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PROPERTY INSIGHTSQuarter 2, 2014

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New completions increase competition in retail sector

PROPERTY INSIGHTSMalaysia | Quarter 2, 2014

Citigold

Market Overview

The Malaysian economy registered strong growth

of 6.2% in Q1, driven by a stronger expansion in

domestic demand and a turnaround in net exports.

The Overnight Policy Rate (OPR) was maintained at

3.00% during Q1. Malaysian economic growth will

remain anchored by domestic demand, with additional

support from the improvement in the external

environment as global economic conditions improve.

Limited new completion of office buildings in Q2

supported office rents, with average office rents

increasing marginally (Figure 1). In addition,

renovation and upgrading activities in some of the

buildings facilitated higher rental and capital values.

However, the huge pipeline supply continues to create

uncertainties for the sector.

The Malaysian Retail Chain Association is

optimistic that domestic retail sales will grow due to

some upcoming events like the World Cup season, Hari

Raya and Christmas, as well as the Visit Malaysia

campaign. Although the rising cost of living, subsidy

rationalization, electricity tariff hikes and a rise in

property tax pose challenges to the retail industry,

they are not expected to be severely detrimental to

retailers.

Prime Office Rental Index

Source : DTZ Research

Figure 1

70

80

90

100

110

Q4 0

5

Q4 0

6

Q4 0

7

Q4 0

8

Q4 0

9

Q4 1

0

Q4 1

1

Q4 1

2

Q4 1

3

Q4 1

4

Q4 1

5

(Q1 2011=100)

Overall housing price growth remains sluggish in

Q2. Competition for buyers is expected to intensify

going forward as developers ramp up new launches,

despite more challenging conditions, before the

implementation of the Goods and Services Tax (GST)

in April 2015. Prospects for the residential sector

remained mixed with continued liquidity supporting

demand, but prices are expected to move sideways, as

relatively high vacancy affects yields and investor

sentiment.

Trends & Updates

Economic Overview

The Malaysian economy expanded by 6.2% in Q1

The Malaysian economy registered strong growth

of 6.2% in Q1 2014, compared to the 5.1% in Q4 2013,

driven by a stronger expansion in domestic demand

and a turnaround in net exports (Figure 2). On the

supply side, the major economic sectors grew further,

supported by both domestic and trade activities. On a

q-o-q seasonally-adjusted basis, the economy grew by

0.8%. Employment conditions remained stable, with

total employment of 13.5 million persons during Q1

2014 compared to 13.7 million persons in Q4 2013. The

unemployment rate was recorded at 3.1% in Q1 2014,

slightly lower than the 3.2% in Q4 2013.

Private consumption growth remained strong at

7.1% in Q1, supported by stable employment condi-

tions and continued wage growth. Growth in public

consumption increased from 5.2% in the previous

quarter to 11.2%, reflecting higher government spend-

ing on supplies and services. Private investment

continued to grow, at 14.1% in Q1, underpinned by

capital spending in the manufacturing and services

sectors.

Headline inflation increases

The headline inflation rate, as measured by the

annual change in the Consumer Price Index (CPI),

averaged 3.4% in Q1 2014, higher than the 3% in Q4

2013. The increase was on account of higher inflation

in the housing, water, electricity, gas and other fuels

and transport categories.

Interest rates remained stable

The OPR was maintained at 3.0% during the first

half of 2014. Monetary conditions remain supportive

of economic activity at the prevailing level of the OPR.

The average interbank rate and retail deposit rates

were stable during the period. The average base

lending rate (BLR) of commercial banks also remained

unchanged at 6.53%.

GDP growth (y-o-y) and unemployment rate

Source : Bank Negara Malaysia, Department of Statistics Malaysia, DTZ Research

Figure 2

0%

2%

4%

6%

8%

Q1 1

1

Q2 1

1

Q3 1

1

Q4 1

1

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GDP growth (y-o-y) Unemployment rate

Ringgit to be affected by global developments

The Malaysian Ringgit and most other regional

currencies continued to be affected by global develop-

ments in Q1. Expectations of stimulus measures in

China and the continued accommodative monetary

policy in the US provided support for the Ringgit

during the quarter.

Overall, the Ringgit appreciated by 0.4% against

the USD. The Ringgit also appreciated against the

Euro (0.7%), but depreciated against the Pound

Sterling (-0.5%) and Japanese Yen (-1.5%). Perfor-

mance of the Ringgit against other regional currencies

was mixed.

Global recovery and the continued strength of domestic demand will underpin growth

Malaysian economic growth will remain anchored

by domestic demand, with additional support from the

improvement in the external environment as global

economic conditions improve. Private domestic

demand is expected to remain the key driver of overall

growth while exports will continue to benefit from the

recovery in the advanced economies. Going forward,

the Malaysian economy is therefore expected to

remain on a steady growth path.

Residential

High-end segment resumed activities with significant supply

A substantial supply of 1,192 units of high-end

condominiums were completed in Q2, compared to the

126 units completed in Q1 and the 40 units completed

during the same period last year. These completions

were mostly located outside of the city centre, such as

Camellia Service Suites, Arata@Tijani and The Verve

Suites (Vox Tower). The only completed project within

the city centre was Soho Suites KL.

Another 5,178 units of high-end condominiums are

expected to enter the market by year end, with the

majority (89%) of these units located in the city

centre (Figure 3).

Stable high-end condominium market with marginal appreciation in capital and rental values

The average price and rental of high-end

condominiums in Kuala Lumpur were both relatively

stable in Q2. The average price increased marginally

by 0.5% q-o-q to RM758 per sq ft in Q2 from RM754

per sq ft in Q1. On the other hand, average rents

remained relatively stable at RM3.59 per sq ft per

month, a minor increase from RM3.55 per sq ft per

month in the previous quarter (Figure 4). Larger units

continued to face weaker demand compared to

smaller ones due to budget constraints. However, a

larger supply of small units is expected to flood the

market with new completions in the near future.

