KUALA LUMPUR, May 28 — The retail and office space sectors are among the notable casualties of Covid-19 pandemic as people adapt to the new norm of online shopping and working from home that had deteriorated demand and value for both sectors in the short term.
According to the KLCC Stapled Group which consists of units in KLCC REIT stapled together with the ordinary shares of KLCC Property Holdings Bhd (KLCCP), the performance of the office segment is expected to remain stable backed by triple net lease agreements and long term leases.
The group, however, remained cautious in its retail segment as Suria KLCC continues to operate in a challenging environment, taking into consideration changes in consumers behaviour and sentiments upon the lifting of the MCO.
Its hotel segment, Mandarin Hotel Kuala Lumpur which was severely impacted due to the pandemic saw its 2020 first-quarter revenue declined 33 per cent year-on-year (y-o-y), despite doing well in January.
The group anticipated the hotel segment would be adversely impacted for the rest of the year.
The group, the largest self-managed stapled security constituted 33 per cent of the market capitalisation of the Malaysian REIT segment.
Meanwhile, IGB REIT, which saw its share price dropped over three per cent in a year, has now gradually regained lost ground up as recent selldown has presented an opportunity for investors to accumulate the REIT, according to analysts.
The real estate investment trust has two malls in its portfolio, namely the Mid Valley Mall and The Gardens Mall, both located in Kuala Lumpur.
In its first-quarter financial result ended March 31, IGB REIT said it is determined to remain resilient throughout the Covid-19 pandemic and committed to long-term value for stakeholders, despite the grim outlook and challenges ahead.
Based on the outlook from these two giant REITs in Malaysia, existing occupancy of office and retail space occupancy would likely be sustained for the long term.
Outlook on the retail industry
Malaysian Institute of Professional Estate Agents and Consultants (MIPEAC) president Francis SP Loh who agreed with the assessment said, comprehensive shopping malls that are centrally located and well-managed would retain their patrons and continue to be successful.
According to the Retail Group Malaysia (RGM), it is estimated that shopping traffic will decline by up to 50 per cent and the retail industry is expected to post an 18.8 per cent year-on-year contraction for the first quarter of 2020.
RGM had projected the Malaysia retail industry to grow by 4.6 per cent in 2020 at end-2019.
However, the situation had since deteriorated significantly as prolonged Covid-19 pandemic and falling domestic demand would see the retail industry suffer a 5.5 per cent contraction for the rest of this year.
For the short term, Loh said office space would see less demand as compared to before Covid-19 pandemic.
Rentals of office space would also be affected, resulting in the corresponding drop in the market values of office space.
As people adapt to the new normal, businesses and companies are considering downsizing whenever they could due to online initiatives and lower business volume.
Loh said smaller and less centrally located shopping malls would be most affected and may have to look at conversion to other possible types of usage.
According to the National Property Information Centre (Napic) website, the country has 1,037 shopping complexes as in the first quarter of 2020, with a total space of 16.54 million square metres.
Decline on sub-sector on the retail segment
On a more specific level, certain sub-sectors of the retail segments would experience a decline, including entertainment centres such as theatres, which may go bust as more people watched movies from the comfort of their homes while filmmakers opted to release their movies online.
Due to the pandemic, departmental stores may also suffer as it is being replaced by online purchases, giving a boost to the online industry, especially on essential household items.
Additionally, co-working or flexi working space enterprises that experienced a rise in demand prior to the pandemic would also see a decline and a corresponding reduction in demand for office space.
Napic showed that as at the first quarter (Q1) 2020, the total occupancy rate of office space in the country stood at 74.9 per cent.
Preliminary data from Q1 2020 showed the value of transactions for commercial sub-sectors was RM5.112 billion, against RM6.758 billion and RM8.383 billion in Q1 2019 and Q4 2019, respectively.
Businesses in need of cash liquidity
Commenting on issues on rental, Malaysia Retail Chain Association president Datuk Seri Garry Chua hopes the government and landlords could defray rental costs to help tenants and justify all the costs they would have to cover to at least 50 per cent due to lower sales volume.
This is because of the lesser traffic flow and social distancing.
On the other hand, he welcomed the move by some property owners like in Sunway, Mid Valley and Bangsar Village which have announced rental discounts of 70 per cent based on their gross turnover (GTO).
Apart from that, he also noted that most retailers were unable to get bank loans and were struggling with issues of cash flow.
Although they have enough assets, the lack of liquidity imposes a challenge to pay salaries, restructure payments within the supply chain and so on, he said.
Industrial sector to do well but demand for residential may weaken
Meanwhile, the industrial sector was doing quite well relative to the other sectors with demand for warehousing space, in particular, would see an increase in line with the upsurge in e-commerce.
According to Napic, the industrial sub-sector recorded RM3.186 billion in terms of the value of the transaction in Q1 2020, from RM4.174 billion in Q1 2019 and RM4.689 billion in Q4 2020.
Meanwhile, there were 127,604 units of residential units launched in Q1 2020, out of which 29,698 were unsold units with the value stood at RM18.9 billion.
Loh said the residential units would have a weaker effective demand in the short term due to the loss of jobs and the increase of unemployment which would see prices probably take a dip.
Nonetheless, before the pandemic, there was already an overhang of residential properties largely attributable to the higher-end segments particularly in service apartments and high-end condominiums.
Loh, however, said that in the mid to longer-term, there would be recovery and an increase in demand in the residential sector, as housing is a basic need for people.
Despite Bank Negara Malaysia’s (BNM) reduction on the Overnight Policy Rate (OPR) by 50 basis points to 2.00 per cent to ease the debt burden of household and business and support credit expansion, would people in the lower-income bracket still afford to purchase houses?
— Bernama
