PROPERTY INSIGHTS. Market Overview. Tighter lending to cool market. Malaysia Quarter 1, 2012

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1 PROPERTY INSIGHTS Malaysia Quarter 1, 212 Tighter lending to cool market Market Overview The economy grew by.1% in 211. The forecasted growth for 212 is.%-.% and is expected to be driven by domestic demand and with support from public expenditure. The residential market was relatively quiet with no new completion recorded and no launches seen due to the seasonal effects of various public holidays. Although 212 will be a challenging year globally, as tighter lending bites into demand especially speculative buying based on little upfront cash under Developer Interest-Bearing Scheme (DIBS). Retail sales are expected to grow more moderately driven by relatively cautious consumers spending and tourist arrivals. With more retail space entering the market and uncertainty in the global economy, filling up the additional retail space that is being completed will be a challenge. Nevertheless, retailers are selective as reflected in the pre-commitment rates of good upcoming malls. Figure 1 Average prime office gross rents 7 RM per sq ft per month The office market showed resilience with both capital and rental values holding firm despite increasing new supply (Figure 1). The market is likely to see greater challenges with slower economic growth and an anticipated oversupply in the coming months, as the pressure to find tenants gather more intensity.

2 Trends & Updates Economic Overview The Malaysian economy expanded at.2% year-onyear (y-o-y) in the fourth quarter last year compared with.8% in the third quarter, higher than market expectations of.9% (Figure 2). For the whole 211, the economy grew by.1% which was within the forecasted range of.%-.%. Domestic demand will continue to be the key driver with strong support from the private sector. Public expenditure is also expected to contribute to the economic growth. The growth for 212 has recently revised downward by Bank Negara Malaysia to.%-.% from.%-6.% in view of weaker external conditions. Bank Negara Malaysia (BNM) is likely to keep the key interest rate - Overnight Policy Rate (OPR) - unchanged at %. The OPR has been maintained at % since May 211 after four rate hikes from 2% in March 21. According to analysts, lower inflation allows BNM to hold the rate steady and allows room for monetary easing. Despite the slower economic outlook, the current interest rate is deemed accommodative enough to support domestic demand. Household debt had edged up to 76.6% of the country s gross domestic product as at end of 211 compared with 7.8% in the previous year. According to BNM, it was not an alarming figure as there had been a declining trend in non-performing loans in that sector. Outstanding household debts grew moderately at 12.% in 211 compared with 1.7% a year earlier, following stringent measures imposed by BNM to curb speculation in the property market. The largest household debt category was loans for the purchase of residential properties (%). The bulk of these loans went to the purchase of residential units priced over RM2,. On the same matter, Malaysian Rating Corp Bhd (MARC) voiced its concern on the lending by non-bank institutions and its contributions to household debts Figure 2 GDP growth and unemployment rate 1 % Q1 9 Q2 9 Q 9 Q 9 Q1 1 Q2 1 Q 1 Q 1 Q1 11 Q2 11 Q 11 Q 11 GDP growth (y-o-y) Unemployment rate which was on an increasing trend in the past few years. This increasing level of household debts could create risks on the housing market in a downturn. The headline inflation rate reflected by the Consumer Price Index (CPI) eased to 2.2% y-o-y in February. Food & non-alcoholic beverages (2.9%) and non-food (1.8%) increased the most. The Consumer Sentiment Index (CSI) remained above the key benchmark 1-point level, notwithstanding that the latest CSI plunged to two-year low of 16. points with growing concerns on finances and jobs as well as inflation. The unemployment rate remained low at.% as at January 212, compared to.1% at December 211. Nevertheless, jobs remained one of the main concerns as reflected in the CSI. Despite global economic uncertainties, as at January 212, Malaysia registered 6 approved projects in the manufacturing sector amounting to RM2.bn with RM1.bn or 6% from Foreign Direct Investment (FDI). According to CIMB Research, the total value of approved investments is expected to slow down from RM6.1bn in 211 to RMbn this year due to the weak external situation.