Home prices under pressure

Overall, housing price growth remained sluggish in

Q2. This follows from the latest available data on the

Malaysian House Price Index (MHPI). After slowing to

9.6% in Q4 2013, the first time that the MHPI has

registered a growth rate below 10%, the MHPI

declined further to 8.0% in Q1 2014.


Figure 4

Rental and price indices of high-end condominiumsin Kuala Lumpur

80

90

100

110

120

130

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Capital value Rent

(Q1 2011=100)

Future supply of high-end condominiums in Kuala Lumpur


Figure 3

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2014 2015 2016 Post 2016

City centre Outside city centre

Consumer Sentiment Index remains below 100-point

The Consumer Sentiment Index in Q1 2014

improved from Q4 2013’s reading but remained below

the 100-point threshold of confidence. The improve-

ment in consumer sentiment was due to an increase in

job confidence and the expected moderation in

inflation in the upcoming quarters.

Sales and new launches were slow in the last

couple of quarters, believed to be due to various

measures imposed by the government to cool the

housing sector. However, after this lull, developers

have started to ramp up new launches despite more

challenging market conditions. This is believed to be to

avoid the imposition of the GST in April 2015, which

may have an adverse short term impact on demand.

RetailRetail industry to face challenging but encouraging 2014

The Malaysian Retail Chain Association is

optimistic that retail sales will grow at 6.2% in 2014

due to upcoming events like the World Cup, Hari Raya

and Christmas, as well as the Visit Malaysia campaign.

However, according to Retail Group Malaysia

(RGM), retail sales in Malaysia saw a lower 4.9%

growth in Q1 compared to 7.5% in the same period last

year. This is in line with the current Consumer

Sentiment Index that remained below the 100-point

confidence threshold. Consumer spending in Q1 was

mostly backed by the Visit Malaysia campaign,

back-to-school events, New Year sales and the

Chinese New Year season.

Factors such as the rising cost of living, subsidy

rationalization, electricity tariff hikes and a rise in

property tax pose challenges to the industry, but are

not expected to be severely detrimental to retailers.

The demand for essential goods remains steady.

Notwithstanding, the OPR is expected to rise in H2,

and could affect retail sales of big-ticket items.

Pressure on retail outlets

Existing secondary malls could struggle to

maintain their current occupancy levels and rental

rates due to a pipeline supply of approximately 4.5

million sq ft in both the city and suburban areas in H2

(Figure 5). Malls that are expected to be completed

include M square Shopping Centre, D’Pulze, Empire

City, Sunway Putra Place, Atria Shopping Mall and IOI

City Mall (Table 1).

Table 1

Selected upcoming retail malls in Klang Valley

Name of Development

Empire City, Damansara Perdana

IOI City Mall, Putrajaya

Sunway Putra Place, Kuala Lumpur

Atria Shopping Mall, Petaling Jaya

M square Shopping Centre, Puchong Perdana

D’Pulze, Cyberjaya

1,500,000

1,300,000

620,000

450,000

380,000

260,000

Est area(NLA, sq ft)


Demand remains selectively healthy, with new

launches such as Infinity Residence at Wangsa Maju

registering strong sales. There were also several new

launches at higher prices located at the fringe of

KLCC, such as Expressionz, Ritz Carlton Residences

and three28 Tun Razak to add to earlier ones such as

Star Residences and The Mew. As such, competition

for buyers is expected to remain intense.

Going forward, prospects for the residential sector

continue to be mixed. Ongoing liquidity is supporting

demand, but prices are expected to move sideways as

relatively high vacancy affects yields and investor

sentiment. The possibility of a property bubble, which

is increasingly being conjectured, remains unlikely as

long as employment remains stable with the interest

rate still at a low level.

Retail new supply (NLA) in Kuala Lumpur, sq ft (million)


Figure 5

0

1

2

3

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Completed Supply New Supply

Retail space, especially in lifestyle malls, will

become increasingly competitive as numerous new

mixed-use developments have incorporated retails

centres as key components.

Figure 6


Office development pipeline, sq ft (million)

0

1

2

3

4

5

6

H2 2014 2015 2016 2017

OfficeLimited new office completions in Q2 provide rental support

In Q2, only one office building was completed,

namely Menara TH @ Platinum Park located in the

Golden Triangle, adding 359,000 sq ft of office space.

With this completion, office stock increased to 70.1

million sq ft in Q2 from 69.8 million sq ft in the

previous quarter, an increase of 0.5% q-o-q. For the

first half of 2014, 632,000 sq ft of office space has

been completed, while another 3.4 million sq ft is

expected to be completed in the second half of the

year. Office projects expected to be completed in H2

include a key project ‘Q’ Sentral at KL Sentral with

more than 1.0 million sq ft of office space.

Between H2 and 2017, the projected office supply

is high with 13.7 million sq ft expected to be completed.

More than 65% of this future supply is estimated to be

completed between H2 and 2015, which could

downwardly affect occupancy and rents (Figure 6).

Marginal increase in rental and capital values

Average Average rental values in the prime

locations of Kuala Lumpur rose marginally to RM6.15

per sq ft per month in Q2, from RM6.13 per sq ft per

month in Q1, after almost six quarters of stability

(Figure 7). This increase is attributed to the revision in

service charges due to higher operating costs as a

result of a rise in utility rates. Rentals of top-tier

buildings ranged from approximately RM7 to RM10 per

Figure 7


Prime office rental index

70

80

90

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110

Q4 0

5

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6

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7

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4

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(Q1 2011=100)

Neighbourhood malls required niche positioning amidst increased competition

With the increased level of competition for tenants,

retail malls require niche positioning for sustainability.

The proliferation of neighbourhood malls has meant

that to survive, these malls have to be able to cater to

the needs of local residents. Some examples of

neighbourhood malls in Klang Valley include Jaya

One, Jaya Shopping Centre, Bangsar Village and Citta

Mall. These malls provide services such as

supermarkets for grocery shopping and eateries that

cater to the nearby residents. Therefore, these

smaller malls are relatively well-occupied despite

concerns on the oversupply of retail space.

