This article first appeared in City & Country, The Edge Malaysia Weekly on January 23, 2023 - January 29, 2023

There are better days ahead as the overall property market is expected to continue growing this year, with gross domestic product expanding between 4% and 5%, said CBRE | WTW at the launch of its Market Outlook 2023 report on Jan 11.

CBRE | WTW chairman Foo Gee Jen said, “Malaysia sailed through 2022 relatively unscathed as its GDP surpassed pre-pandemic levels. Despite the projected headwinds for this year, Malaysia’s economy remains a relatively bright spot in Asia.”

Group managing director Tan Ka Leong gave a snapshot of the market outlook. “In 2022, we saw property growth in the market and it was a robust one. Our country remained the bright spot in the region, with active property transactions compared with 2021,” he added.

Total loans approved for residential properties in 3Q2022 grew in approval rate by 17.6% year on year (y-o-y) to 42% and in loan amount, by 105% y-o-y to RM49.32 billion, according to the report.

The improved performance of the industrial property segment was due to increased demand from investors, with quite a few transactions in the industrial parks, according to Tan. “The retail and hospitality segments have also seen improvements in transactions and activities. Developers and investors are [banking on] the improved sentiments, while real estate investment trusts (REITs) are continuing to acquire assets,” said Tan.

According to the CBRE | WTW Market Outlook 2023 report, the Industrial Production Index (IPI) recorded double-digit growth (12.2%) y-o-y for 3Q2022, supported by the mining and manufacturing sectors.

During the presentations, the consultants concurred that the real estate market across all segments are showing signs of good recovery, and appeared sanguine about this year’s outlook.

C H Williams Talhar & Wong (Sabah) Sdn Bhd (WTWS) director Cornelius Koh opined that the overall market in Sabah appeared to have improved in the last financial year. “The market is in a recovery phase.”

According to the report, large investment projects are expected to lead to positive sentiment in FY2023. In the state, for the period up to 3Q2022, transactions increased 54% to 8,660 and 57% to RM4.568 billion by total volume and value respectively. The state is expected to maintain positive growth in 2022 and 2023, at a rate of 4% and 5% respectively.

“In the industrial segment, Kota Kinabalu is the main distribution hub in Sabah and there is limited new supply. The office segment is a small market with few transactions. Meanwhile, there is no supply of purpose-built offices (PBOs),” he said.

“For the landed residential sub-segment, there was an increase in prices and growing demand for rental properties. Construction activities sped up as well.”

According to Koh, the supply of new high-rise residential properties is rising, with gradual sales. In the hospitality segment, there was an increase in visitor arrivals but they were still below pre-pandemic levels. “Presently, the hospitality segment is domestic-driven and in anticipation of the China market reopening. There was also an increasing number of serviced suites and Airbnb units. The retail segment in Sabah is generally well managed, [with] quality retail malls expected to maintain their performance. Older malls and those with fragmented ownership need to reinvent themselves.”

He added, “There is also the issue of affordability — with interest rate hikes, inflation and the higher cost of living — as well as the matching of demand and supply. Market conditions remain challenging.”

A few projects were announced last year and will be key to the market such as the RM19.59 billion, 3-phase green steel project in the Sipitang Oil and Gas Industrial Park (SOGIP) by Esteel Enterprise Sabah Sdn Bhd.

The key sectors to look out for in Sabah are tourism-related, in anticipation of the reopening of the China market “and its spillover to various sectors. The industrial sector will also see growth in demand for storage, warehousing and services”, said Koh, adding that there will be limited supply of new landed residential developments.

C H Williams Talhar Wong & Yeo (WTWY) managing director Robert Ting KS shared key insights on the Sarawak market. “Sarawak’s economy and market are on the mend and expected to improve further in 2023,” he said, adding that the state’s initiatives and incentives are expected to put it back on track in the next two years.

These initiatives include Sarawak’s Post Covid-19 Development Strategy 2030 (PCDS 2030), which kick-started in 2022 with a RM63 billion allocation for Phase 1 — for digital transformation, basic infrastructure, transport and renewable energy.

The tourism sector was revived in 2022 and buoyed by events such as the 25th Rainforest World Music Festival, which attracted 12,000 participants after a two-year hiatus.

