Better prospects for the Malaysian property market, but headwinds remain
The Full Movement Control Order (FMCO) has undoubtedly disrupted the country’s economic recovery plan. When it comes to financial figures, however, the impact of the second nationwide lockdown has not been as severe as expected.
According to the Department of Statistics Malaysia (DOSM), the country recorded 3.7% growth in gross domestic product (GDP) in the first nine months of 2021, compared to -6.3% a year ago. . The DOSM also forecasts GDP growth of 3% to 4% for 2021, largely attributable to the restrictive measures of phase 1 of the National Recovery Plan.
Meanwhile, the consumer confidence index in 3Q2021 rose to 101.7 from 64.3 in 2Q2021 and 98.9 in 1Q2021, showing the overall upbeat mood in the market. This is due to the improvement in finances and the recovery of confidence in employment.
The general optimism is also reflected in the performance of the real estate market.
According to the Property Market Review 2021/2022 report by Rahim & Co International Sdn Bhd, which was officially launched on January 27, in the first nine months of 2021, Malaysia recorded a total of 201,065 property transactions worth of RM98 billion, a slight decline of 1.8% YoY in volume. However, there was a notable 21.4% year-over-year increase in value.
Rahim & Co’s research director, Sulaiman Sahed, said that after the fall in real estate market transactions in 2020 (-9.9% in volume and -15.8% in value) compared to the pre-Covid environment of 2019, the first half of 2021 saw a significant rebound as the economy and market gradually adapted to a pandemic environment with a jump of 21% in volume and 32.1% in value. However, the overall performance was pulled down in 3Q2021, when the FMCO came into effect. Among others, the residential sector experienced the most significant slowdown in terms of transactions.
“[Residential property] transaction activity showed growth in the first half but slowed in the third quarter, leading to overall growth of 2.6% for the first nine months of the year. On the supply side, new launches in the primary market had plummeted as developers were still adapting and affected by the pandemic and the country’s lockdown measures,” Sulaiman said during the presentation of his speech at the launch of the report, adding that sporadic rapid sales were seen for homeowners and domestically focused markets.
It should also be noted that several states in Malaysia recorded encouraging performance in residential real estate transactions, such as Kuala Lumpur (+10.1%), Selangor (+11.5%), Penang (+18.8%) and Sabah (+8.4%). Overall, residential real estate transactions in Malaysia increased by 2.6% in the first nine months of 2021.
“The [residential] market recovery efforts were further supported by the extension of the HOC (Home Ownership Campaign) until the end of 2021, the exemption from RPGT (property gains tax) and the initiatives planned within the framework of the budget 2022. More comprehensive support was also provided by the economic stimulus introduced throughout the year which aimed to restore the livelihoods of Malaysians and revive the business sectors,” says Sulaiman.
More overhanging property
As of 3Q2021, there were 56,734 overhang residential units (including serviced apartments and small office/home office [SoHo] units) worth RM41.59 billion in Malaysia, the majority of which comprised high-rise dwellings.
“The overhanging units seen across all price segments means that the root cause is not just absolute property sales prices, but also size, psf price, type, location as well as preferences. and buyers’ personal considerations when making a buying decision,” says Sulaiman.
According to the report, residential properties priced between RM500,001 and RM700,000 are the category with the most unsold units in 3Q2021, with 14,061 units, or 24.8%. It should be noted that 83.2% of the properties in this category are high-rise residential buildings.
Meanwhile, properties priced between RM300,001 and RM500,000 came second, with a total of 12,229 units, or 21.6%. Similar to the category above, the majority (87.8%) of properties in this category are high-rise buildings.
Johor had the most overhanging units in 3Q2021, with 23,224 units worth RM19.29 billion, followed by Kuala Lumpur (8,955 units, worth RM7.94 billion), Selangor ( 6,970 units, worth RM4.82 billion) and Penang (5,023 units, worth RM4.12 billion).
Although the country’s overhang is down slightly quarter on quarter (quarterly) in 3Q2021, the total number of unsold homes (overhang, unsold under construction and unsold but not yet built), which stood at 205,217 units , is the highest since 2016.
“[One of the reasons is] purchase incentives have not had enough of an impact, as disposable income levels [remain low] and economic uncertainty persists. This presents a problem of completed units competing with new incoming units, and the longer a home remains unsold after completion, the less attractive it is to buyers,” says Sulaiman.
Citing the report on average house prices in capital cities by Rahim & Co, he says that the main current challenge for overhanging property is that income levels over the past year have fluctuated due to the pandemic, this which has compounded the persistent problem of housing affordability.