Meanwhile, the supermarket scene is becoming

more diverse following the entry of new retailers. One

of these is Lulu International Group, a Dubai-based

retailer and a large regional player, is entering

Malaysia via a joint-venture with Felda. They have has

committed to opening six hypermarkets in the coming

years.

Figure 8


Office net absorption, sq ft (million) and vacancy rate

10%

12%

14%

16%

18%

-0.5

0.0

0.5

1.0

1.5

Q2 1

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Q2 1

4

Net absorption (LHS) Vacancy rate (RHS)

sq ft per month, with average rent also increasing

from RM7.76 in Q1 to RM7.82 per sq ft per month at

the end of Q2.

A similar trend was noted in average capital values,

which increased marginally from RM838 per sq ft in Q1

to RM850 per sq ft in Q2.

With negative net absorption of 164,100 sq ft,

occupancy declined 1.0 percentage-point to 84% in Q2

(Figure 8). The occupancy level is projected to weaken

further with negative net absorption and the large

amount of supply which will be completed by the end

of this year.

Uncertain market sentiment

Oversupply will continue to be a concern for some

time given the significant pipeline supply which is

expected to exceed projected demand. Landlords

continue to take this opportunity to upgrade and

refurbish older buildings to be able to compete with

newer buildings for tenants.

Green buildings, with minimal rental premium, are

becoming standard offerings amongst the new space

completed. Notwithstanding, the supply pressure on

rents could be positive for attracting new demand. In

short, the comparatively lower rents continue to make

Kuala Lumpur an attractive destination for

multi-national corporations (MNCs) to set up their

regional headquarters.

GENERAL DISCLOSURE

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prior approval. Any such reproduction should be credited to DTZ.

© DTZ July 2014

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COUNTRY SPECIFIC

MALAYSIA

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Market Overview

PROPERTY INSIGHTSSingapore | Quarter 2, 2014

Citigold

Better performance in non-residential sectors

Based on advanced estimates by the Ministry of

Trade and Industry (MTI), the Singapore economy

grew 2.1% year-on-year (y-o-y), but contracted by

0.8% quarter-on-quarter (q-o-q) in Q2 largely due to a

slowdown in manufacturing.

Prices across all residential segments continued

their decline in Q2, falling at a faster rate compared to

Q1, as buyers remained price-sensitive. Average

rentals also fell in Q2 due to seasonal factors, lower

corporate budgets and oversupply. With a slowdown

in interest both locally and from abroad, prices and

rents are likely to continue to ease over the course of

the year.

Real estate investment fell to $4.4bn in Q2,

bringing total investment volume in H1 2014 to

$9.4bn. Non-residential deals – especially office deals

– led activity, with local property companies as the

largest buyers. In view of the tepid private residential

market, non-residential deals are expected to

continue to drive activity for the rest of 2014.

Average office rents continued to rise in Q2 on the

back of consistent demand and high occupancy rates

(Figure 1). Demand stemmed mainly from tenants

consolidating their operations from various locations

or expanding within their existing buildings.

Given the limited supply in the near term, rental

growth is likely to continue up till 2015. However,

downward pressure on rents is expected thereafter,

when a record supply of 3.9 million sq ft will be

completed in 2016.

While average resale capital values of prime retail

space edged up, retail rents remained flat in most

areas in Q2, as the differing expectations between

landlords and retailers continued. Nevertheless, rents

are expected to stay firm or trend upwards in

Orchard/Scotts Road, supported by limited supply.

Figure 1

Office Rental Indices


0

40

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240

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Raffles Place Shenton Way/Robinson Rd/Cecil St

(Q1 2011=100)

Trends & Updates

Economic Overview

Poor performance in the manufacturing sector

Based on advanced estimates by the MTI,

economic growth in Singapore slowed to 2.1% y-o-y in

Q2, compared to the 4.7% growth recorded in Q1

(Figure 2). This was largely due to the poor

performance of the manufacturing sector, which grew

by only 0.2% y-o-y in Q2, after a 9.9% expansion in Q1.

On a q-o-q basis, the economy contracted by 0.8%,

reversing the 1.6% expansion recorded in Q1.

Correspondingly, Singapore’s manufacturing

economy expanded at a slower pace in June, with the

Purchasing Managers’ Index (PMI) recording a reading

of 50.5, a marginal dip of 0.3 point from 50.8 in May

(Figure 3). A reading above 50 indicates that the

manufacturing sector is generally expanding. The

drop was due to lower new orders and new export

orders, as well as a decline in production output and

imports.

Positive business sentiment in the next three months

Despite slower growth, business sentiment in the

manufacturing sector is positive for the next three

months ending September, supported by improved

economic conditions in the United States and Europe.

A net weighted balance of 7% of manufacturers are

positive about the business situation up to September,

with the precision engineering cluster being the most

optimistic on the back of better demand from both the

local and overseas markets.

Inflation continued to be driven by higher domestic costs

On the other hand, inflation picked up to 2.7% in

May from 2.5% in April, according to the Monetary

Authority of Singapore (MAS) (Figure 4). However,

core inflation (excluding accommodation and private

transport costs) fell 0.1 percentage-point to 2.2% in

May from the previous month, due to the lower

contributions from services and food items.

Figure 2

Source : MTI

GDP growth rates

-10%

0%

10%

20%

Q2 1

2

Q3 1

2

Q4 1

2

Q1 1

3

Q2 1

3

Q3 1

3

Q4 1

3

Q1 1

4

Q2 1

4

GDP growth (y-o-y) GDP growth (q-o-q)

Figure 3

Source : SIPMM, IE Singapore, DTZ Research

Singapore PMI and NODX

-40%

-20%

0%

20%

40%

46

48

50

52

54

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct-1

3

Nov-

13

Dec-

13

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14PMI (LHS) NODX growth (y-o-y) (RHS)

Figure 4

Inflation, interest rate and unemployment rate

Source : MTI, MAS, MOM, DTZ Research *CPI figures for Q2 14 are based on April and May. Unemployment figure for Q2 14 is not available.

