PROPERTY INSIGHTS. Market Overview. Weaker consumer sentiment impacts retail sector. Citigold Private Client. Malaysia Quarter 1, 2014

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Citigold Private Client PROPERTY INSIGHTS Malaysia Quarter 1, Weaker consumer sentiment impacts retail sector Market Overview Bank Negara Malaysia (BNM) has widened its economic growth forecast from

1 Citigold Private Client PROPERTY INSIGHTS Malaysia Quarter 1, Weaker consumer sentiment impacts retail sector Market Overview Bank Negara Malaysia (BNM) has widened its economic growth forecast from 5%-5.5% to 4.5%-5.5% to reflect heightened global uncertainties. BNM maintained the Overnight Policy Rate (OPR) at 3.0% as global economic and financial uncertainties remain a risk to Malaysia s economic growth. Following an upward adjustment in the electricity tariff with effect from January, headline inflation increased to 3.4% in January compared to 3.2% in December Inflation in is expected at around 3-4% although the inflation rate would be closer to 4% if government subsidies for sugar, fuel and energy are reduced further. Overall, the office sector witnessed very minimal activity in terms of new supply while rental and capital values were stable in Q1 (Figure 1). With the huge pipeline of supply up till 2018, the market will continue to see challenges ahead as it is not certain if projected future demand will be able to absorb the amount of new supply. Figure 1 Prime Office Rental Index (Q1 2011=100) Q4 05 Q4 06 Q4 07 Q4 08 Q4 09 Q4 10 Q4 11 Q4 14 Q4 15 Despite the large pipeline supply of condominium units in, many investors are expected to continue to invest in the residential segment this year instead of next year. This is to avoid paying higher prices if developers were to pass on to consumers the increase in construction costs due to the introduction of the Goods and Services Tax (GST) in April The retail sector faces challenges from weakening consumer confidence and the pipeline supply of 5.0 million sq ft of new space. Consumers are tightening their spending while retailers are cautious on their expansion plans and operational expenses. Nevertheless, major international retailers are still looking to enter the Malaysian retail market.

2 Trends & Updates Economic Overview BNM more cautious about the economy BNM has widened its economic growth forecast from 5%-5.5% to 4.5%-5.5% to reflect heightened global uncertainties. The key risks include the continued fiscal uncertainty in the advanced economies, and risks from the global monetary policy normalisation that BNM expects to take place. The risk could potentially destabilise capital flows, in particular to emerging markets, which would result in volatility in the financial markets. According to BNM, if this slowdown were to happen, Malaysia s economic growth would be close to where it was in The Malaysian economy grew 4.7% in 2013, with an expansion of 5.1% year-on-year (y-o-y) in Q4 (Figure 2). Services and manufacturing spearheaded the performance, with all sectors posting positive growth except the mining and quarrying sectors. As an indication of weakened sentiment, the business confidence index slid further in Q to 92 points from 99 points in the previous quarter as sales performance deteriorated against the combination of sluggish domestic orders and slower export orders. OPR maintained for stability BNM maintained the OPR at 3.0% as global economic and financial uncertainties remain a risk to Malaysia s economic growth. However, this is expected to increase by the second half of this year. Headline inflation grows over time Headline inflation, as measured by the annual percentage change in the Consumer Price Index (CPI), increased to 3.4% in January from 3.2% in December This increase was mainly due to higher inflation in the housing, water, electricity, gas and other fuels category, as prices rose 3.2% in January compared to the 2.4% growth in December 2013, following an upward adjustment in the electricity tariff that took effect in January. Figure 2 GDP growth (y-o-y) and unemployment rate 8% 6% 4% 2% 0% Q4 11 Q1 12 Q2 12 Q3 12 Q1 13 Q2 13 Q3 13 GDP growth (y-o-y) Unemployment rate Source : Bank Negara Malaysia, Department of Statistics Malaysia, DTZ Research For, inflation is forecasted in the range of 3%-4%, higher than the historical average of 3%. The inflation rate would be closer to 4% if the government reduces further the subsidies on sugar, fuel and energy. Consumer confidence falls significantly in Q The Malaysian Institute of Economic Research s (MIER) Q Consumer Sentiments Index (CSI) fell below the 100-point threshold for the first time in almost five years as consumers became increasingly cautious with their spending. The CSI fell to 82.4 points due to inflationary pressures as well as concerns over current economic conditions. Consumer spending is expected to remain modest, if not slower, in the coming months. The negative sentiment among consumers was further fuelled by low household income and BNM s moves to rein in rising household debt which had reached a historic high of 86% of GDP at the end of Malaysian Ringgit depreciated against the USD The Malaysian Ringgit and other regional currencies depreciated against the USD following concerns surrounding regional economic growth prospects, affecting demand for regional financial assets. The introduction of the tapering in quantitative easing measures by the US Federal Reserve also contributed to lower investor interest in regional financial markets.

