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April 4, 2016

Malaysia, Southeast Asia’s third-largest economy, is projected to grow 4 to 4.5 percent in 2016 compared with last year’s 5 percent growth, according to the latest estimates by the country’s central bank. Slowing economic growth, in part caused by weaker energy prices and softer domestic consumption, has impacted the local real estate market. Growth in capital values and rentals have weakened due to oversupply and falling demand. However, the weak ringgit, which has reached historic lows against the U.S Dollar, is making real estate acquisitions cheaper for overseas investors. Here, YY Lau, Country Head for Malaysia, gives her outlook for the real estate sector.

What is your view of the office rental market going forward and how will that impact capital values?

If the current global macroeconomic and local micro-market dynamics continue to prevail, we are expecting average office rentals to soften in the short term due to supply pressures. Some locations could see upside potential in the mid-term as infrastructure improvements continue to support occupiers’ growth. We expect capital values to move in tandem with rentals, which would mean a stable to expansionary yield on the back of rising U.S. interest rate.

Globally, the financial and oil and gas sectors are cutting their workforce and costs. How would Malaysia benefit as global investors look for cheaper office space in Asia? Would the country’s cost advantage over Singapore and Hong Kong spur investors to shift some of their office requirements to Malaysia?

With consolidation going on in the local oil and gas sector, many of these firms are right sizing. While the choice of location is primarily driven by cost, there are a myriad of other factors that will influence such decisions such as the quality of buildings, political risks, business transparency, and market opportunities. Occupancy cost is an important element of a firm’s overall expenses, but other factors such as cost of labour and taxation are often quoted as key determinants.

Nonetheless, Malaysia could benefit from relocations and expansions of business operations when the connection between Singapore and Kuala Lumpur is further enhanced through the high-speed rail project. Additionally financial firms in Singapore with an emphasis on Islamic banking could expand their operations here eventually.

How should developers differentiate their products to compete in an oversupplied market?

Developers could explore offering greener buildings with greater floorplate and workspace flexibility to meet the shifting needs of the millennium generation.
By offering lifestyle experiences and greater breakout zones outside the traditional workspace will also help push the concept of work, live and play. These are all part of the Fourth Industrial Revolution, which is characterized by a fusion of technologies that is blurring the lines between the physical, digital and biological spheres.

Strata offices are continually flooding the market, yet developers are still building them. With the oversupply situation, how would you advise investors?

Generally strata offices offer an affordable space for small firms and businesses, allowing them to take ownership and not be subjected to rental fluctuations in the leasing market. However with divided ownership, the concern is the alignment of all strata owners towards a similar vision for the asset in the longer term. This could have an impact on the overall value of the asset eventually. It is also worth bearing in mind that the revised Strata Act that was enacted into law in June 2015 will provide further comfort to strata owners. It gives strata owners recourse in the event that developers and owners aren’t complying with maintaining service charge payments and etc.

We would advise investors to focus on the demographics and economic growth trends in the neighbourhood of the project and most importantly, on the reliability of the developer, and types of buyers into the project.

If foreign investment is relatively small and not significant, why did the government place a threshold to curb foreigners buying property?

The enlarged global liquidity as a result of the US quantitative easing program has driven asset inflation across major cities in Asia such as in Singapore and Hong Kong. In my opinion, the policy actions taken by the government here could have been motivated more by the potential political fallout if they choose not to adopt any preemptive measures, especially if such inactivity resulted in global hot money driving down affordability in the housing market for our local buyers.

Click below for an interview with Head of JLL’s International Capital Group in Asia Pacific, Alistair Meadows, where he tells Bloomberg TV Malaysia that there’s a ‘long-term game’ in Malaysia beyond current supply challenges.

YY Lau
Country Head, JLL Malaysia

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