According to the report, it takes an average of 6.9 years for a household to save enough money to afford a property in Kuala Lumpur. In Penang, it takes 6.4 years; Johor, 5.8 years; and Selangor, 5.7.
Looking ahead, Rahim & Co expects residential property prices to undergo a correction and only reach moderate growth in the immediate future. The company is also urging the government to consider reviewing and revamping the HOC, which just ended in 2021, to focus more on the secondary market.
“The secondary residential market accounts for 70-80% of total real estate transactions in the country, and it will continue to dominate the market. The government should introduce something for the secondary market to help buyers make decisions faster, thereby moving the whole real estate market forward,” Sulaiman says.
Difficult commercial segment
On the other hand, commercial real estate sectors remain mostly under pressure, particularly in rental performance and rental levels, a trend which Rahim & Co predicts will continue in 2022 as incoming supply continues even though demand is still shaken by the pandemic.
According to the report, transactions for the office and retail segments in the first nine months of 2021 fell by 3.2% and 0.9% respectively year-on-year, where Kuala Lumpur was the biggest loser. . It saw the number of office transactions fall by 5.4% and retail by 0.4%.
“As the largest contributor to the national supply of purpose-built office space, the Klang Valley has seen its supply exceed 150 million square feet of total existing office space, with the completion of several new buildings. This has heightened the level of concern about the sustainability of such market capacity when [placed alongside] a pace of demand that has slowly declined over the years,” notes Sulaiman.
In 1H2021, the office occupancy rate in the Klang Valley was 72.1% after a further decline of 75.4% in 1H2020. He pointed out that at this rental level, the Klang Valley office market has a vacancy of 41.9 million square feet.
The next major purpose-built offices in the Klang Valley include Merdeka 118 (leasable area: 1.65 million square feet), The MET Corporate Tower (leasable area: 628,000 square feet), Kompleks Dayabumi Phase 3 (leasable area: 628,000 square feet) : 1.5 million square feet), Cititower (leasable area: 1.72 million square feet) and Pavilion Embassy Corporate Towers (leasable area: 720,000 square feet).
“Factors contributing to the difficult situation faced by office building owners include new work practices that focus more on remote working for social distancing purposes and remain relevant to the trend current demand from new and existing tenants in the face of a highly competitive supply market,” says Sulaiman.
He believes the market will take time to reach a new equilibrium, as demand still struggles to cope with uncertain economic conditions, while new supply maintains its pace to enter the market.
Additionally, the traditional purpose-built office segment also faces the challenge of the rise of coworking spaces.
New coworking spaces have multiplied in recent years. In November 2021, for example, Swiss-based International Workplace Group plc announced two new luxury flexible workspaces in Kuala Lumpur – Spaces Exchange 106 and Regus Bukit Bintang City Center (BBCC).
Located on the 23rd floor of The Exchange 106 at Tun Razak Exchange, Space Exchange 106 offers 38,309 square feet of workplace solutions with 360-degree panoramic views of the city skyline. Meanwhile, Regus Bukit Bintang City Center is located in The Stride at BBCC and will officially launch on 1Q2022.
Similar difficult sentiment and conditions were also seen for the retail sector, which had been heavily impacted by the pandemic due to significant loss of foot traffic due to strict local MCOs and international border controls. The national occupancy rate decreased by 2% year-on-year to stand at 76.6% in 1H2021. Of the existing retail complex space in the Klang Valley, 14.7 million square feet out of a total of 73.6 million square feet was vacant.
Asked about the outlook for the retail sector, Sulaiman says there may have been several more closures of retail brand outlets in 2021, but new openings and expansions have also been seen, signaling a resilient market that adapts to a new trading environment.
“While the Covid-19 containment measures in 2021 had been a drag at certain times of the year, 2022 should have a better growth trajectory as high vaccination rates allow the physical movement of visitors. Thus, seasonal sales periods are considered [as having] better prospects. And while e-commerce has established itself as the new way to shop, brick-and-mortar malls and outlets have retained their relevance, as evidenced by the return of footfall during [looser] movement restrictions.
He also believes that at present, industrial properties will continue to attract more attention than others.
“Considered as one of the most stable sectors in a pandemic environment, it is particularly so thanks to the logistics, warehousing and healthcare segments. This is further boosted by the overwhelming demand for e-commerce transactions, which will continue to command attention in the future.
“Given the relative slower pace of incoming supply, especially for managed industrial parks with custom-built arrangements, investment in industrial property will be keenly watched this year,” he concludes.