0%

1%

2%

3%

4%

5%

6%

Q1 1

2

Q2 1

2

Q3 1

2

Q4 1

2

Q1 1

3

Q2 1

3

Q3 1

3

Q4 1

3

Q1 1

4

*Q2

14

Hun

dred

s

CPI change (y-o-y) 3-month SIBOROverall unemployment rate

Residential

Transaction activity remains weak

Total transaction volume increased 29% q-o-q with

1,739 and 1,420 private homes sold in the primary and

secondary markets respectively. On a y-o-y basis

however, this was still about 60% lower than the

number of units transacted in the same period last

year, before the implementation of the TDSR

framework (Figure 5).

As purchasing ability has been clipped by the

tighter financing conditions, some developers have

adopted realistic and competitive pricing, while others

attempt to differentiate their products to appeal to

potential buyers.

In April and May, a total of 2,390 units were

launched for sale by developers. While this was

already about 20% higher than the total number of

launches for Q1, buyers remained selective. Healthy

take-up was observed only for a few projects that

were priced attractively or located close to amenities

such as MRT stations, schools and shopping malls.

Reflecting buyers’ growing price-sensitivity, some

developments also saw renewed interest after new

units were released at lower prices in Q2. These

developments had median prices reduced by 10-15%

since their initial launches.

Figure 5

Primary and secondary home sales(excluding executive condominiums), units

Source : URA REALIS, 11 July, DTZ Research

0

1,000

2,000

3,000

4,000

5,000Ap

r-11

May

-11

Jun-

11Ju

l-11

Aug-

11Se

p-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr-

12M

ay-1

2Ju

n-12

Jul-1

2Au

g-12

Sep-

12O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb

13M

ar-1

3Ap

r-13

May

13

Jun

13Ju

l 13

Aug

13Se

p 13

Oct

13

Nov

13

Dec

-13

Jan

14Fe

b 14

Mar

14

Apr 1

4M

ay 1

4Ju

n 14

Primary sales Secondary sales Units launched

Higher ABSD in Jan-13Implementation of

TDSR rules on Jun-13

Price declines seen across all residential segments

In the secondary market, price declines were more

pronounced in Q2 as sellers set more realistic price

expectations. In the non-landed residential market,

average resale prices for luxury condominiums fell the

most in Q2 by 3.0% q-o-q, bringing the fall in H1 to

5.0%. Meanwhile, prime freehold and suburban

leasehold condominiums fell by a smaller 3.9% and

3.8% respectively for H1 (Figure 6).

In the landed segment, after holding flat in Q1,

prices began to dip in Q2 too, with declines mainly

seen in the suburban areas for detached,

semi-detached and terrace homes.

Nevertheless, MAS expects core inflation to remain

around 2-3% in 2014 as higher domestic costs,

particularly stemming from a tight labour market, are

likely to remain as the primary source of inflation.

Unemployment expected to remain low in 2014

According to Ministry of Manpower (MOM), even

though the overall seasonally adjusted unemployment

rate rose 0.2 percentage-point q-o-q to 2.0% in March

2014, total employment grew by 28,300 in Q1. Despite

the slight increase in the unemployment rate in Q1,

MOM expects unemployment to remain low for the

rest of the year. The labour market is expected to

continue to tighten this year as previously announced

foreign workforce policy measures come into effect.

Interest rate hike may occur earlier than expected

Although the US economy contracted 2.9% in Q1, a

monthly average of 272,000 jobs was added in Q2 and

consumer expenditure grew 1.0% q-o-q. As a result of

ongoing labour market improvements, strong wage

growth and rising inflation, the US Federal Reserve

could raise the Fed funds rate earlier than expected in

Q2 2015.

Investment

Larger average deal size in Q2 despite fall in activity

Real estate investment fell approximately 11%

q-o-q to $4.4bn in Q2 (Figure 7). This brought total

investment volume in H1 2014 to $9.4bn, about 17%

lower than the $11.3bn invested in H1 2013. Investment

sales comprise transactions that are $5m and above

and exclude $553m of transactions in single

residential units and lots that cannot be redeveloped

or subdivided into more than one plot.

Although the overall transaction volume was lower

in Q2, there were a larger number of deals between

$500m and $1.0bn. Four such deals were concluded,

namely the sale of Equity Plaza ($550.0m), a 92.8%

stake in Prudential Tower ($512.0m) as well as two

government land sites at Woodlands Avenue

5/Woodlands Square and Sims Drive.

Non-residential deals lead activity

Non-residential deals, especially office deals,

continued to lead activity in Q2, although the amount

of non-residential investment was lower by 6% q-o-q

at $2.9bn (Figure 8). Besides the sale of office

properties Prudential Tower, Equity Plaza, Cecil House

for $110.0m via a transfer of shares in the holding

Rental pressure expected to be stronger in subur-ban areas

Due to seasonal factors, falling corporate budgets

and an increasing number of private home

completions, average rentals for luxury and prime

condominiums fell by 2.5% and 3.0% respectively

q-o-q in Q2 after holding up in Q1. In suburban areas,

after a 0.8% decline in Q1, average rentals fell by a

stronger 2.0% q-o-q in Q2.

Despite foreign professionals continuing to look to

suburban areas for more affordable housing options,

rental pressure is expected to be highest in these

locations going forward in view of the large impending

supply.

Between Q2 and 2015, close to 35,000 units are

expected to be completed, substantially higher than

Figure 6

Resale non-landed residential price indices


80

90

100

110

120

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Luxury Prime freehold Suburban leasehold

(Q1 2011=100)

Figure 7

Investment sales, SGD bn


05

1015202530354045

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Q1 Q2 Q3 Q4

the past two years’ (2012-2013) supply of 23,000

units. About 55% will be in suburban areas, providing

potential tenants with greater bargaining power.

company and the commercial government land sale

(GLS) site at Woodlands Avenue 5/Woodlands Square,

other notable non-residential deals in Q2 included the

sale of Changi City Point, Hyflux Innovation Centre,

and Tides, a freehold commercial building at East

Coast Road.

