PROPERTY INSIGHTS

Tighter lending to cool market

Malaysia Quarter 1, 2012

Market Overview

The economy grew by 5.1% in 2011. The forecasted

growth for 2012 is 4.0%-5.0% and is expected to be

driven by domestic demand and with support from

public expenditure.

The residential market was relatively quiet with

no new completion recorded and no launches seen

due to the seasonal effects of various public holidays.

Although 2012 will be a challenging year globally,

as tighter lending bites into demand especially

speculative buying based on little upfront cash under

Developer Interest-Bearing Scheme (DIBS).

Retail sales are expected to grow more moderately

driven by relatively cautious consumers’ spending

and tourist arrivals. With more retail space entering

the market and uncertainty in the global economy,

filling up the additional retail space that is being

completed will be a challenge. Nevertheless, retailers

are selective as reflected in the pre-commitment rates

of good upcoming malls.

The office market showed resilience with both

capital and rental values holding firm despite

increasing new supply (Figure 1). The market is likely to

see greater challenges with slower economic growth

and an anticipated oversupply in the coming months,

as the pressure to find tenants gather more intensity.

Figure 1

Average prime office gross rents

0

1

2

3

4

5

6

7

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

RM per sq ft per month

Source: DTZ Research

Trends & Updates

Economic Overview

The Malaysian economy expanded at 5.2% year-on-

year (y-o-y) in the fourth quarter last year compared

with 5.8% in the third quarter, higher than market

expectations of 4.9% (Figure 2). For the whole 2011, the

economy grew by 5.1% which was within the forecasted

range of 5.0%-5.5%. Domestic demand will continue to

be the key driver with strong support from the private

sector. Public expenditure is also expected to contribute

to the economic growth. The growth for 2012 has

recently revised downward by Bank Negara Malaysia to

4.0%-5.0% from 5.0%-6.0% in view of weaker external

conditions.

Bank Negara Malaysia (BNM) is likely to keep the key

interest rate - Overnight Policy Rate (OPR) - unchanged at

3%. The OPR has been maintained at 3% since May 2011

after four rate hikes from 2% in March 2010. According

to analysts, lower inflation allows BNM to hold the rate

steady and allows room for monetary easing. Despite

the slower economic outlook, the current interest rate

is deemed accommodative enough to support domestic

demand.

Household debt had edged up to 76.6% of the

country’s gross domestic product as at end of 2011

compared with 75.8% in the previous year. According

to BNM, it was not an alarming figure as there had been

a declining trend in non-performing loans in that sector.

Outstanding household debts grew moderately at 12.5%

in 2011 compared with 13.7% a year earlier, following

stringent measures imposed by BNM to curb speculation

in the property market. The largest household debt

category was loans for the purchase of residential

properties (45%). The bulk of these loans went to the

purchase of residential units priced over RM250,000.

On the same matter, Malaysian Rating Corp Bhd

(MARC) voiced its concern on the lending by non-bank

institutions and its contributions to household debts

which was on an increasing trend in the past few years.

This increasing level of household debts could create

risks on the housing market in a downturn.

The headline inflation rate reflected by the Consumer

Price Index (CPI) eased to 2.2% y-o-y in February. Food

& non-alcoholic beverages (2.9%) and non-food (1.8%)

increased the most.

The Consumer Sentiment Index (CSI) remained above

the key benchmark 100-point level, notwithstanding that

the latest CSI plunged to two-year low of 106.3 points

with growing concerns on finances and jobs as well as

inflation.

The unemployment rate remained low at 3.0% as

at January 2012, compared to 3.1% at December 2011.

Nevertheless, jobs remained one of the main concerns

as reflected in the CSI.

Despite global economic uncertainties, as at January

2012, Malaysia registered 60 approved projects in the

manufacturing sector amounting to RM2.5bn with

RM1.4bn or 56% from Foreign Direct Investment (FDI).

According to CIMB Research, the total value of approved

investments is expected to slow down from RM56.1bn

in 2011 to RM50bn this year due to the weak external

situation.

Figure 2

GDP growth and unemployment rate

-10

-5

0

5

10

15

Q1

09

Q2

09

Q3

09

Q4

09

Q1

10

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

GDP growth (y-o-y) Unemployment rate

%

Source: DTZ Research

Residential

No new completion was observed in the quarter.

However, almost 3,000 units of condominiums are

expected to enter the market by end of this year. A

majority of about 86% or 2,565 units are located in

the city centre whilst the remaining 14% or 432 units

are outside the city centre. Prominent projects to

be completed in the year include Verticas Residensi,

Sky Residence and St. Mary Residences (Figure 3).

Although 2012 will be a challenging year globally,

developers are confident that the demand for

residential properties in Kuala Lumpur will remain

selectively strong, as developers focus on smaller

and therefore more affordable units as well as

packaging launches with attractive Developer

Interest-Bearing Scheme (DIBS).

