The year 2022 was challenging for the property market because of the discontinuation of the Home Ownership Campaign 2021 and the end of Bank Negara Malaysia’s loan moratorium, according to Savills Malaysia Sdn Bhd head and group managing director Datuk Paul Khong.
As a result of the lack of government support, the property industry had to continue to rely on other means — such as restructuring profit margins, rationalisation of property holdings, consolidation and repurposing buildings — to remain resilient and thrive in the face of uncertainty and difficulties.
In a press statement released on Jan 1, several consultants from Savills Malaysia shared their reflections on the local property market in 2022 as well as predictions for 2023. In the statement, Khong says 2022 was an eventful year because of unexpected challenges brought on by the Ukraine-Russia crisis.
“This has caused unwarranted price hikes in oil and gas, resulting in serious inflation. Construction costs and higher loan rates have weighed on both the domestic economy and the real estate sector. We have seen a major cost-push in new developments and these new products will eventually come with a higher price tag in 2023,” he says.
Khong predicts that global inflation and high borrowing costs will continue this year. Last year, Malaysia saw four consecutive increases in the overnight policy rate (OPR), at 25 basis points each time.
He says property prices will continue to struggle in current market conditions; as it is, prices are being pressured to move upwards, but with slower increases — a result of resistance caused by local demand and more OPR increases.
He adds that because of forces of supply and demand, developers have to “restructure profit margins and refocus on mid-range or niche high-end developments”.
In addition, the recent spike in Covid-19 cases in China has recreated a highly speculative environment globally. According to recent news, certain provinces in China saw one million daily cases and a nationwide daily number estimated at above 3.7 million people.
Khong says the health authorities’ easing of quarantine measures for overseas arrivals from Jan 8 signals the end of the zero-Covid policy. “Any relaxation in its border controls will indeed have a profound impact on tourist arrivals and will boost tourism receipts. These changes, however, will be carefully observed in months to come.”
Meanwhile, there is also an ongoing global trend to include environmental, social and governance (ESG) concerns in investment decisions. Khong says that in many developed countries, ESG standards are being applied to real estate and this phenomenon is becoming increasingly apparent. “There is increased awareness that the real estate industry has a significant role to play in reducing negative social and environmental impacts.”
While this trend is picking up in Malaysia, Khong notes, it is still less popular than in developed countries. Many investors, including large corporations and funds, have started their ESG initiatives and reporting. He foresees the trend growing in the Malaysian real estate industry in 2023 and the coming years.
Khong says demand in the residential market picked up in 2022. “There was improvement in sales volumes and values from the first to third quarters last year, owing mainly to pent-up demand and the tendency to take advantage of still-low mortgage costs.
“Nevertheless, the challenges remain in 2023, as Bank Negara may raise the OPR above pre-pandemic levels (3.25% to 3.5%), depending on the global economy. Aside from that, rising home-buying costs could affect the purchasing power of potential buyers in the coming years. Still, we predict that there will be resilient demand for residential properties this year.”
Investment market transactions
In the press statement, Savills Malaysia head of capital markets Nabeel Hussain says last year’s investment market transactions recovered to some degree after being weak for the past two years. “Investment transactions are typically larger-value decisions; therefore, factors such as investor confidence, market prospects and political stability play a greater role than in other types of property sector decisions.”
He thus expects to see continued rationalisation of property holdings by government-linked companies (GLCs) and government-linked investment companies (GLICs), with older and less competitive assets being disposed of and replaced by investment in more relevant property sectors such as logistics and data centres.
There will also be consolidation in the retail sector, Nabeel reckons. “With several upcoming new retail malls, including The Exchange and Pavilion Damansara, there is likely to be additional pressure on secondary malls, which have already been struggling since the onset of the pandemic and the growing popularity of e-commerce. We may see more distressed assets or efforts to repurpose older, less competitive malls and centres.”
Investment in logistics facilities and data centres is also on the rise. For example, foreign players LOGOS SE Asia Pte Ltd and Ally Logistic Property Co Ltd (ALP) have announced significant joint ventures (JVs) with Sime Darby Property Bhd and the Employees Provident Fund (EPF) respectively; and domestic logistics developer AREA Industrial Development Holdings Sdn Bhd has announced one with MIDF Property Bhd (a subsidiary of Permodalan Nasional Bhd) and KWEST Sdn Bhd (a subsidiary of Kumpulan Wang Persaraan (Diperbadankan) (KWAP). Similarly, Axis Real Estate Investment Trust (Axis REIT) has continued to expand, adding multiple properties during 2022.
Nabeel points out that older office premises might be sold for repurposing. “Over the past 24 months, we have seen older buildings being sold to buyers; they include Wisma KFC (to become Hyatt Centric
Hotel), Menara MIDF (to be redeveloped into a boutique hotel), and Bangunan KWSP CRC (being planned as a data centre).”
As this segment of the office market has been hit the hardest, Nabeel says older and less competitive buildings are being converted to serve a more enticing purpose.
The real estate consultancy firm’s executive director of corporate valuation Marcus Chia notes that 2022 was a challenging year for most valuers, especially with regard to valuation uncertainties for assets exposed to market risks due to the impact of the pandemic.