According to the report, Sarawak’s GDP growth is projected to improve between 5% and 6% for 2022. “Kuching has seen an uptrend across most sectors, while other sub-regions maintained their ­performances. There was an uptrend in the residential sector in particular,” said Ting.

According to the report, the volume of transactions in Sarawak improved 44% y-o-y while value increased 25%, with the residential segment being the biggest contributor.

One of the notable developments in Sarawak is the newly completed Borneo Cultures Museum, which is the second largest in Southeast Asia and was opened to the public in March 2022.

According to Ting, the challenges in the state involve size and logistics, “Sarawak has a small population of 2.45 million [as at 2020], resulting in low population density … this does not encourage fast developments, and that includes a lack of manpower and skilled labour for growth in all sectors of the state.”

“Its land mass is also physically separated from Peninsular Malaysia. It renders its air routes as a secondary sector, with a lack of connectivity with other parts of the world. There are a few direct international flights plying the Sarawak route — out of the total of 408 weekly flights to Sarawak, less than 10% are international flights,” he said.

Despite the challenges, Sarawak’s prospects appear to be improving. “We have a number of mega projects such as the Pan Borneo Highway — the biggest infrastructure development in the state and country — and is said to be a game changer and catalyst to spur further growth and development in more parts of Sarawak.”

Ting highlighted the Kuching Urban Transport System by Sarawak Metro, which kick-started the Autonomous Rapid Transit (ART) in 2022. “This revolutionises transport in urban areas with a new hybrid transport mode — tram on wheels powered by hydrogen-charged batteries.”

A bright spot in Sarawak lies in its industrial segment, according to Ting. “Industrial developments — the oil and gas industry — are stationed in Bintulu and Miri. We expect the high-tech electronics [electronic chips] sub-sector to [perform] in Kuching, with an increase in employment opportunities for the skilled and professional workforce in the state.”

CBRE | WTW director Jonathan Lo said the reopening of borders resulted in a positive outlook for the overall market in Iskandar Malaysia amid looming uncertainties. “In the state’s industrial segment, there was an increase in foreign investments and a higher demand for warehouse and logistics while in the office segment … there was stale movement, but the co-working space is slowly seeing higher demand.”

Between 2006 and June 2022, the cumulative committed investments in Iskandar Malaysia reached RM367.8 billion, of which RM219.2 billion (60%) had been carried out.

“The residential segment in Iskandar Malaysia has seen an increase in property prices and a higher demand for rental properties, while construction activities have accelerated,” noted Lo.

“There are flourishing tourism activities, which encouraged a number of new hotel openings. And in terms of retail, there has been an increase in footfall and foreign spending … the occupancy rate [of hotels] has also improved.”

The reopening of borders in April 2022 saw the return of foreign visitors, especially from Singapore, Lo observed. An example is the Desaru Coast, which had high hotel activity with an average rental rate of RM270 per night and a 70% occupancy rate as at November last year.

According to him, projects performed well, especially residential units with easy access to the Singapore Causeway. “[However,] the overhang in high-end serviced apartments is high despite the efforts made to reduce existing inventories,” he stressed.

According to the report, in the first nine months of 2022, some 16,169 properties worth RM10.6 billion were transacted, up 40% y-o-y from 11,544 properties in 2021. All segments of residential, commercial, industrial and agriculture showed an upward trend in the state.

Nonetheless, Lo highlighted the challenges of spending power, with the increase in property prices and the overnight policy rate (OPR), and the rising prices of basic commodities, which in turn affect domestic spending power. “There is also increasing supply in the hotel, office and retail segments. However, it will create competition to attract and retain both new and existing tenants.”

“The market challenges give developers the opportunity to reconfigure their products and offer various types and price ranges to suit the current market demands, likewise with office space and the changing business model and demand for co-working spaces.”

Desaru Coast and Desaru Coast International Ferry Terminal are key catalysts. “The Desaru Coast is to be developed in three phases and to date, there are four hotels, two world-class golf courses, waterparks, an entertainment lifestyle village and a convention centre. The Desaru Coast International Ferry Terminal has also been completed and will enable quicker and more convenient travel options for travellers from Singapore.”

“There was significant rebound in 2022 but cautious optimism lingers on,” said CBRE | WTW director Peh Seng Yee as he reviewed the state’s market.