This was also in line with the results from DTZ’s

annual Global Investors Survey 20141 published in

June, where investors indicated that they expect to

put more money into the office and industrial sectors

in 2014, with about 40% expecting to increase their

allocation to offices.

Transaction activity remains weak

Total transaction volume increased 29% q-o-q with

1,739 and 1,420 private homes sold in the primary and

secondary markets respectively. On a y-o-y basis

however, this was still about 60% lower than the

number of units transacted in the same period last

year, before the implementation of the TDSR

framework (Figure 5).

As purchasing ability has been clipped by the

tighter financing conditions, some developers have

adopted realistic and competitive pricing, while others

attempt to differentiate their products to appeal to

potential buyers.

In April and May, a total of 2,390 units were

launched for sale by developers. While this was

already about 20% higher than the total number of

launches for Q1, buyers remained selective. Healthy

take-up was observed only for a few projects that

were priced attractively or located close to amenities

such as MRT stations, schools and shopping malls.

Reflecting buyers’ growing price-sensitivity, some

developments also saw renewed interest after new

units were released at lower prices in Q2. These

developments had median prices reduced by 10-15%

since their initial launches.

Figure 8

Investment sales by sector, SGD bn


0

2

4

6

8

10

12

14

Q2 1

1

Q3 1

1

Q4 1

1

Q1 1

2

Q2 1

2

Q3 1

2

Q4 1

2

Q1 1

3

Q2 1

3

Q3 1

3

Q4 1

3

Q1 1

4

Q2 1

4

Residential Office Industrial Retail Mixed Hotel Others

Only one cross-border deal in Q2

Investment activity in Q2 was dominated by

Singapore-based investors. There was only one

cross-border deal in Q2: Japanese developer Sekisui

House was part of the joint-venture that was awarded

the GLS site at Woodlands Avenue 5/Woodlands

Square. While this was not the first time that Sekisui

House participated in a GLS tender, this would be their

first office development in Singapore.

Property companies were the largest buyers of

properties in Q2, accounting for $3.1bn, or about 71%

of investment activity and continued to be net buyers.

REITs were also active in Q2, in terms of both

divestments and acquisitions. For instance, Keppel

REIT divested its stake in Prudential Tower while

Frasers Centrepoint Trust acquired Changi City Point

and Ascendas REIT purchased Hyflux Innovation

Centre. With the amount of divestments ($512.0m)

higher than their total acquisitions ($496.2m), REITs

were net sellers in Q2. However, this is expected to

reverse in Q3, as REIT activity will be boosted by the

listing of Frasers Hospitality Trust, which will acquire

Intercontinental Singapore and Fraser Suites

Singapore for a total of $824.1m as part of its initial

portfolio.

2014 activity could come in around $20.0bn

REIT activity and developer acquisitions will

continue to support investment activity going

1 This Investors Survey is part of DTZ Research’s flagship report, Money

into Property, published June 2014.

forward. In addition, as global real estate markets

start to improve, investors and funds are becoming

more positive about the performance of the real

estate market. This could see them increasing their

allocations to real estate and Singapore could benefit,

being one of the most liquid markets in the region.

Non-residential deals will continue to drive

investment activity for the rest of this year, given the

tepid private residential market. In spite of an

expected increase in REIT and investor activity in H2,

with only $9.4bn invested in H1, we expect real estate

investment volume in 2014 to come in at the lower end

of our previous forecast of $20-25bn.

Retail

Limited supply supports capital value growth

According to a basket of completed properties

tracked by DTZ Research, both the average resale

capital values of prime retail units in Orchard/Scotts

Road and suburban areas grew 0.8% q-o-q in Q2.

In contrast, resale capital values of prime strata

retail units in other city areas were flat in Q2. These

units are usually located in product-specific

developments which mainly serve the needs of a

limited clientele of long-time customers and hence

may attract comparatively lower investor interest.

Going forward, capital value growth is expected to

stay firm due to the limited supply of prime strata

retail units. While investor interest in strata retail units

remains strong, the limited supply means that sellers

require a premium before divesting their units.

Retail rents remain resilient

Meanwhile, with the exception of upper-storey

retail rents in other city areas, which declined 0.8%

q-o-q, retail rents remained flat in most areas in Q2, as

the differing expectations between landlords and

retailers continued.

According to the Department of Statistics, retail

sales (seasonally adjusted, excluding motor vehicles)

decreased 1.9% month-on-month (m-o-m) in April,

with the sales of discretionary items such as wearing

apparel and footwear, recreational goods and watches

and jewellery falling between 4.3% and 8.5% m-o-m in

April.

The fall in retail sales could also have been

exacerbated by a drop in tourist arrivals to Singapore.

Tourist arrivals declined marginally by 0.6% y-o-y in

the first four months of 2014, but the number of

mainland Chinese tourists fell more significantly by

21.9% y-o-y during the same period. The fall in visitor

numbers from one of Singapore’s largest markets

could have contributed to lower retail sales figures as

the majority of Chinese tourist expenditure went

towards shopping.

Figure 9


Average prime first-storey retail gross rental index inOrchard/Scotts Road

85

90

95

100

105

110

115

Q4 0

5

Q4 0

6

Q4 0

7

Q4 0

8

Q4 0

9

Q4 1

0

Q4 1

1

Q4 1

2

Q4 1

3

Q4 1

4

Q4 1

5

(Q1 2011=100)

Figure 10

Source : URA, DTZ Research

Retail development pipeline including projects onawarded GLS sites, sq ft (million)

0

1

2

3

2014 2015 2016 2017 2018Completed in H1 14 Orchard/Scotts RdOther city areas Suburban areas

Nevertheless, despite lacklustre retail sales

performance, retail rents are expected to stay firm or

trend upwards in Orchard/Scotts Road, supported by

limited supply (Figure 9). Between H2 and 2018, 5.7

million sq ft of retail space is expected to be

completed but only about 4.5% will be located in

Orchard/Scotts Road (Figure 10).