No new launches were noted in the quarter, due

to the seasonal effects of various public holidays.

After recording an encouraging sales rate of 80%

to 90% for its Platinum Suites, the developer,

Platinum Victory Sdn Bhd, is planning to launch the

second phase of its high-end project called Platinum

Victory Face in Q3 2012. This phase will comprise

serviced apartments priced from RM1,650 per sq ft.

G Residence, a condominium development by

Tan & Tan Development Berhad and located at Jalan

Desa Pandan, a suburb at the fringe of the embassy

row of Ampang Hilir/U-Thant location, recorded a

good sales rate since its preview in December last

year. About 80% of the 474 condominiums sized

between 1,080 sq ft and 1,545 sq ft and priced at an

average of RM650 per sq ft were snapped up.

Other new launches are being planned for

this year. In the city centre, proposed launches

include 288 Jalan Raja Chulan and the Platinum

Residences@Platinum Park, the latest residential

project around KLCC.

Quill Group is said to plan to launch its Quill 15

integrated development at Jalan Sultan Ismail this

year, where one of the components is a 45-storey

residential tower. Outside the city centre, Naza TTDI

planned to launch 175 units of condominium in its

KL Metropolis project in 3Q 2012.

Figure 3

Future supply of high end condominium in Kuala Lumpur

0500

1,0001,500

2,0002,5003,0003,5004,0004,500

20

12

20

13

20

14

20

15

Po

st2

015

units

City centre Outside city centre

Source: DTZ Research

According to the International Trade and Industry

Minister Datuk Seri Mustapha Mohamed, the realised

private investment is forecasted to increase to RM110bn

in 2012 from RM94bn last year with a significant

contribution from the oil and gas sector as government

continues the implementation of ETP’s projects. It is

estimated that about 40% of the private investment will

come from oil and gas sector.

The economic environment is expected to attract more

private investments with continuous implementation of

mega projects such as Mass Rapid Transit, Light Rail

Transit extension, Kuala Lumpur International Financial

District, Banting-Taiping Highway, Bandar Malaysia and

100-storey Menara Warisan Merdeka to cushion the

expected economic slowdown.

The average capital value of high-end

condominiums in Kuala Lumpur increased

marginally by 0.5% q-o-q to RM634 per sq ft, whilst

the average rental value rose 3.1% q-o-q to RM3.62

per sq ft per month (Figure 4).

The government initiative, My First Home

Scheme, to encourage lending to first home buyers

for properties valued at a maximum of RM220,000

(for single applicants) or a maximum of RM400,000

(for joint spousal applicants with a household

income of below RM6,000 per month cumulatively)

was reported to fail with few loans approved.

With the imposition of stricter guidelines on

personal lending to individual households in general,

developers are likely to feel the impact of slower

sales in the coming months. Effective January 1,

under the responsible lending guidelines, loans

will be approved based on net income compared

with gross income previously. This will cool an

over-heated market that has run up substantially

in terms of pricing in the last two years as well as

focus developments toward the more affordable

housing segment.

Retail

According to Retail Group Malaysia, retail sales

growth in the first quarter of 2012 is estimated at a

conservative figure of 10% after achieving 11.5% in

the fourth quarter 2011. For 2012, RM88.2bn of sale

is anticipated with a projected slower growth of 6.0%

compared to 6.5% in 2011, in view of the European

debt crisis, job uncertainties and an anticipated

reduction in credit card spending.

Nielsen’s Global Survey on Consumer Confidence

and Spending Intention revealed that Malaysians were

more cautious with their spending. They are spending

less new clothes and out-of-home entertainment,

switching to cheaper grocery brands and curbing

telephone spending due to growing concerns over

the economy, job security and increasing food prices.

The recent revision in civil servant pay package

and the proposed country’s minimum wage which is

indicatively set at RM900 would benefit the retail

industry as these measures will boost household

incomes especially as the lower income group will

have extra Ringgit to spend.

The retail stock in Kuala Lumpur stood at 23.5

million sq ft, a decline of 0.8% from the preceding

year (Figure 5) due to the closure of two retail malls

Figure 5

Retail new supply (NLA) in Kuala Lumpur

0

5001000

15002000

25003000

3500

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06

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Completed Supply New Supply

sq ft (000s)

Source: DTZ Research

Figure 4

Rents and capital values of high end condominiums in Kuala Lumpur

0100200300400500600700

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Q1

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Q2

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Q1

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5

Capital values (LHS) Rents (RHS)

RM per sq ft RM per sq ft per month

Source: DTZ Research

The office market was largely stable with an

average occupancy rate of 86%, a slight improvement

from 85.8% recorded in the previous quarter (Figure

6). Although net absorption was low at only 129,110

sq ft, no new offices was completed in the quarter

(Figure 6).

