It is a combination of both, providing millennials with in-store experiences along with the ease of shopping online. The days when retail malls could depend on big, popular brands to attract shoppers are now gone. The presence of more retail

malls in Greater KL is expected to further dilute the market as most malls will be off ering similar goods and services. This means that retailers will continue operating their businesses in a challenging environment.

Food and beverage off erings remain the main crowd-pullers: attracting footfall while providing venues for social as well as economic interaction.

Stable rental levels across all prime retail segments are anticipated, despite the

challenging retail environment.

GRAPH 3: Prime Retail Rental Index, 2005 to 2018

100

125

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175

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225

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5

200

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Q4

/20

05

= 10

0

Source Savills Malaysia Research

GRAPH 4: The Millennial Generation In Malaysia, 2010 to 2018

0

500

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3,500

 0 -

4

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- 1

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 15

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 25

- 29

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 35

- 39

 40

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 45

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 50

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 55

- 59

 60

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 65

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 70

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75+

2010 2012 2014 2016 2018

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Source Department of Statistics, Malaysia

20 -

24

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34

Millennial Generation

Savills MalaysiaLevel 9, Menara MilleniumJalan Damanlela, Bukit DamansaraKuala Lumpur 50490Malaysia+603 2092 5955