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Saturday, January 17, 2009

Retail space faces mounting pressure

Both are components of the commercial real estate business and neither will escape the pressures of the economic slowdown, but the performance of office space and retail space in the coming months will also depend on a few factors unique to each segment.

For one thing, office space may not do well if many companies opt to stay put instead of shifting to larger and better premises. In retail, occupancy depends significantly on the growth strategies of the business operators, and the kind of products and service they sell.

Regroup Associates executive chairman Christopher Boyd says the Malaysian commercial property market will remain quite competitive this year as the take-up of new space is expected to be affected by the global financial crisis.

“We have already seen a lot of potential tenants saying they would like to wait and see. With so much uncertainties in the world, companies will play safe and defer any decision to move if they can avoid it,” he told StarBizWeek.

Boyd says it costs about RM100 per sq ft to fit out an office. This is a big commitment. For example, a 5,000 sq ft office may require about RM500,000 just for the furniture and fittings.

“The poor sentiment will lead to weaker demand for commercial space. The asking rentals will probably weaken but there isn’t going to be a crash because supply is fairly tight,” he adds.

However, he believes that international companies that are looking for a lower-cost environment will still choose Malaysia because the rental rates are still low as compared with those in other parts of the region.

“Businesses like service centres and back-office services might decide to come to Malaysia simply because of the low rental rates,” he says.

According to Boyd, this year alone, 10 new buildings in Kuala Lumpur will be completed, thus adding to the market a total area of about 3.4 million sq ft.

“However, approximately half of these building will be pre-let, like the SSM building, Menara Bumiputra Commerce and MIDA building. The available space to let is actually about 1.9 million sq ft only,” he says.

Among other buildings available for lease this year are G Tower, KL Pavilion, Menara Worldwide and Towers B, C and D of KL Sentral. He says the average rental rate for Grade A buildings in the Golden Triangle is currently at about RM7 to RM9 per sq ft.

Retail rumblings?

On the outlook for the retail sector this year, Regroup Associates managing director Allan Soo says the market has dipped since the third quarter of 2007.

“Although companies like Parkson, Jaya Jusco, the hypermarkets, and some local fashion operators and food retailers seemed to be doing well until the third quarter, they all faced business decline by the fourth quarter,” he adds. Everybody agrees that the fuel hike last June has affected sales.

“In most cases last year, there was a sales drop of about 5% to 10%, while the drop for some higher-end fashion brands was about 10% to 30%,” says Soo.

“Because of the huge drop last year, we don’t expect another plunge this year. There will be a fall but it won’t be dramatic. Overall, most sectors will see turnover shrinking by 5% to 10%.”

However, he reckons that the hypermarkets will keep faring well because people still need to shop for groceries. Their margins may narrow because of price competition, but the total sales volume should increase.

More hypermarkets will open this year to cater for the demand for bargains and lower-priced goods.

Soo says there will be 1.5 million sq ft of additional retail space this year and it will badly affect the market.

He points out that there is already about 39 million sq ft of retail space in the Klang Valley. The new properties will increase the available space by 3%.” The new malls will be much smaller and are mostly located in the suburbs.

“By 2010, the incoming supply of retail space will drop to 1.7 million sq ft from the proposed 3.4 million sq ft. This is good news for the industry, for that avoids an oversupply of space,” he adds. Some of the planned projects are put on hold.

“Based on our survey of 13 shopping centres, the occupancy rate is still stable. We foresee some people closing their shops but it will be very limited,” he says.

DTZ Nawawi Tie Leung Property Consultants Sdn Bhd director Adzman Shah Mohd Ariffin says some mall operators will start looking seriously into repositioning their properties. The aims are to remain competitive, attract more shoppers and retain tenants.

“Well-located and well-managed malls will continue to do well in weathering the downturn. More spending on advertising and promotion activities will have to be carried out to attract or at least, retain shoppers,” he adds.

He, however, cautions that mall operators should be prepared to come up against stiff resistance should there be any attempt to raise rental rates after the Chinese New Year. Some tenants have begun to consolidate and downsize to reduce operating expenses.

Although lower growth and sales are expected, retailers are more prepared now than in previous downturns, to revise their sales projections. They may want to consider moving to new locations to achieve better market penetration.

Optimistic owners

The building owners and managers are somewhat more upbeat. Joyce Yap, president of the Malaysian Association for Shopping and Highrise Complex Management, says the outlook for shopping malls this year is still vibrant despite the slowdown.

“Though people are a bit cautious, the traffic flow at the malls is still strong,” she adds. As she points out, shopping is a way of life among Malaysians and they will still go to the malls even in these tough times.

She says good shopping centres will still record good occupancy rates, such as Pavilion in Kuala Lumpur, which is 100% occupied.

She believes that shopping centres that will be ready this year will survive although they have to face more competition from the existing complexes.

“However, malls that have still some way before completion will face tough times ahead to fill the space as retailers are now more cautious and are putting their expansion plans on hold,” she contends.

Yap says shopping malls that are located in the city centre will still be attractive, especially among the tourists, and can benefit from their spending power. “The ones that are located in the suburbs will face difficulty in boosting sales,” she adds.

Berjaya Land Bhd chief executive officer Datuk Francis Ng agrees that the current economic situation will dampen the demand for commercial properties.

“Purchasers are exercising more caution and we expect the market to be soft during this period. However, we believe that once the global economy stabilises, the take-up rate for commercial property will improve,” he told StarBizWeek in an e-mail.

Boustead Curve Sdn Bhd director Datuk Ghazali Mohd Ali says the company’s shopping mall, The Curve at Mutiara Damansara, Petaling Jaya, is still doing very well, with existing tenants eager to expand their businesses.

This is a good sign that their businesses are doing well, he says, adding that the mall’s occupancy rate is about 98%.

By The Star - StarBizWeek - (by EDY SARIF)

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