More industrial land deals flowing through in 2023 is expected for KualaLumpur and Selangor.
Savills Malaysia’s top property predictions for the Year of the Rabbit
Contributed by Datuk Paul Khong
The New Year brings new hope with a fresh start plus positive vibes to the economy as a whole as 2022 was a clean-up year where high-vaccination rates were well-achieved, endemic status was declared and the re-opening of international borders on April 1, 2022 were done to lay a new foundation for 2023.
2022 was an eventful year with unexpected challenges ranging from the Ukraine War in February causing unwarranted oil and gas (O&G) price hikes thus resulting in serious inflation. Malaysia itself had an additional challenge with the local politics in GE15 in November and now, a new unity government is in place to move forward. We are still waiting for the new Budget 2023 to come in February with hopeful goodies to rejuvenate the entire property sector, not only for the B40s.
Construction costs and higher loan rates have both weighed on 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 at a higher price tag for 2023.
Peaking inflation, high borrowing costs
Property prices will continue to struggle in current market conditions as prices are pressured to move upwards but with slower increases (with some resistances due to local demand and further OPR increases) in the high-cost environment and uncertain petrol prices.
Rising interest rates and the further construction costs push will also continue to pressure property prices upwards in many new projects. Developers are suffering from the dual stress of supply and demand forces to restructure profit margins, re-introduce innovative sales packages and refocus on mid-range or niche high-end developments.
China’s recent Covid-19 cases hike
As per recent news, certain provinces in China saw 1 million daily cases and a nationwide daily number is estimated above 3.7 million persons. The health authorities have announced lower quarantine measures now for overseas arrivals starting Jan 8 and thus signalling the end of the zero-Covid system.
Any relaxations 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.
Investors especially from Singapore and China will dominate the real estate market in Johor and the Southern region.
International trend
We also see a global trend of ESG being embedded deeply into investment decisions. In many developed countries, ESG standards are being applied to real estate and this is becoming more and more apparent.
Awareness is also growing that real estate has a significant social and environmental impact too. This trend is picking up well in Malaysia. Although it is less popular than in developed nations, many investors including large corporate companies and funds have started their ESG initiatives.
We foresee this trend perforating deeper in Malaysian real estate into 2023 and in years to come.
Savills Malaysia deputy managing director and capital markets head Nabeel Hussain added: “Recent discussions with asset owners and potential buyers have shown a growing concern at the possible implementation of GST, which was earlier implemented but halted in 2018 after GE14. While we do not dispute the economic benefits of such a tax, it means that property prices are likely to be pushed up, as it is unlikely that Vendors will be willing to absorb such a reduction in their property values.”
The residential market demand picked up in 2022 is evidenced by the improvement of sales volumes and values in Q1 to Q3, primarily due to the pent-up demand and the tendency to take advantage of still-low mortgage costs.
Nevertheless, the challenges remain in 2023 as BNM may raise the OPR above the pre-pandemic level (3.25% - 3.50%), depending on the global situation. Rising home-buying costs could affect the purchasing power of potential homebuyers in the coming years; However, we foresee that there will still be a resilient demand for residential properties into 2023.
Repurposing older properties
“During 2022, investment market transactions recovered to some degree after a weak 2020-2021. Investment transactions are typically larger-value decisions; therefore, factors such as investor confidence, future market prospects and political stability play a greater role than in other types of property sector decisions,” said Nabeel.
“That being said, we expect to see a continued rationalisation of property holdings by GLCs and GLICs, with older, less competitive assets being disposed of, to be replaced by investment in more relevant, modern property sectors, such as logistics, data centres, and other alternatives.
“With several upcoming new retail malls, including The Exchange, Pavilion Damansara and others, 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 will likely see more distressed assets or attempts to reposition/ repurpose older, less competitive centres,” he said.
Corporate valuation executive director Marcus Chia pointed out that 2022 was a challenging year for most valuers, especially dealing with valuation uncertainties for assets that are exposed to various market risks due to the impact of Covid-19.
Additionally, the rapid increase in the OPR in 2022 has impacted homeowners — more property auction sales evidence this event after the BNM moratorium ended in early 2022. Likewise, high OPR and construction costs may affect sales and developers' cash flows.
“The latest Napic (National Property Information Centre) statistics showed improvements in the overall transaction volumes in the first nine months of 2022, suggesting investors/homebuyers are still taking opportunities for bargain-hunting.
“Whilst we foresee this uncertainty factor in the market outlook for 2023, the upcoming revised Budget 2023 is still impending. Possible property incentives from the newly appointed government may help to revive the property market, such as allowing the mortgage interest deduction for homeowners of B40 and M40 against their taxable incomes,” said Chia.