3 Residential Insignificant new supply in Q1 but pipeline throughout remains high Only one condominium with 126 units, namely Sastra U-Thant, located within the exclusive residential enclave of U-Thant, was completed in Q1. This was a significant drop of 91% in terms of new supply from the same period last year. However, with an additional 7,684 condominium units expected to be completed in the remaining quarters, a total of 7,810 units will be completed in (Figure 3). This is a considerably greater volume of supply compared to the 3,971 units completed in The larger new supply will place downward pressure on rental values, especially in the city centre. Amongst the major developments expected to be completed this year are The Elements in Jalan Ampang (1,040 units) and Camellia Service Suites in Bangsar South (720 units). Stable high-end condominium market In Q1, the high-end condominium market in Kuala Lumpur was relatively stable. The overall average price increased marginally by 1.0% q-o-q to RM754 per sq ft from RM746 per sq ft in Q Average rents in Q1 remained relatively stable at RM3.55 per sq ft per month, just slightly lower than the RM3.56 per sq ft per month in the previous quarter (Figure 4). lines as well as an increase in the price threshold to RM1.0m for foreign ownership. Notwithstanding, it is believed that many investors remain likely to invest in the residential segment this year to avoid the introduction of GST in Although property purchases are exempted from GST, the perception is that developers will transfer to buyers the extra costs of construction incurred as a result of GST. Furthermore, developers are likely to experience a rise in construction costs fuelled by higher oil prices and an increase in material and labour costs, which they will be seeking to offset. Figure 3 Future supply of high-end condominiums in Kuala Lumpur 7,000 6,000 5,000 4,000 3,000 2,000 1, Post 2016 City centre Outside city centre The sluggish momentum in the housing market extended from the previous quarter into Q1. There were no new launches in Q1, except for the soft launch of Vortex@KLCC by Monoland, which was reported to be sold within two hours of its launch. This was due to the competitive launch price, indicated to be about RM 1,000 per sq ft. Despite new cooling measures, buyers could enter market this year to avoid higher prices next year The market is expected to weaken due to the cooling measures that were announced during last year s budget. These measures include raising the Real Property Gains Tax, removal of the Developer Interest Bearing Scheme, stricter bank lending guide- Figure 4 Rental and price indices of high-end condominiums in Kuala Lumpur (Q1 2011=100) Q1 12 Q2 12 Q3 12 Capital value Q1 13 Q2 13 Q3 13 Rent Q1 14

4 Retail Consumer confidence at its lowest level in five years Consumer confidence has fallen to its lowest level in five years, to 82.4 points in Q4 2013, which is below the 100-point threshold for the first time since the Global Financial Crisis. The CSI revealed that Malaysian consumers are becoming more prudent and delaying expenditure on big-ticket items following rising prices due to the fiscal consolidation measures by the government. The fall in consumer confidence will be exacerbated further by the implementation of a GST in April 2015 and expectations of more subsidy cuts. Growing concern about future prices has led Malaysian consumers to save more and change their spending habits to tighten household expenses. Better retail sales expected in Q1 According to Retail Group Malaysia (RGM), Malaysia s retail industry is expected to register better performance of 4.8% in Q1, compared to 3.9% in the previous quarter, contributed by the Chinese New Year celebrations. For Q2, retail sales are expected to expand by 5% despite growing concern about rising prices. In Q3, RGM anticipates that retail sales will grow 6.3%, in tandem with the Hari Raya celebrations. For the whole of, RGM forecasts retail sales to grow 6%, in conjunction with the tourism campaign Visit Malaysia. This is in comparison to the 4.5% growth in The entry of these new malls will see a tougher operating environment for mall operators and downward pressure on rents amidst competition to attract retailers, particularly in the suburban neighbourhoods where most of the new malls are located. Meanwhile, on the back of the increasing cost of doing business and the depreciation in the Malaysian ringgit, retailers were also cautious on their expansion plans and operational expenses. centre selling genuine IT products and electronic gadgets, to a Jakel Department Store (Figure 5 and Table 1). Favourable ground for international retailers Despite weakening consumer confidence, the longer term outlook for the retail market remained attractive to major international departmental store and fashion retailers. Galeries Lafayette, the leading French department store and Japan-based Takashimaya Co Ltd were looking to enter the Malaysian market. Their entry would enliven the Malaysian retail industry due to the variety of brands offered and their potential establishment as anchor tenants, supported by their up-market brand names. Figure 5 Retail new supply (NLA) in Kuala Lumpur, sq ft (million) 3 2 New malls pose challenges 1 The retail market remained stable in Q1, with the stock in Kuala Lumpur unchanged at 22.9 million sq ft and occupancy rate at 93.1%. However, several major malls in both the city and suburban areas will be Completed Supply New Supply 2016 completed in the coming months, adding a total of about 5.0 million sq ft of retail space (Figure 5 and Table 1).