Recently completed buildings such as Petronas

Tower 3, Bank Islam Tower and Menara Prestige

recorded improvements in occupancy rate recording

100%, 50% and 30% respectively, up from Q4 2011

occupancy rates of 70%, 45% and 20%.

The total supply of office space in Kuala Lumpur

currently stood at 64.6 million sq ft and will see

a growth of 19% in the next three years, with an estimated 4.8 million sq ft expected for the rest of

the year.

Offices

namely Plaza Warisan and UDA Ocean located at Jalan

Sultan which were acquired for the development of a

Mass Rapid Transit (MRT) station. There was no new

major completion of new retail space in Q1 2012.

Retail centres in Kuala Lumpur (KL) registered a

decline in occupancy rates. Average occupancy rate

in KL decreased to 90.6%, a drop of 0.1 percentage-

point quarter-on-quarter (q-o-q) and 1.4 percentage-

points y-o-y.

Nevertheless, new upcoming major retail centres

continued to attract retailers who are selective and

would still lease space in centres that are expected to

see high footfall.

Setia City Mall in Shah Alam with over 740,000

sq ft of net lettable area (NLA), due to open in May

2012, recorded overwhelming response with about

95% of its retail outlets already leased out. KLIA2 at

the new low cost carrier terminal (LCCT), adjacent to

Kuala Lumpur International Airport (KLIA) in Sepang

with an approximate NLA of 350,000 sq ft has

received strong interest from international and local

concessionaires. It is planned to open in April 2013

and is expected to achieve RM1.6bn in retail sales

once the new LCCT is in full operation. Nu Sentral at

transit hub KL Sentral with 650,000 sq ft NLA has

registered about 70% pre-commitment rate to date.

It is slated to open in March 2013 (Table 1).

The proposed IOI City Mall in Putrajaya with 1.3

million sq ft NLA reported that it had secured two

major tenants to its mall. Scheduled for completion

in 2014, the mall is part of a mixed project which

also features an entertainment park and two office

towers, and a hotel to be added in 2015.

Looking forward, the retail sector is likely to

continue to grow moderately supported by relatively

cautious consumers’ spending and tourist arrivals.

With more retail space entering the market and

uncertainty in the global economy, in the next five

years, there will be a challenge to fill up the additional

retail space that will be completed.

Figure 6

Office net absorption and vacancy rate

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

Q1

09

Q2

09

Q3

09

Q4

09

Q1

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Q2

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Q3

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Q4

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Q1

11

Q2

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Q3

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Q4

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Q1

12

3456789101112131415%

Net absorption (LHS) Vacancy rate (RHS)

sq ft(000s)

Source: DTZ Research

Table 1

Opening of selected upcoming retail centres in Klang Valley

Name of development NLA (sq ft) Opening

Setia Alam Mall, Shah Alam 700,000 2012

Nu Sentral, Kuala Lumpur 700,000 201 3

KLIA2, KLIA 350,000 2013

IOI City Mall Putrajaya, Putrajaya 1,300,000 201 4

Source: DTZ Research

Prime rents stood at RM6.25 per sq ft per month,

unchanged from the last quarter, exhibiting resilience

despite weakening market conditions (Figure 7).

Major leasing activities noted were from oil and

gas giant Technip continuing their expansion with

97,000 sq ft at Wisma Dijaya, and Nomad Service

Office relocating their operations to Menara Prestige

from Etiqa Twin. Meanwhile, some of the existing

tenants in Petronas Tower 2 relocated to Petronas

Tower 3 to make way for the return of Tower 2 for

Petronas own occupation.

The quarter saw Multimedia Development

Corporation, the regulatory authority for the

multimedia industry, liberalising their guidelines for

the siting of MSC status companies by allowing such

companies to be located within areas designated as

“Cybercities” without necessarily being in a specific

MSC designated building. This provides flexibility to

such companies whilst landlords of properties within

such designated areas will benefit from this move

without putting additional capital investments to

upgrade them to the approved specifications.

As part of the development of the Greater Kuala

Lumpur Region under the Economic Transformation

Plan, the Government is likely to expedite the

implementation of the Kuala Lumpur International

Financial District in the near future. This will involve

the launching of a key landmark office tower. Whilst it

will be exciting for the market to see the emergence

of a rival office district to KLCC, it will ratchet up the

competitive pressure on rents by several notches at

a time when oversupply is a major concern.

The market is likely to see greater challenges

with slower economic growth and an anticipated

oversupply in the coming months, as the pressure to

find tenants gather more intensity.

Figure 7

Average prime office gross rents

01234567

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

RM per sq ft per month

Source: DTZ Research

GENERAL DISCLOSURE

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© DTZ April 2012

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