However, new supply in Orchard/Scotts Road may

be forthcoming should Hotel Properties Limited (HPL)

decide to redevelop its assets in west Orchard,

comprising Forum The Shopping Mall, Hilton

Singapore, Four Seasons Hotel and HPL House. The

combined site offers 180 metres of prime retail

frontage along Orchard Road and may benefit from

improved accessibility from the Orchard Boulevard

MRT station on the Thomson Line which is expected to

be completed in 2021.

Office

Occupancy rate edges up to 95.0% amidst limited supply

Average office rents rose in Q2, as the island-wide

occupancy rate increased 0.4 percentage-point q-o-q

to 95.0%. This was in spite of a lower net absorption

figure of 290,000 sq ft, compared to 322,000 sq ft in

Q1. This brought cumulative net absorption for H1 2014

to 612,000 sq ft, still higher than the 545,000 sq ft in

H1 2013.

Demand in Q2 stemmed mainly from tenants

consolidating their operations from various locations

or expanding within their existing buildings. These

demand sources remained diversified across

industries such as social media, pharmaceuticals and

technology, as well as secondary financial institutions.

Central Business District (CBD) rents grow by up to 6.5%

Within the CBD, occupancy rates and rents

increased the most in Marina Bay in Q2. The

occupancy rate of Marina Bay rose 3.3

percentage-points q-o-q to 91.4%, while average gross

rents increased 6.5% q-o-q to $12.25 per sq ft per

month. Elsewhere in the CBD, average gross rents in

Shenton Way/Robinson Road/Cecil Street stagnated

q-o-q at $8.00 per sq ft per month while the

occupancy rate fell from 97.9% in Q1 to 94.7% in Q2,

due largely to the significant amount of space vacated

by Singapore Exchange (SGX) from their flagship

building (Figure 11). However, occupancy in the area

could strengthen in H2 as Aon will relocate to SGX

Centre and absorb part of SGX’s vacated space.

Capital values continue to inch up

Based on a basket of existing buildings tracked by

DTZ Research, capital values of office space within

Raffles Place and Shenton Way/Robinson Road/Cecil

Street areas inched up 0.5% and 0.2% q-o-q

respectively in Q2. The continued interest in

strata-titled office units and enbloc office deals,

amidst expectations of further rental increases,

helped lift average capital values of office space in Q2.

Office Rental Indices


Figure 11

04080

120160200240

Q4 0

5

Q4 0

6

Q4 0

7

Q4 0

8

Q4 0

9

Q4 1

0

Q4 1

1

Q4 1

2

Q4 1

3

Q4 1

4

Q4 1

5

Raffles Place Shenton Way/Robinson Rd/Cecil St

(Q1 2011=100)

Large supply in 2016 provides occupiers with opportunity to review long-term accommodation strategies

Going forward, an estimated 2.7 million sq ft of

office space will be completed between H2 and 2015

(Figure 12). This works out to be an annual average

supply of 1.8 million sq ft, in line with annual average

demand over the past three-years (2011-2013) of about

1.7 million sq ft.

Beyond 2015, however, the pipeline supply of office

space will reach a new peak of about 3.9 million sq ft in

2016, with about 60% located in the CBD. This could

exert some downward pressure on office rents going

forward until this additional space can be absorbed.

Notwithstanding, the large supply in 2016 presents

an opportunity for occupiers to review and formulate

their long-term accommodation strategies. They could

enjoy first-mover advantage should they decide to

take up space in these upcoming developments.

Figure 12

Source : URA, DTZ Research

Office development pipeline including projects onawarded GLS sites, sq ft (million)

-1.0

0.0

1.0

2.0

3.0

4.0

2014 2015 2016 2017 2018

Completed in H1 14 Termination CBD CBD Fringe Decentralised Areas

GENERAL DISCLOSURE






© DTZ July 2014










NO WARRANTY















COUNTRY SPECIFIC

MALAYSIA

© 2014 CITIBANK




Strong interests in en-bloc offices

PROPERTY INSIGHTSHong Kong | Quarter 2, 2014

Citigold

Market Overview

Office rents remained relatively flat this quarter

with Kowloon East having dropped by 3.2%

quarter-on-quarter (q-o-q) (Figure 1). Demand in

Central/Admiralty is currently being fuelled by the

expansion of Chinese financial institutions and this

has caused vacancy to drop by 0.4 percentage point

to 5.2%. Interest in Kowloon East persists but rents

dropped in light of growing supply and increasing

vacancy.

Within Q2, affected by negative sales growth,

changing spending habit of the Mainland tourists and

increasing vacancy in retail premises, retail rents in

Hong Kong Island and Kowloon declined by 3.0% and

6.4% q-o-q, respectively. Shopowners have become

more pragmatic but the rental expectation gap

persists between landlords and tenants despite having

narrowed.

The relaxation on Double Stamp Duty (DSD) has

stimulated market activities with the number of S&Ps

for building units and land spiking by 43.3% between

Q1 and Q2 2014. Meanwhile, new residential projects

launched across the city within the quarter saw very

positive response.

Two major en-bloc office transactions were

recorded this quarter in the non-core office

submarkets of Kowloon East and Wong Chuk Hang.

Hence, despite the number of major deals dropped

from 60 to 29 between Q1 and Q2 2014, the total

consideration increased from HK$12.4bn (US$1.6bn) in

the first quarter to HK$17.8bn (US$2.3bn) in the

second quarter.

DTZ office rental index (Q1 2006 =100)

Figure 1


0

50

100

150

200

250

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2014F

2015F

Central/ Admiralty Wanchai/ Causeway Bay Island East Tsimshatsui

Q1 2006 = 100

Trends & Updates

Economic OverviewThe preliminary figure on GDP shows that the

economy grew moderately in the first quarter of 2014,

with real GDP growth rate reaching 2.5%, slightly

lower than the 2.9% in the preceding quarter (Table 1).

