JUST last week, Perda City Mall in Bukit Mertajam, Penang, suddenly shut down after a mere 18 months in business. The mall’s operator gave tenants a day’s notice in writing and no explanation, according to people familiar with the matter. Last month, Sime Darby Property Bhd and CapitaLand Malls Asia’s joint venture — the RM670 million Melawati Mall in Kuala Lumpur — postponed its opening from the year’s end to 2Q2017. The delay was due to “design planning and current headwinds” in the economy.
Recall too that last year, two malls in the Klang Valley — SStwo Mall in Selangor and Bukit Bintang Plaza in Kuala Lumpur — closed down for redevelopment while the massive 2.3 million sq ft net lettable area (NLA) Empire City Mall in Damansara Perdana, Selangor, announced that it would delay its opening from end-2015 to next month.
Are these signs of the times that are to come? Perhaps.
The shopping mall business has come under pressure and undergone substantial change in recent times due to a confluence of external factors. They include the much-talked-about oversupply of retail space, lower tourist arrivals, weakness in domestic retail spend, lacklustre consumer sentiment, intense competition for tenants and changing consumer preferences and behaviour.
Data from the National Property Information Centre (Napic) reveals that Malaysia had 148.85 million sq ft of existing retail space with another 16.2 million sq ft incoming and a further 11.08 million sq ft being planned as at end-2015.
According to Henry Butcher Malaysia Sdn Bhd, the Klang Valley (covering Kuala Lumpur, Selangor and Putrajaya) had 241 shopping centres with a total space of 64.1 million sq ft, with an average occupancy of 80.4% in the same period.
The saturation is mostly seen in certain locations in the Klang Valley, particularly the Damansara area. Malls in the Damansara area include 1 Utama Shopping Centre, Glo Damansara and Atria Shopping Gallery, with a few more to open in the coming months to next year, such as Empire City Mall, the Starling and Damansara City Mall.
What’s more, shopping malls are on the front line of confronting weak consumer sentiment and lower retail spend due to macroeconomic pressures such as the weaker ringgit, which translates into higher costs of goods and services.
The Malaysian retail industry reported a 4.4% year-on-year drop in sales in 1Q2016, compared with 4.6% growth in 1Q2015, which was buoyed by pre-Goods and Services Tax buying, according to survey data from the Retail Group Malaysia. This prompted it to revise downwards its sales growth projection to 3.5% from the earlier 4% for 2016.
What does this all mean for malls?
Most retail consultants say they cannot remember a more challenging time for shopping malls in the country. Among them are Savills Malaysia managing director Allan Soo, who recalls that the difficult times during 1997/98 Asian financial crisis were real but temporary for the retail industry.
“After 1998, things were back up pretty fast,” he says. Recall that some major malls opened almost immediately after the crisis, including Suria KLCC (opened in May 1998) and Mid Valley Megamall (November 1999).
“This time is the toughest. There are more variables, more competition and real oversupply issues. It’s going to be much harder work,” adds Soo.
Industry experts say these dynamics are unlikely to significantly dent the business of well-managed, established malls in locations where there is already a big catchment. The oft-cited retail giants include 1 Utama, Mid Valley Megamall, Suria KLCC, Pavilion Kuala Lumpur and Sunway Pyramid.
Suria KLCC CEO Andrew Brien concedes that consumer sentiment has been weaker across Asia. To mitigate that, he says Suria KLCC is leveraging its fundamental strength, chiefly its location, access to customers, footfall and market understanding.
“Our strategy is consumer-centric, by continuously understanding and actively responding to our consumers and retail partners,” says Brien.
Relatively insulated too are the well-managed shopping malls in tier-two cities outside the Klang Valley, such as those in Perak, Penang and Johor.
Nevertheless, newcomers to the mall game will find it increasingly tough to attract shoppers and preferred tenants.
Power dynamic shift from landlords
What’s for sure is that the good old days of “build and they will come” are long gone and mall owners can no longer sit quietly and wait to collect rent.
Sunway Real Estate Investment Trust CEO Datuk Jeffrey Ng says that it is now a tenant’s market and landlords have to play a supportive role to tenants, especially when the economy proves challenging.
This means the landlord is no longer a mere rent collector but an active business partner who has to help drive business. Landlords no have to play their part in running lots of on-ground activities to attract consumers to the mall and directly assisting tenants in coordinating sales and promotional activities.
A good asset manager is an active manager who knows how to add value. “Good asset managers spend on improving tenant mix and bringing in the traffic, not just cosmetic enhancements,” says a retail consultant who declined to be named.
Given the growing supply of retail malls in Malaysia, Sunway REIT’s Ng points out that tenancy mix and offerings are becoming more similar. This could lead to market share dilution for existing players while the newer ones that cannot differentiate themselves may find it hard to sustain footfall after the novelty wears off.
Mall operators and retailers will have to work harder to attract shoppers and reach out to previously untapped or under-served segments.
“Many shopping centre owners had to offer rental rebates in order to retain tenants while many new shopping centre managers needed to extend rent-free periods for tenants as it took longer to draw shoppers to their centres,” Henry Butcher Malaysia says in a report.
