Rising supply of retail and office space worrying
PETALING JAYA: Malaysian REIT Managers Association (MRMA) chairman Datuk Jeffrey Ng said Malaysian REITs will give an average distribution yield this year of 6.3% despite the escalating supply of office and retail space in the country, particularly in the Klang Valley.
This represents a modest increase from the 5%-6% average distribution yield last year, he said.
Prices of Malaysian REITs have been having a pretty good run since late last year and early this year but uncertainties loom ahead, he said.
Other than national and global issues, the rising levels of office and retail space is an issue, he said.
Office space over supply has been an issue for several years while the growing number of malls in the Klang Valley and its impact on rent is a burgeoning issue.
Ng said total existing stock of retail space within purpose-built retail centres stood at 59.89 million sq ft with average occupancy rate of 80.1% in the third quarter of calendar year 2016.
A number of fairly large malls were also completed late last year and some will be completed this year, adding to the retail space over supply situation. “The outlook for 2017 remains challenging. “Consumers will continue to stay cautious in their spending and retail sales growth is expected to be modest in the short term,” said Ng.
This will affect rental, which will eventually impact retail REITs. The most successful REIT counters are retail-focused.
“Leading regional malls with strong track record and good tenancy mix are expected to stay resilient due to their captive market while new malls will need to establish their market position,” said Ng.
The growth in online shopping also impacts the retail segment and eventually retail REITs.
Although online shopping market share is still at the single-digit in Malaysia, it is a gaining prominence, Ng said.
“Consumers shop online because of attractive pricing and convenience. It is crucial for retail mall operators to create engaging shopping. It is the experience that counts, which includes convenience, comfort and safety.
In the office space segment, a “huge” incoming supply of about 13.32 million sq ft is scheduled for completion by the end of 2018 bringing the total Klang Valley’s stock to well more than 100 million sq ft.
Existing office stock stood at 114.4 million sq ft in the third quarter of calendar year 2016, said Ng.
While Ng did not directly say how this will impact on the real estate investment trusts (REITs), he said the demand for office space is expected to be “limited” in the short term due to various challenges internal and external issues.
The disequilibrium between demand and supply for office space is “unlikely to be resolved” in the absence of any strong catalyst, which would further put pressure on occupancy and rental rates in a highly challenging market, particularly for older office buildings, said Ng.
He said owners of older buildings might have to upgrade their properties to manage occupancy and attrition rates.
“Even if these older buildings are upgraded, property yield is expected to remain lackluster with owners possibly seeking alternative use for these buildings,” he said.
More are expected in the pipeline with the completion of projects like Bandar Malaysia, Tun Razak Exchange and Bukit Bintang City Centre, he said.
Kenanga Investment Bank Bhd’s equity research head Sarah Lim Fern Chieh said it is unclear if the slight uptick of incoming office space includes supply from mega projects such as the Tun Razak Exchange (TRX), KL118 - formerly Menara Warisan - and other projects.
What she is certain is that the over supply situation has been priced into office REIT prices. Office occupancy is about 70%-80% on the back of incoming supply, said Lim.
The bulk of the office space is occupied by the oil and gas sector and once the leases are up, tenants may not be moving in, if the overall economic situation does not improve.
Over the last five years the various redevelopment in Jalan Sultan Ismail, Kuala Lumpur will also add to the space.
“There will be a wave of transformation and changes. Will these (office space) be occupied?
“This depends on economic activities. If the economic activities do not improve, it will be tough on building owners.
Meanwhile, Industrial space is not in over supply but the poor economic outlook is not helping, said Axis REIT chief executive officer Leong Kit May.
“Industrial assets are safe and defensive in nature due to long term leases attach to the properties,” said Leong.
She said demand for logistics and the e-commerce warehousing is growing.
“Malaysia is an excellent hub for SouthEast Asia as we have excellent infrastructure,” Leong said.