Malls in secondary towns faring better than those in major cities

This article first appeared in The Edge Malaysia Weekly, on January 18, 2021 - January 24, 2021.
Central Square in Kedah is one of  four malls that Hektar REIT operates in secondary towns (Photo by Hektar)

Central Square in Kedah is one of four malls that Hektar REIT operates in secondary towns (Photo by Hektar)

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WHILE malls in the CBD and major towns have been struggling for the greater part of 2020, it appears that malls in secondary towns — depending on location, target market and competition — are faring somewhat better in terms of footfall, tenancy or even overall performance.

Many of them also have the advantage of little to no competition and are less reliant on tourists when compared with Klang Valley malls or those in tourist zones.

“Shopping malls in secondary towns fare slightly better than those in CBDs, with some managing to achieve 70% footfall (compared with pre-MCO levels last March) just before the Conditional MCO (CMCO) was again imposed on Nov 9, when it fell to 50%,” Malaysia Shopping Mall Association (PPK) president Teo Chiang Kok tells The Edge.

He says malls in the secondary cities have experienced less negative impact because there are fewer malls in these localities and those within a residential zone tend to be the primary shopping destination.

In contrast, the Klang Valley — from which 60% of the country's total retail sales are derived — saw malls in the CBD lose weekday office crowds as more people worked from home. The absence of tourists compounded the situation, as did a limit on the number of people allowed to travel in a car.

Hektar Real Estate Investment Trust (Hektar REIT) is an example of a player with a geographically diversified mall portfolio. It operates four malls in secondary towns — Wetex Parade and Segamat Central in Johor; and Central Square and Kulim Central in Kedah — as well Subang Parade in the Klang Valley and Mahkota Parade in the tourist state of Melaka.

Asked about the malls’ performance, Hektar Asset Management Sdn Bhd executive director and CEO Datuk Hisham Othman says, “No one has been spared from Covid-19 and the lockdown. Being geo­graphically diversified and not relying on tourist traffic is definitely a plus point for our malls in secondary towns, the exception being Melaka (Mahkota Parade).

“Being the only mall or dominant mall serving a particular area is also a plus point, as seen in a few of our malls,” he says, adding that this has also helped cushion the overall effect on occupancy rates of the REIT’s portfolio.


Hisham: Being geo­graphically diversified and not relying on tourist traffic is definitely a plus point for our malls in secondary towns, the exception being Melaka

While shopper traffic fell, the impact on footfall at the out-of-town malls was not as severe as in the Klang Valley, he says. In fact, during the Recovery MCO, Hektar REIT’s secondary town malls saw an increase in visitor footfall to almost 80% or more, compared with the pre-Covid period.

On the other hand, in the Klang Valley, when the CMCO was reinstated across several states because of the increasing number of cases, fewer people travelled for leisure. At the time, shoppers also turned cautious and stayed away from malls when Covid-19 cases emerged at some Klang Valley malls.

“Traditionally, our malls in secondary towns have had busy traffic and repeat shoppers, as most of them are the only malls in town,” Hisham says, citing the examples of Wetex Parade, Kulim Central and Segamat Central. For the locals in these towns, the mall is still the main and only place for meeting friends and meeting a variety of family needs in an enclosed comfortable environment.

With the exception of Mahkota Parade, Hektar REIT’s portfolio of malls serves the local communities and is not dependent on tourist traffic, which has been severely affected.

On the sales achieved by the tenants, Hisham says, “The performance of our tenants in secondary towns is much better and this is again attributable to less competition locally.” Sales in 2020 were significantly lower, though.

Nevertheless, Hektar REIT is optimistic of a recovery in 2021. “There is a firm pledge by our government to begin mass vaccination in the first half of 2021 or earlier, with countries such as the UK and the US having announced successful vaccines and having started their vaccine rollout programmes,” Hisham says.

For now, Hektar REIT is working on ensuring its overall occupancy rate holds firm at 88.5% and to arrest any decline. Hisham says several tenants have requested for an early termination of their tenancy, owing to the challenging retail environment. Where possible, Hektar REIT is providing rental assistance to eligible tenants and helping them boost sales through marketing promotions.