Savills Malaysia logistics, industrial and data centre head Kevin Goh was optimistic that with the improving local political environment, things should improve further leading to more land transactions in 2023.
“The flight-to-quality trend also exists for warehouse space. Many new warehouses are being built in the market and most are already pre-leased to tenants. 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 said.
Due to rising construction costs all around, it has been a tough year for newly built plants. This includes prices of materials such as steel bars and concrete, which have increased nearly 40-50 % compared to a year ago.
But, what drives the domestic economy is the construction of new plants generating new jobs in the country and vast sums of Foreign Direct Investments (FDI) mainly go to purchasing machinery after building the plants.
Investors, including REITs, are actively looking at this asset class as their latest all-time favourite investment, especially the properties with an extended lease arrangement in place.
In Penang and Kedah, there are more relocation exercises from foreign companies especially from China and Taiwan due to the ongoing US-China and China-Taiwan tussles.
“In the Central Region (Selangor and Kuala Lumpur), we also expect to see more industrial land deals flowing through in 2023 with a strong market push here due directly to the continuation of the local PH government onsite while in the Southern Region (Negeri Sembilan, Melaka and Johor), investors especially from Singapore and China will dominate here to leverage on the states' infrastructure, location and capabilities offering lower operation costs,” said Goh.
In East Malaysia, the new Borneo Bloc in the Unity Government will play a major role to ensure full support benefiting both Sabah and Sarawak.
In Penang and Kedah, there are more relocation exercises from foreign companies.
Revenge shopping and dining
Despite all apprehensions regarding the future of Brick and Mortar post-Covid, retail across the country bounced back as soon as restrictions were removed in April 2022.
“Revenge shopping and revenge dining seemed to have been on everyone’s minds, at least for the initial few months after retail and national/international borders opened; despite the absence of Chinese tourists, most local tourism destinations, as well as retail sales, jumped significantly not just compared to the previous year but even as compared on a like to like basis with pre-covid sales,” said retail services director Murli Menon.
Online/social media helped improve penetration and general awareness of products and brands in markets where they were physically absent. This trend is expected to continue as we move into 2023 – pure online brands continue to expand into brick-and-mortar retail and vice versa as brands realise the importance of both channels and the fact that it is the customer’s choice when it comes to the preferred channel at any point in time.
Shopping malls and retail concepts have also realised the importance of offering a wide range of F&B and services to ensure repeat visits – shopping then happens as a positive fallout/consequence. The retail market saw an emergence of creative and collaborative arrangements as far as commercial terms were concerned.
Still a struggle
“2022 was a bounce-back year for office space, particularly the newer crop of Grade A buildings, which have started to rise in occupancies. It has been an active year for Savills Leasing,” said Savills Malaysia worldwide occupier service head Zawani Abidin.
After years of a tenant’s market, we see it swing back slightly towards the landlord’s end who have begun pushing back on too flexible tenancy terms and the long rent-free periods as seen since the pandemic hit. However, with the oversupply and limited new entrants to Malaysia, tenants will have some upper hand in 2023.
While many companies explored hybrid-working 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.
“Older Buildings that fall below requirements will continue to struggle to either attract and/or retain tenants. With the limited supply in KL Suburban (enclaves of KL Sentral, MidValley and KL Eco City) for Grade A and flex spaces, KL City should see more activities in 2023,” said Zawani.
Still a bumpy ride
In 2023, the path towards full recovery remains uncertain and it is further faced by ongoing headwinds like high worldwide inflationary pressures, the increases in both raw materials, OPR and O&G, and the unknown impact of our new unity government after an abrupt GE 15.
We enter 2023 with uncertainties all around, especially with the high costs push seen in the property sectors (thus indirectly driving up the production costs of properties and hopefully in the same breath the capital values too).
We anticipated that the overall property market in 2023 is likely to be a direct extension of 2022 and hence the challenges but with a stronger positive card. It will still be a bumpy ride moving into 2023 but hopefully with better support from the new government for a strong landing.
Certain traditional asset classes such as office and retail, especially the aged-down properties, are likely to struggle in the market and the newer ones such as industrial, logistic and data centres are to continue in the limelight in market activities.
With the new unity government – we hope to see a strong inflow of foreign investments and higher relocation of foreign companies (as a part of cost-cutting measures) which will bring in more opportunities during these testing times and help rejuvenate and reboot the local economy.
“We anticipated that the overall property market in 2023 is likely to be a direct extension of 2022 and hence the challenges but with a stronger positive card. It will still be a bumpy ride moving into 2023 but hopefully with better support from the new government for a strong landing,” Khong said.
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