Compared with decades ago, the rental structure has undergone changes in recent years. These days, a tenant can be charged different modes of rent. It may be a fixed amount along with service charges, base rental plus a percentage of a tenant’s turnover, or base rental or a percentage of turnover, whichever is higher.
“Today, the rental structure goes by negotiation between the landlord and tenant. Who needs who more? Do you need a particular preferred tenant to attract customers to your mall? Or does a tenant absolutely need to open in your mall?” says retail consultant Richard Chan of RCMC Sdn Bhd.
It is not necessarily true that a Grade A tenant — also known as a crowd-puller — pays the highest rent. Most times, preferred tenants pay preferred rental rates and get preferential terms. Strong tenants also have the upper hand in negotiating competitive terms against weaker landlords. For example, a major bookstore chain can demand to be the only bookshop in the mall.
Mall operators say some tenants, especially the preferred mini anchors, are also beginning to ask for capital expenditure, where the landlord has to pay for renovations.
Going by turnover rental, the shopping mall operator is indeed a business partner of sorts for tenants and is incentivised to work harder to drive business for the tenants. But it cuts both ways as the landlord takes on more risks, because it accepts the potential volatilities of retail sales, says an industry player.
According to Henry Butcher Malaysia’s data, occupancy and average rental rates for Kuala Lumpur and Selangor malls somewhat suffered last year.
Average monthly rental rates, excluding the anchor tenants’, fell 7.2% to RM13.03 psf to RM12.09 psf in Kuala Lumpur but held steady at RM10.12 in Selangor.
Average occupancy for Kuala Lumpur malls fell to 82% from 83.2% in 2014 while Selangor malls saw a decline to 79% from 81.7%.
According to Sunway REIT’s Ng, leading retail malls may not see lower rental rates despite the challenging operating landscape.
“Established malls with strong track records should remain resilient and profitable, albeit growing at a slower pace. The challenge lies in the newer malls where some are offering extensive incentives to boost occupancy, and supporting tenants will need a longer gestation period,” he says.
According to RCMC’s Chan, yields of 6% to 8% is considered decent, given the competitiveness of the industry compared with the good days where mall owners can expect yields of 15% to 20% or more.
Rent is certainly the bulk of a mall owner’s income, but increasingly, ancillary income from mall management is becoming important too. Apart from floor rental space, malls can make money from things like service charge, utility management, car park management, kiosk and pushcart rentals, promotional and al fresco areas as well as advertising and signages. “It can be as high as 20% to 30% of total income if you manage it well,” says Chan.
Not all doom and gloom
Despite the more challenging times, Savills Malaysia’s Soo reminds that things are not all doom and gloom. Sure, it is becoming more difficult to create another giant like Suria KLCC or Mid Valley Megamall.
“There are opportunities as well. Everyone is trying to refine their game and strategy,” says Soo.
According to him, despite the challenges, there are still opportunities to build and operate malls profitably, provided that they are well planned from the start and the management is competent.
In an intensely competitive area, what becomes extremely important is in the planning of the mall and conceptualising a differentiating factor.
“Assuming [in a certain area], all the external factors are the same, then internally, you have to be able to say ‘I am the biggest’ or ‘I am the best’,” Soo says.
Retail consultants say the key to developing a successful shopping mall is to go back to basics and understand the needs and wants of a mall’s primary catchment area. This means understanding the demographics, spending power and lifestyle demands.
“Shopping is no longer about going somewhere to buy something. It is all about the experience,” says Soo.
Retail is hardly a static environment and consumer preferences are constantly evolving due to a number of factors, including higher levels of education and income, aspiration, lifestyle preferences, the prevalence of e-commerce and social media-driven consumption behaviours.
Additionally, technology can be a key driver of traffic and consequently, consumer spend. Social media platforms are becoming more important in attracting and retaining customers. Data analytics, too, is a useful tool for mall managers.
According to Soo, the mass rapid transit will be another catalyst for shopping malls as it will help improve accessibility for locations along or near the MRT line. “You can see that effect throughout the world. Every time an MRT line is built, sales improve or a mall makes a comeback. Malls are driven by footfall; if you get more footfall, you get more business.”
There are still opportunities for shopping malls in new townships or tier-two cities across the country where there is pent-up demand for retail experiences.
One example of a successful mall in a tier-two town is Kluang Mall in Johor, which is owned and operated by property developer Majupadu Development Sdn Bhd.
Despite the challenges in 2015, Majupadu executive director Tey Fui Kien says, the mall saw a record 5.7 million visitors, with an average 10% y-o-y increase in traffic.
She attributes this surge in visitors to the mall’s four new fast fashion mini anchors — H&M, Uniqlo, Cotton On and Brands Outlet — which came in at the end of last year.
“Tenant sales have increased across the board with a number of retailers recording double-digit growth,” she says.
Kluang Mall, however, is not facing the same competitive pressures as malls in the Klang Valley. There are no large malls that directly compete with it in central Johor. Its primary catchment has 314,000 people within the Kluang District and a larger catchment of 700,000 within a 45-minute drive.
“A lot of people now shop at Kluang Mall instead of driving 90 minutes to Johor Baru. It reinforces our point that retail is largely driven by the local catchment and demographics,” says Tey.
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