Total exports in May were up by 4.9% compared to

a year earlier to reach HK$306bn (US$39.5bn) (Table

1). There are some improvements in advanced

markets, with exports to Japan rising by 11.9% y-o-y

and exports to Germany growing by 9.4% y-o-y.

Inflationary pressure remained low in May, with the

overall consumer price rising by 3.7% on a yearly

basis, but remaining the same as that in April (Table 1).

The labour market remained tight in March – May

2014, with seasonally adjusted unemployment rate

stayed at the 16-year low of 3.1% (Table 1).

Domestic private consumption expenditure grew

at an annual rate of 4.3% to reach HK$358.6bn

(US$46.3bn) in Q1 2014, the slowest growth since Q3

2009. The sluggish growth is mainly due to the timing

of the Easter holiday (Table 1). The expected low

unemployment rate and further increase in wages will

continue to support the growth of private consumer

spending in the second half of the year.

Total visitor arrivals in May increased by 10.8%

y-o-y to reach 4,590,579. As such, visitor arrivals in

the first five months of 2014 reached 24,036,520,

equivalent to a jump of 13.6%. The growth in tourism

industry continued to be driven by Mainland Chinese

visitors, as 75.2% or 3,452,734 were from Mainland

China. On the other hand, total retail sales in May

dropped by 4.1% y-o-y to be recorded at HK$39.0bn

(US$5.0bn). Due to the change in consumption

pattern of the mainland tourists, negative retail sales

growth was recorded for the past four months (Table

1).

* In chained (2012) dollars

Source : Census and Statistics Department, HKSAR, Hong Kong Tourism Board

Table 1

Economic indicators

PeriodIndicator Unit Value Changey-o-y(%)

Q1 2014

May 2014

Q1 2014

Mar 2014 –May 2014

May 2014

HK$bn

HK$bn

HK$bn

%

Million

517.8

306.0

358.6

3.1

4.6

+2.5

+4.9

+4.3

-0.3 pts

+10.8

May 2014 - 119.2 +3.7

May 2014 HK$bn 39.0 -4.1

GDP at constant prices*

Total exports

Privateconsumptionexpenditure

Unemployment rate (seasonallyadjusted)

Visitor arrivals

Composite CPI

Total retail salesvalue

Residential

With the proposed relaxation of Double Stamp

Duty (DSD) in May, the residential market regained

momentum and transaction volume rebounded in the

second quarter of the year. As such, the number of

S&Ps for building units and land reached 20,716 in Q2,

equivalent to a jump of 43.3% from Q1. In particular,

the transaction volume increased from 6,178 S&Ps in

April to 6,978 in May, and further to 7,560 in June

(Figure 2).

Recent land sales in Pak Shek Kok, Tai Po show

that developers have become more conservative in

making their bids in view of huge potential supply in

the New Territories. By contrast, due to limited supply

in the urban area, sites in both Kai Tak and Wan Chai

sold at a very high price. Keen interest in bidding for a

land plot in Shouson Hill also revealed that the high

end niche has not been affected by government

measures.

The government proposed a six-month exemption

period from payment of the DSD which will take effect

once the official contract is signed. This proposed

delay in tax payment is expected to benefit up-graders

and buyers of non-completed flats. As such, the first

hand market is gaining momentum and several new

projects across the city such as City Point received

very good market response.

On the other hand, the relaxation of government

measures, combined with the robust sales of new

projects, activated the secondary market. The

transaction volume of the secondary sales increased

by 48.9% from March to April, and rose by another

21.5% to reach the level of 4,429 in May. As supported

by strong fundamental demand and the reduced

number of listings, room for negotiation has

narrowed. As a result, vendors are more optimistic in

raising their asking price and a number of high unit

rate transactions were recorded.

With respect to price, the mass market and the

luxury market performed differently. The mass market

price index recorded a rise of 1.4% compared with the

previous month and was up by 0.4% from the last

quarter. Compared with the last price peak (February

Figure 2

Transaction volume of S&P Agreements(No. of S&P Agreements)

Source : Land Registry

0 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of S&P Agreements

Table 2

Primary residential market statistics TBU

Total stock(no. of units)

price index(Jan 2000= 100)

q-o-qchange (%)

y-o-ychange (%)

MassMarket 1,037,237 207.3 0.4 -0.2

-1.6 -6.186,396 208.0

1,123,633 207.6 -0.4 -2.8Overall

Source : DTZ Research, Rating and Valuation Departement HKSAR

LuxuryMarket

Figure 3


Residential price index (Jan 2000 = 100)

60

80

100

120

140

160

180

200

220

240

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mass residential Luxury residential Overall

Jan 2000 = 100

Office

As there were no new completion in this quarter,

the overall stock of Grade A office remains at

78,994,024 sq ft. Overall net absorption reached

96,482 sq ft and vacancy rate dropped from 5.6% in

Q1 to 5.5% in Q2. However, the overall rent dropped

further to be recorded at HK$59.3 (US$7.7) per sq ft

per month, this being the fourth consecutive quarter

in which overall rents have dropped (Table 3).

In the Central Financial District (CFD) of Sheung

Wan/ Central/ Admiralty, demand of office space

continues to be driven by companies of PRC origin.

With the establishment of Shanghai-Hong Kong Stock

Connect, the transaction volume of the stock market

is expected to surge and Chinese brokerage

companies are expected to benefit from this rapid

business growth. As Chinese financial institutions

have a strong preference for locating in the CFD,

numerous leasing activities within this submarket

have recently been recorded. To cite just one example,

China Citic Security took up one floor of office space

(13,107 sq ft) at Exchange Square Two. As such, the net

absorption of the CFD reached 139,411 sq ft and

vacancy rate dropped from 5.6% in Q1 to 5.2% in Q2.

On the supply side, landlords are no longer willing to

offer concessions, causing the overall rent to stabilize

at HK$99.3 (US$12.8) per sq ft per month (Table 3 and

Figure 4).

