Klang Valley retail occupancy rate at 5-year low

This article first appeared in The Edge Financial Daily, on December 6, 2017.
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KUALA LUMPUR: The average occupancy rate of retail space in the Klang Valley, which has been falling marginally over the last six years, is now hovering at a five-year low of 86%, said real estate services firm Nawawi Tie Leung Sdn Bhd (NTL).

Despite this, a new supply of retail properties continues to be strong and is expected to remain so over the next three years “with no loss of enthusiasm commercially by developers to build more”, NTL said in a report released yesterday

“As of 3Q17 (third quarter of 2017), total retail stock in [the] Klang Valley stood at 61 million sq ft and estimated pipeline supply for those under construction is currently estimated at 16 million sq ft, comprising 23 projects,” the firm said. “This implies an overall growth of 26% to current stock.”

NTL said competitive demand from real estate investors has continued to drive yield downwards to a current state whereby yield for prime retail and commercial assets are at parity.

It added that while the traditional yield gap to reflect different risk profile between office and retail properties has “narrowed or disappeared altogether”, it does not provide more diversity of tenants to choose from. 

“The market share is controlled by limited key players in several subsegments such as hypermarket, supermarket and cinema, and there have been constant mergers and consolidations.

“In recent years, we have witnessed a mall closure in Petaling Jaya, and increasing occupancy stress, low footfall and retailers’ turnover, in some of the newer [and older] malls, matched by slower or worse, no rental growth and [an] increasing need to provide for tenants’ incentives,” said NTL.

The firm also argued that the retail sector has not benefited from new trends such as urban sprawl, looser planning control, and the rise of the automobile which contributed to the rise of neighbourhood and regional suburban malls.

“Some of the newer malls have been struggling to establish market share that is getting more fragmentary and diminishing. “Construction of [the] mass rapid transit network has spurred a wave of transit-oriented developments, and more retail space supply can be expected along the train ride, resulting in overlapping catchments and intensified competition,” it added.

With the rise of e-commerce, experiential retail and a shift towards an ageing population, NTL suggested that real estate investors may need to re-examine their assumptions on what is “a reasonable entry return” on the retail property segment.

“It is and will continue to be very much impacted by the ongoing structural changes in the market, and not a normal supply-demand disequilibrium, that in the past could be resolved through the passage of time, rising affluence and population,” the firm said.