5 Hit on tourism In the wake of the recent MH370 crisis, the tourism industry saw a sharp decline of 20%-40% or some 400,000 to 800,000 of mainland Chinese visitors. A potential loss of RM2bn-RM4bn in tourism revenue is expected as mainland Chinese tourists account for about 12% of the tourism market and is the third largest source of visitors to Malaysia. However, despite this loss in tourism revenue, it is expected that the decline will not have any significant effect on the retail market. Table 1 Selected upcoming retail malls in Klang Valley Name of Development IOI City Mall, Putrajaya Nu Sentral, KL Sentral Atria Shopping Mall, Petaling Jaya Sunway Velocity, Kuala Lumpur Quill City Mall, Kuala Lumpur Central Plaza@i-City, Shah Alam Est area (NLA, sq ft) 1,300, , , , ,000 1,500,000 Est year of completion Office Minimal new supply in Q1 There was additional supply of 273,000 sq ft in Q1 with the completion of the Grade B office building The Crest on Jalan Sultan Ismail. With the addition of this project, office stock in Kuala Lumpur increased 0.4% quarter-on-quarter (q-o-q) to 69.8 million sq ft in Q1, compared to 69.5 million sq ft in the previous quarter. On a y-o-y basis, office stock in Q1 increased 2.5%. There is a substantial office supply pipeline of approximately 16.3 million sq ft from Q2 to Nearly 50% of this future supply is expected to be completed in the remainder of and in 2015, with 3.7 million sq ft and 5.5 million sq ft respectively (Figure 6). Figure 6 Office development pipeline, sq ft (million) Q2-Q Figure 7 Prime office rental index Stable rental and capital values Average prime office rents in Kuala Lumpur have remained stable for the fifth consecutive quarter at (Q1 2011=100) RM6.13 per sq ft per month. The top-tier office 90 buildings also witnessed no variation in rents, which stood at RM7.76 per sq ft per month for the last six quarters (Figure 7). Likewise, average capital values of prime office Q4 05 Q4 06 Q4 07 Q4 08 Q4 09 Q4 10 Q4 11 Q4 14 Q4 15 buildings remained stagnant at RM 838 per sq ft since Q

6 The overall office occupancy rate also remained unchanged at 85% in Q1, with net quarterly absorption of 232,050 sq ft reflecting weak office market sentiment (Figure 8). With low net absorption and more supply expected to be completed, the vacancy rate is expected to increase further in the coming months. Figure 8 Office net absorption, sq ft (million) and vacancy rate % % % Challenges ahead Considering the challenging market conditions and oversupply in the market, there is increasing competition amongst office landlords to secure tenants, resulting in the lack of rental and capital value growth. With more supply to be completed in and 2015, the pressure to secure a high occupancy rate at new office buildings is expected to persist in the coming years, thereby placing downward pressure on rents Q1 12 Q2 12 Q3 12 Q1 13 Net absorption (LHS) Q2 13 Q3 13 Remarks : LHS : Left Hand Side Axis Reading (sq ft, million) RHS : Right Hand Side Axis Reading (%) Q1 14 Vacancy rate (RHS) 12% 10%

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