According to the report, infrastructure developments are required catalysts to boost property projects in the state. In the first nine months of 2022, property transaction activities in Penang recorded a notable rebound y-o-y, with a total of 17,297 properties valued at RM9.51 billion, it added.

A spillover effect from infrastructure is anticipated, with the Bayan Lepas Light Rail Transit (LRT) to commence in 4Q2023, the report added. Penang also commenced its 5G network in a bid to achieve its aspiration of being an international smart city.

“Upon the border reopening, Penang has witnessed its property segments going from strength to strength, especially industrial [as the state has increased manufacturing investments], while the office segment is experiencing a stable occupancy rate and limited new supply … The residential market remains active with government initiatives, price corrections in high-rise properties and price stability for landed homes.”

The state also witnessed y-o-y increases of 44.4% and 31.5% in terms of overall property transaction volume and value respectively.

Despite the uptrend, Penang still has a few obstacles to overcome. “Along with the current market conditions, the state also faces conservation issues, scarcity of sizeable development land and development constraints. For the state’s residential segment, there are also stringent guidelines, which in turn would cause concern for the state’s economy and job security,” said Peh.

“Penang also has an overhang issue for its high-rises, while for office and retail, older stratified buildings are under pressure to maintain occupancy and rental rates,” he added, noting that there is a depletion of land for development of major industrial parks in the industrial segment.

“Still, there are plenty of prospects in Penang — for example, co-working spaces are seeing encouraging take-up. The retail segment is also poised for a full recovery, riding on good acquisitions and omnichannel retailing.”

In the Klang Valley, CBRE | WTW director Ungku Mohd Iskandar Ungku Ismail observed that while the Klang Valley market is in the recovery stage, landlords are enhancing their property portfolio.

There was active sub-sale activity, noted Iskandar. “There was also a recovery for luxury high-rise residential properties as emphasis skewed towards the local market. In the office segment, there was growing demand for flexi-working space, fitted units and short-term leases, with more buildings with the latest infrastructure and green elements being popular,” he said, adding that in the retail segment, there was more interest from international brands.

“Land banking opportunities are plentiful as interest in industrial assets gain prominence, with industrial and warehousing space still in demand, especially by e-commerce [companies],” said Iskandar. “As for the hospitality segment in the Klang Valley, there will be a few upcoming international brand openings, with a target market of luxury and upscale customers.”

There are a few challenges in the Klang Valley market. “There is the issue of old versus new buildings. There is a 67% supply of old building offices in KL city centre (including in the old central business district). The incoming supply of new building offices include Merdeka PNB 118, Aspire Tower at KL Eco City, UOB 2, Menara Felcra, Oxley Tower and Finas Tower, among others. The occupancy rate is less than 50% in buildings that were completed in the 1980s and 1990s, while the new buildings would offer services, high-speed internet, environmentally friendly features, ventilation and lighting with more focus on ESG (environmental, social and governance),” said Iskandar.

“In the Klang Valley’s residential segment, it appears that there has been a slowdown in the launch of new projects, especially in the light of the OPR hikes, which creates a challenging environment for the local market,” he noted. “Likewise, it applies to the retail segment, as we encounter the issue of vacant malls, while factors such as layout, strategy model, location, target market, tenant profile and lease model have to be taken into account. There is also an incoming supply of large malls such as TRX, 118 Mall and Pavilion Damansara.”

Iskandar highlighted catalysts such as a growing interest in ESG, with consumers being more aware of the environment, living standards and quality works. “There is also more emphasis on refurbishment, rebuilding and repurposing of older commercial buildings such as Maju Junction, utilising [their] strategic location, securing a new class of tenants and preserving the history of the area.”

He also highlighted that MRT Putrajaya Line will be completed in March 2023, “MRT 3 (Circle Line) will connect the existing MRT, LRT, KTM and Monorail lines, while TRX and PNB 118 will benefit the city with commercial activities, an evolving business environment and global attention.”

Tan concurred that the country is on track with its mega projects such as the East Coast Rail Link (ERCL) and unlocking pockets of land, as well as connectivity in new growth areas with more in the northern region of the Klang Valley (such as Ijok, Selangor) to be unlocked in the future.

Moving forward, ESG and technology appear to be the future of the real estate industry. Sustainability has become increasingly important and it is expected to generate returns in the long term and preserve property value over time, said CBRE | WTW.

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