“We still continue to see some interest from retailers even during these trying times, but the number of renewals and entry of new tenants have been somewhat subdued in the third quarter [July to September]. We are expecting more interest from new tenants and hopefully positive reversions in 2021. “

In mid-September, Village Grocer opened a 25,000 sq ft NLA store in Subang Parade. Hektar REIT then started to experience an increase in traffic during the CMCO, following the opening of the upscale grocer as shoppers prioritised shopping for groceries.

Meanwhile, the REIT is enjoying better psf and monthly rental revenue in the Klang Valley, owing to the spending power of the mall’s catchment market. In the financial year ended Dec 31, 2019, Subang Parade and Mahkota Parade contributed a combined 62% to total revenue.

Still, Hisham notes: “Rental revenue in secondary towns is more stable because of less competition. Over time, we hope to expand our portfolio by adding more secondary town locations, especially if they hold semi-monopoly positions. They may grow slowly, but at the least they are relatively stable.

“Overall, our portfolio is faring as expected; our secondary town malls are doing reasonably well.” Hektar REIT is working to improve occupancy rates and footfall at Segamat Central, which is undergoing a tenancy remix exercise.

Hisham expects that malls located in main towns will be able to recover faster once the MCO/CMCO has been lifted. “We are optimistic that a vaccine rollout in 2021 will eventually allow for a recovery, especially for the retail and hospitality sectors, and provide a boost to the economy.”  

As for individual malls, Hisham says Mahkota Parade is expected to benefit from the return of tourists both locally and abroad while Wetex Parade in Muar is banking on an increase in demand for furniture, as Muar is the furniture capital of Malaysia. Recovery of its malls in Kedah is expected to be led by Penang, which has attracted significant [foreign direct investment] and a spillover from MNCs in Kulim.

“All these factors are expected to bring a positive impact, aided by the expected improvement in the global economic recovery. Our malls will be the beneficiary of consumer spending once sentiment improves. We do hope retail sales have reached a bottom in 2020 and we look forward to a recovery in 2021.”

Is securing a tenant in secondary towns easier?

PPK divides malls into three categories based on the net lettable area (NLA): A — up to 500,000 sq ft; B — 501,000 to one million sq ft; and C — above one million sq ft. A majority of secondary town malls are below 500,000 sq ft.  

Teo says even though traffic has been better at secondary city malls, it is not always easy to attract good tenant brands. “It will boil down to rental terms, and the majority of tenants usually request to propose and discuss first, and they will look at expansion only in 2Q2021.”

Kluang Mall in Johor is an example of a mall that added space in 2020 and yet managed to secure tenants. The mall’s owner and operator Tenaga Nusantara Sdn Bhd is enjoying a 98% occupancy rate — the same as a year ago before the pandemic. CEO and executive director Tey Fui Kien says that, since March, the mall has gained a dozen new tenants and, in December alone, added two more — Auntie Anne’s Pretzel and fashion apparel Sixty Eight.

“During the enforcement of the second CMCO period in Kluang from Nov 9 to 20, we experienced a slight dip in footfall,” she says. In December, footfall increased 16% over November, spurred by year-end and holiday spending.

“It is not all gloomy. Secondary cities/towns have so many opportunities for regional and national retail brands to grow their presence and further penetrate the middle-income segment,” says William Tang, executive director of Mall of Malaysia Group, which operates KB Mall, Kelantan; Batu Pahat Mall, Johor; Alor Star Mall, Kedah; KTCC Mall, Terengganu; and SB Mall, Selangor. “Today’s retailers are very cautious and selective in partnering with suitable shopping malls, however, and will open only one to two stores, depending on the size of the population, consumer shopping trend and basket size, as well as the brand maturity in the market.”

Hektar REIT’s Hisham says: “Unfortunately, the pool of retailers is larger in the Klang Valley versus the secondary towns. Thus, cultivating local businesses is vital to operating in secondary towns. At the same time, educating and persuading chain retailers to set up operations in secondary towns is also essential, as they usually thrive when they venture into such areas, owing to their marketing reach and economies of scale.”

 

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