Property sector may still be in for the worst

The worst is yet to come for the property sector as the country continues to feel the impact of the global economic crisis, according to HWANGDBS Vickers Research Sdn Bhd's roundtable.

The discussion with three property brokers to assess conditions in the sector and its outlook found the high-end residential market at the Kuala Lumpur City Centre (KLCC) and Mont'Kiara as well as retail and hotel segments, especially those with poor branding, to be the most vulnerable.

The panel included Hall Chadwick Asia Sdn Bhd chairman Kumar Tharmalingam and Regroup Associates' executive chairman Christopher Boyd and managing director Allan Soo.

"Office rental/occupancy rate should continue to hold up, with demand support coming from government-linked companies (GLCs). The KLCC commercial segment would be the most resilient due to its captive demand," HWANGDBS Vickers analyst Yee Mei Hui said in a report.

She noted that asking prices for the high-end residential segment in the KLCC and Mont'Kiara areas had fallen 20-30 per cent year-on-year.

Given the large incoming supply over the next two to three years and the high foreign ownership, prices were likely to fall further, Yee said.

However, the fourth quarter of 2008 saw growth. The average rental for prime office space in Kuala Lumpur breached RM7 per sq ft, while the vacancy rate dropped to 7 per cent.

As to the retail sector, Yee projects a 10-20 per cent rental downside this year amid rising vacancies.

"The average rental for prime retail malls started declining marginally in the fourth quarter of 2008. We understand that newer malls are struggling to breach 60 per cent occupancy and a few tenants are looking to pull out from recently-opened malls. Some have been offered rebates, such as at The Gardens Mall at Mid Valley City," she said.

Yee also expects hotels with poor branding to be the worst hit by the slowdown.

"The average room rate (ARR) has fallen by 20 per cent, while occupancy rate has remained steady at around 70 per cent. Most affected were hotels with ARR less than RM200 per room per night, partly due to slower public spending.

"Niche budget hotels, like Tune Hotel, however, have been relatively resilient.

"The Mandarin Oriental Hotel Kuala Lumpur saw ARR grow 5 per cent to RM630 per room per night, while the occupancy rate eased slightly to 65-70 per cent last year from 74 per cent in 2007."

Among the strategies highlighted at the roundtable for property developers to weather the crisis and emerge stronger were to hold income-producing, fully-tenanted properties and sell underperforming assets.

Developers were also advised to accumulate strategic landbank, focus on branding, reassess their business models and identify new opportunities.

Yee reiterated her cautious view on the Malaysian property sector and named KLCC Property Holdings Bhd as her top stock pick owing to its locked-in rental income from blue-chip tenants on long-term leases.

By Business Times