Offices and malls remain in oversupply, pressure on vacancy and rental rates

KUALA LUMPUR (Apr 3): Oversupply conditions in the office space and shopping complex (OSSC) segment in Malaysia have not improved. As at 3Q 2019, the incoming supply of office space in Klang Valley remained sizeable at 36.2 million sq ft, equivalent to about 30% of existing supply. 

"It is estimated that 5.5 million sq ft of office space will be completed each year until 2021, far exceeding the average annual demand of 2.3 million sq ft per annum over the past three years. The number of completed and planned shopping complexes in key states also increased further to 373 units as at 3Q 2019 (from 372 units as at 1Q 2019)," according to Bank Negara Malaysia's Financial Sustainability Review for Second Half 2019 released today. The key states are Kuala Lumpur, Selangor, Johor and Penang.

The central bank added that this will have a more noticeable effect on vacancy and rental rates for office and retail spaces especially in the Klang Valley with conditions weakening further for non-prime properties. Office and retail centres are classified as ‘prime’ or ‘non-prime’ based on multiple criteria, including location, accessibility, design and features of the building

"Competition for tenants has led to the offering of generous incentives such as longer rent holidays and additional parking bays, which has lowered effective rental rates. The growth of e-commerce and changing customer preferences have also seen more retailers reducing their physical footprint," the report stated.

Nevertheless, the central bank said that the financial stability risks from the property sector remain largely mitigated.

"While conditions are likely to have deteriorated further in the wake of recent developments, the amount of debt-at-risk from bank exposures to the property sector is expected to be manageable with potential losses comfortably within banks’ excess capital buffers.

"Developments in the property market are important from a financial stability perspective given that banks’ total exposures to the property sector account for 33% and 51% of total banking system assets and loans, above the long-term average of 28% and 45%, respectively," the report said.

The report noted that loans for the purchase of residential properties, account for about two-thirds of banks’ total exposures, and remained the prime driver of growth in property exposures.

"While risks from bank exposures to housing loans have increased slightly, they remain low. In the non-residential property segment, banks’ exposures to OSSC account for less than 4% of banking system loans. New loans in the non-residential property segment have also continued to shift away from the higher risk OSSC segment to loans for the purchase of shoplots, industrial buildings and factories".

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