While rents in other sub-markets remained stable,

the rents in Kowloon East softened by 3.2% q-o-q to

be recorded at HK$32.0 (US$4.1) per sq ft per month

(Table 3 and Figure 4). As the submarket is backed by

the government policy “Energizing Kowloon East

Office” and offers abundant choice of high quality

office spaces, Kowloon East has increasingly attracted

the attention of office market occupiers. In facts,

Table 3

Grade A office market statistics

29.5

16.0

11.0

9.3

13.3

79.0

5.2

4.3

2.8

5.2

10.1

5.5

0

0

0

0

-3.2

- 0.3

Sheung Wan/Central / Admiralty

Island East

Tsimshatsui

Kowloon East

Overall

Totalstock(millionsq ft)

District Availability ratio (%)

Changeq-o-q(%)

Monthly Rent(HKD persq ft)

99

47

38

33

32

59


Wanchai /Causeway Bay

Looking into the second half of the year, prices in

the luxury sector would continue to see downward

pressure. By contrast, the demand for small lump sum

units will remain strong, but with no major price

increase anticipated.

2013), the drop narrowed down to 4.5%. However,

prices in the luxury sector continued to soften, with its

price index being recorded at 208.0 in May, down by

0.4% from April and 9.0% from the peak in February

2013 (Figure 3 and Table 2).

Figure 4

DTZ office rental index (Q1 2006 = 100)


0

50

100

150

200

250

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2014F

2015F

Central/ Admiralty Wanchai/ Causeway Bay Island East Tsimshatsui

Q1 2006 = 100

Figure 5


Grade A office supply (GFA sq ft million),net absorption (GFA sq ft million) and availability ratio (%)

-4

-2

0

2

4

6

8

10

-2

-1

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

%

New supply Net absorption Availability ratio

GFA sq ft million

tenants from different sectors are looking for office

space in this submarket. Though the demand for office

space in this area is strong, rental growth is

suppressed at the moment by huge supply and high

vacancy rate.

Swire properties is moving forward with its

intention to redevelop a portion of the Island East

portfolio. Tenant relocation is expected to take place

gradually. As there is a lack of office space in Island

East, some tenants may be relocated to other

submarkets, stimulating demand and market

performance across various regions.

Office availability by location

© The Government of the Hong Kong SAR Map reproduced with permission of the Director of LandsSource : DTZ Research

Map 1

Retail

According to the Immigration Department,

387,700 visitors from Mainland China visited Hong

Kong between May 1st and 3rd, which is equivalent to

a drop of 1.7% compared with the same period a year

earlier. This is the first time to witness a drop of

mainland visitors during the Labour Day Golden Week

since the implementation of individual travel scheme

in 2003.

On the other hand, the introduction of

anti-extravagance rules, the slowdown of the Chinese

economy and the reduction of purchasing power of

mainland visitors have adversely affected retails sales

in Hong Kong, especially for luxury goods. As such,

total retail sales in May dropped by 4.1% y-o-y to reach

HK$39.0bn (US$5.0bn) (Figure 6). In particular, the

sales of jewellery, watches and clocks, and valuable

gifts recorded a y-o-y drop of 24.5%. However, the

sales of mid-range products continue to thrive. In

particular, the sales of medicines and cosmetics

increased by 8.0% y-o-y, which explains why this

group of tenants is more active recently. For instance,

Nature Republic leased 2,242 sq ft in Taurus Building

while Bonjour leased 1,941 sq ft in Hanley House.

Affected by the visitor arrival and retail sales

figures, multinational brands have slowed down

expansion plans in prime shopping districts and

landlords are more willing to accept a lower rent and

shorter-term tenancy agreements. Hence, both Hong

Kong Island and Kowloon recorded rental decline in

this quarter, with the former dropping by 3.0%

compared with the previous quarter and the latter

dropping by 6.4% over the same period (Table 4 and

Figure 7).

However, the situation is completely different in

non-core areas. As Mainland Chinese visitors prefer to

shop in the New Territories due to ease of convenient

access to the border, leasing activities were more

active in areas like Sheung Shui, Yuen Long and Tuen

Mun. As such, the New Territories rental index

continued to outperform the other two submarkets,

with rental growth of 3.4% q-o-q and 7.1% compared

with the previous year (Table 4 and Figure 7).

Hong Kong Island 188.7 -3.0 -3.1

3.4 7.1186.8

-6.4 7.0157.2Kowloon

New Territories

Source : Rating and Valuation Department HKSAR, DTZ Research

y-o-ychange (%)

Rental Index(Q1 2000 = 100)

q-o-qchange (%)

Retail market statistics

Table 4

Source : Rating and Valuation Department HKSAR, DTZ Research

Retail rental index (Q1 2000=100)

Figure 7

60

80

100

120

140

160

180

200

220

Q12006

Q3 Q12007

Q3 Q12008

Q3 Q12009

Q3 Q12010

Q3 Q12011

Q3 Q12012

Q3 Q12013

Q3 Q12014

Hong Kong Island Kowloon New Territories

Q1 2000 = 100

Figure 6

Total retail sales (Value HK$bn, yearly growth %)

Source : Census and Statistics Department HKSAR

The government has announced its intention to

reduce the Individual Visit Scheme by 20%. If it is

implemented, it will definitely place additional

pressure on the retail market as both the tourist

arrivals and retail sales figures will drop further.

However, if the policy is modified to restrict

multi-entrance travellers, the effect of the retail

market in the North District will be affected more as

parallel traders tend to purchase basic necessities

near the border. Hence, the demand for shops in these

areas will drop as a result.

-25

-15

-5

5

15

25

35

0

10

20

30

40

50

60

Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

Jul

Oct Jan

Apr

2007 2008 2009 2010 2011 2012 2013 2014

Retail Sales Value Retail Sales Growth

Value (HK$bn) Yearly growth (%)

GENERAL DISCLOSURE






© DTZ July 2014










NO WARRANTY















COUNTRY SPECIFIC

MALAYSIA

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Citigold PROPERTY INSIGHTS - Citibank Malaysia · Camellia Service Suites, Arata@Tijani and The Verve ... Atria Shopping Mall, Petaling Jaya M square Shopping Centre, Puchong Perdana