The rapid increase in the OPR has affected homeowners in that there were more property auction sales after the Bank Negara moratorium ended in early 2022, Chia says. “High OPR and construction costs may affect property sales and developers’ cash flows. We expect developers to continue their discount offerings on the unsold inventories to improve cash flow positions.”
Since National Property Information Centre (Napic) statistics showed improvements in overall transaction volumes in the first nine months of 2022, Chia believes investors or homebuyers are still seeking bargaining opportunities to purchase more properties.
While he foresees uncertainty in the market outlook this year, the upcoming revised Budget 2023 may bring positive news. “The newly appointed government may help revive the property industry by providing incentives and allowing mortgage interest deductions for B40 and M40 homeowners against their taxable incomes,” he adds.
Savills Malaysia head of logistics, industrial and data centre Kevin Goh says politics and uncertainties in 2020 and 2022 caused many developers and manufacturers to rethink their land acquisition decisions, except for plant relocation from foreign countries, as part of global cost-cutting measures.
Moreover, developers have also been plagued by inflating construction costs and rising interest rates. Goh thinks the property industry will further improve, leading to more land transactions in 2023, owing to the country’s improved political environment.
“Having said that, we are also seeing speculative-built warehouses that might be at risk for a longer gestation, especially if the supply continues to grow massively without strong economic support,” he says.
According to Goh, investors, including REITs, are actively looking at industrial and logistic spaces as their latest all-time favourite investment, especially for properties that have extended lease arrangements in place.
Goh says, in the Northern region, particularly Penang and Kedah, there have been more relocation exercises by foreign companies. A substantial number of investments come from China and Taiwan specifically, owing to the ongoing US-China and China-Taiwan conflicts.
In the Central region, namely Selangor and Kuala Lumpur, Goh expects more industrial land deals to flow through in 2023, given the continuation of the Pakatan Harapan government. He foresees investors from Singapore and China to dominate the Southern region (Negeri Sembilan, Melaka and Johor), leveraging on its infrastructure, location and low operation costs.
In Sabah and Sarawak, the new Borneo bloc in the unity government will play a major role in ensuring more foreign direct investments, industrial parks and data centre hubs are forthcoming, Goh says.
The firm’s head of retail services Murli Menon notes that the country’s retail sector bounced back as soon as the country transitioned to the endemic phase in April last year.
Murli says: “Revenge shopping and dining seemed to have been on everyone’s minds, at least for the initial few months after local and international borders opened. Most local tourism destinations, as well as retail sales, saw a significant jump not [only from] the previous year but even compared on a like-to-like basis with pre-Covid sales.
“Luxury, athleisure and F&B sectors grew significantly higher than other retail categories. While e-commerce channels offered convenience, retailers as well as shoppers realised that consumers were missing out on the experience of shopping and dining. Nevertheless, overall contribution of online sales increased [from] the pre-Covid period without compromising brick-and-mortar sales as much — which means overall market size increased for most of the brands and categories.”
He adds that malls and retail concept stores have also realised the importance of offering a wide range of F&B services to ensure more footfall.
Murli attributes the increase in general awareness of products and brands that were physically absent in the market to online platforms and social media. It is expected that this trend will continue this year, whereby pure online brands are expanding into brick-and-mortar retail and vice versa as brands realise the importance of both channels. According to Murli, retailers and landlords have also become open to sharing information and sales data to facilitate win-win commercial terms.
“While Malaysia continues to lag behind other countries in the region as far as omnichannel integration, as well as digitisation and integration of point-of-sale systems, are concerned, this is now growing at a significant pace.
“We also hope to see more research and a fact-based approach when it comes to overall retail planning and sizing of new malls, considering the continuous convergence and seamless transition into the omnichannel strategy by most retail brands,” he says.
Savills Malaysia head of leasing and occupier services Zawani Abidin says 2022 was a bounce-back year for office spaces, particularly the new crop of Grade-A buildings, which have started to see a rise in occupancy rates.
Zawani reckons that, after years of being a tenant’s market, it is swinging back slightly towards landlords, who have been pushing back on flexible tenancy terms and long rent-free periods seen since the pandemic hit. With the oversupply and limited new entrants to Malaysia, however, tenants will have somewhat of an upper hand in 2023.
“While many companies explore hybrid work models and either contracted or expanded accordingly, it is clear that office space is essential for most organisations, leading to searches for areas that can meet their technology, sustainability and health goals,” she says.
Older buildings that fall below requirements will continue to struggle to attract or retain tenants. Zawani believes the limited supply of Grade-A buildings and flex space in suburban areas of Kuala Lumpur such as KL Sentral, Mid Valley City and KL Eco City will see more activity in 2023.
Wrapping up this year’s property market predictions in the Savills press statement, Khong says the overall property market in 2023 is most likely to be a direct extension of 2022, alongside its share of challenges but with more positive growth.
“It will still be a bumpy ride moving into 2023 but, hopefully, with better support from the new government, the industry will have a strong take-off,” he concludes.