SHOPPING malls have been the assets en vogue of late. Data from the National Property Information Centre (Napic) shows a spike in new planned supply of retail space from 2012.
New planned supply of mall space doubled from 1.6 million sq ft in 2012 to 3.2 million sq ft in 2013. Then came the surge to 10.23 million sq ft in 2014, before halving to about five million sq ft in 2015, likely due to economic uncertainties.
In recent years, both property developers and construction companies have been coveting shopping malls.
Listed companies that currently own malls include Mah Sing Bhd (Star Avenue Lifestyle Mall in Sungai Buloh), UEM Sunrise Bhd (Publika Shopping Gallery in Solaris Dutamas, KL), Glomac Bhd (Glo Damansara, KL), OSK Holdings Bhd (Atria Shopping Gallery, Damansara Jaya), JAKS Resources Bhd (The Evolve Concept Mall, Ara Damansara) and PPB Group Bhd (Cheras Leisure Mall, KL).
Then, there are the privately held property and construction firms that own shopping malls: First Nationwide Group (1 Utama Shopping Centre in Bandar Utama, Selangor), Mammoth Empire Holdings Sdn Bhd (Empire Shopping Gallery in Subang Jaya and developing the Empire City Mall in Damansara Perdana), See Hoy Chan Sdn Bhd (developing The Starling in Damansara Uptown) … and the list goes on.
Industry observers say this desire to own shopping malls is driven by the realisation that recurring income from retail assets is a good thing to have, especially when property development or construction earnings are impacted in a downturn.
The caveat, however, is that the bigger property players may not see meaningful contribution to their earnings from shopping malls; their revenue base may be so large that the income from one or two malls may be relatively small. Furthermore, some of the mall assets are still in the early years of operations.
Costly land also means that property developers are likely to push for high plot ratios on a relatively small plot to maximise returns on development.
Many property developers build shopping malls as part of integrated developments. For example, Eco World Development Group Bhd’s joint-venture Bukit Bintang City Centre, which has a gross development value of RM8 billion, boasts a lifestyle mall to complement its office towers, serviced residences and hotel.
I-Bhd, meanwhile, is constructing a one million sq ft NLA shopping centre at a gross development cost of RM799 million as part of its Central i-City project.
Tropicana Corp Bhd’s three projects also feature malls, namely in its integrated development Tropicana Gardens, the Tropicana Metropark township in Subang Jaya and the Tropicana Danga Bay development in Johor.Tropicana used to own Tropicana City Mall but sold it along with the Tropicana City Office Tower to CapitaLand Malaysia Mall Trust for RM540 million cash in 2015.
The general thinking seems to be that if there are high-rise serviced apartments, hotels and offices, there must be demand for a mall.
But Savills Malaysia managing director Allan Soo says it is not a good idea to just rely on the population of an integrated development to sustain a mall, unless it is sufficiently large, like a township or an urban centre.
“You can’t support a mall with 1,000 people living in a condominium. You need a whole population. It’s about the 5, 10 and 15-minute-drive catchment areas.
“It is not that having apartments there is no good; it’s a good thing. But it’s also about the amount of traffic that could potentially come. The whole place has to be an urban centre,,” he adds.
According to Soo, the first thing retail consultants do before planning a mall is to do an assessment to understand how well a particular market can support a mall.
Broadly speaking, a 300,000 sq ft to 500,000 sq ft mall needs a minimum market of 200,000 to 300,000 people. A larger mall will have to be in the vicinity of much larger primary and secondary catchment areas.
Apart from population size, income levels are also an important gauge of a key market’s spending power and habits. “You want a primary income level of at least RM5,000 a month household average because if it is below that, it is hard to do anything that is competitive,” Soo says.
He adds that the next thing to evaluate is how well retailers are doing in the vicinity of the proposed mall. “If all the retailers are not doing well, then it is hard for you to justify building a mall unless you know there is potential or maybe the retailers there are not doing the business properly.
“For example, if you discover that the retailers can make roughly RM200 psf turnover a month, and if you work backwards, you can do RM15 or RM20 psf on rent, then you know there is capacity for a mall. Then you can work backwards and size the mall, the tenant base, the positioning, everything.”
With the property market in a prolonged slowdown, can retail assets be the buffer?
Not really, say the experts.
One retail consultant laments, “Sure, a lot of developers want to own malls. But a lot of them are used to the ‘build-to-sell’ mode as opposed to build-and-lease, which is the mall business. This is a very different game.”
The shopping mall business in Malaysia has become increasingly challenging over the years, according to industry veterans. This is due to a combination of factors, including the rising cost of construction and operations coinciding with pressures on rental and occupancy rates.
Soo, an experienced retail consultant, points out that asset yield-on-cost is facing pressure because total development cost, particularly land and construction cost, has outpaced rental growth.
“In the past, costs didn’t rise so fast and rents were still strong. There was no oversupply; a bit of saturation in some areas but not so hard. Initially, yield on cost was high, in the high teens. Today, you’ll be lucky to get about 11% in the first year of operation, assuming full occupancy,” he says.
It generally takes some time for new malls to start charging rank rent or the highest level of rent possible for a certain area. There is typically a 20% to 30% discount to an area’s rank rent.
Secondly, says Soo, it is getting increasingly difficult to get a new mall leased up to over 80% when it opens its doors. It takes another year or so to get the mall up to full occupancy.
Already, there are signs that recurring income from the retail segment cannot be taken for granted.
Take KSL Holdings Bhd, which owns three investment properties — KSL City Mall and KSL Resort hotel in Johor Baru as well as KSL City Mall in Klang — that contributed about 23% to total group revenue in FY2015 ended Dec 31, 2015.
In its 1Q2016 ended March 31, KSL’s property investment earnings took a slight hit with pre-tax profit for the segment falling 9.65% to RM20.8 million despite revenue rising 1.44% to RM37.29 million.
In FY2015, revenue fell 14.5% year on year to RM686.1 million while net profit fell 22.2% to RM266.05 million due to lower property demand.
Nevertheless, KSL pointed out that while property investment revenue fell 2.1% to RM155 million, the segment still posted its best results last year since the opening of KSL City Mall and KSL Resort in 2010.
“Despite the prevailing mixed sentiments in the property sector, we believe our business model of having both development revenue and recurring income is resilient in facing any economic challenge,” KSL chairman Ku Hwa Seng says in the company’s 2015 annual report. — By Chua Sue-Ann
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.