3 According to the International Trade and Industry Minister Datuk Seri Mustapha Mohamed, the realised private investment is forecasted to increase to RM11bn in 212 from RM9bn last year with a significant contribution from the oil and gas sector as government continues the implementation of ETP s projects. It is estimated that about % of the private investment will come from oil and gas sector. The economic environment is expected to attract more private investments with continuous implementation of mega projects such as Mass Rapid Transit, Light Rail Transit extension, Kuala Lumpur International Financial District, Banting-Taiping Highway, Bandar Malaysia and 1-storey Menara Warisan Merdeka to cushion the expected economic slowdown. Residential No new completion was observed in the quarter. However, almost, units of condominiums are expected to enter the market by end of this year. A majority of about 86% or 2,6 units are located in the city centre whilst the remaining 1% or 2 units are outside the city centre. Prominent projects to be completed in the year include Verticas Residensi, Sky Residence and St. Mary Residences (Figure ). Although 212 will be a challenging year globally, developers are confident that the demand for residential properties in Kuala Lumpur will remain selectively strong, as developers focus on smaller and therefore more affordable units as well as packaging launches with attractive Developer Interest-Bearing Scheme (DIBS). No new launches were noted in the quarter, due to the seasonal effects of various public holidays. After recording an encouraging sales rate of 8% to 9% for its Platinum Suites, the developer, Platinum Victory Sdn Bhd, is planning to launch the second phase of its high-end project called Platinum Victory Face in Q 212. This phase will comprise serviced apartments priced from RM1,6 per sq ft. G Residence, a condominium development by Tan & Tan Development Berhad and located at Jalan Desa Pandan, a suburb at the fringe of the embassy row of Ampang Hilir/U-Thant location, recorded a Figure Future supply of high end condominium in Kuala Lumpur,,,, 2, 2, 1, 1, Source: units 212 DTZ Research 21 City centre good sales rate since its preview in December last year. About 8% of the 7 condominiums sized between 1,8 sq ft and 1, sq ft and priced at an average of RM6 per sq ft were snapped up. Other new launches are being planned for this year. In the city centre, proposed launches include 288 Jalan Raja Chulan and the Platinum Residences@Platinum Park, the latest residential project around KLCC. 21 Quill Group is said to plan to launch its Quill 1 integrated development at Jalan Sultan Ismail this year, where one of the components is a -storey residential tower. Outside the city centre, Naza TTDI planned to launch 17 units of condominium in its KL Metropolis project in Q Outside city centre Post 21

4 The average capital value of high-end condominiums in Kuala Lumpur increased marginally by.% q-o-q to RM6 per sq ft, whilst the average rental value rose.1% q-o-q to RM.62 per sq ft per month (Figure ). The government initiative, My First Home Scheme, to encourage lending to first home buyers for properties valued at a maximum of RM22, (for single applicants) or a maximum of RM, (for joint spousal applicants with a household income of below RM6, per month cumulatively) was reported to fail with few loans approved. With the imposition of stricter guidelines on personal lending to individual households in general, developers are likely to feel the impact of slower sales in the coming months. Effective January 1, under the responsible lending guidelines, loans Figure Rents and capital values of high end condominiums in Kuala Lumpur RM per sq ft will be approved based on net income compared with gross income previously. This will cool an over-heated market that has run up substantially in terms of pricing in the last two years as well as focus developments toward the more affordable housing segment Capital values (LHS) RM per sq ft per month Q1 11 Q2 11 Q 11 Q 11 Rents (RHS) Q Retail According to Retail Group Malaysia, retail sales growth in the first quarter of 212 is estimated at a conservative figure of 1% after achieving 11.% in the fourth quarter 211. For 212, RM88.2bn of sale is anticipated with a projected slower growth of 6.% compared to 6.% in 211, in view of the European debt crisis, job uncertainties and an anticipated reduction in credit card spending. Nielsen s Global Survey on Consumer Confidence and Spending Intention revealed that Malaysians were more cautious with their spending. They are spending less new clothes and out-of-home entertainment, switching to cheaper grocery brands and curbing telephone spending due to growing concerns over the economy, job security and increasing food prices. The recent revision in civil servant pay package and the proposed country s minimum wage which is indicatively set at RM9 would benefit the retail Figure Retail new supply (NLA) in Kuala Lumpur Source: sq ft (s) 26 DTZ Research Completed Supply industry as these measures will boost household incomes especially as the lower income group will have extra Ringgit to spend New Supply The retail stock in Kuala Lumpur stood at 2. million sq ft, a decline of.8% from the preceding year (Figure ) due to the closure of two retail malls

5 namely Plaza Warisan and UDA Ocean located at Jalan Sultan which were acquired for the development of a Mass Rapid Transit (MRT) station. There was no new major completion of new retail space in Q Retail centres in Kuala Lumpur (KL) registered a decline in occupancy rates. Average occupancy rate in KL decreased to 9.6%, a drop of.1 percentagepoint quarter-on-quarter (q-o-q) and 1. percentagepoints y-o-y. Nevertheless, new upcoming major retail centres continued to attract retailers who are selective and would still lease space in centres that are expected to see high footfall. Setia City Mall in Shah Alam with over 7, sq ft of net lettable area (NLA), due to open in May 212, recorded overwhelming response with about 9% of its retail outlets already leased out. KLIA2 at the new low cost carrier terminal (LCCT), adjacent to Kuala Lumpur International Airport (KLIA) in Sepang with an approximate NLA of, sq ft has received strong interest from international and local concessionaires. It is planned to open in April 21 and is expected to achieve RM1.6bn in retail sales once the new LCCT is in full operation. Nu Sentral at Table 1 Opening of selected upcoming retail centres in Klang Valley Name of development NLA (sq ft) Opening Setia Alam Mall, Shah Alam 7, 212 Nu Sentral, Kuala Lumpur 7, 21 KLIA2, KLIA, 21 IOI City Mall Putrajaya, Putrajaya 1,, 21 transit hub KL Sentral with 6, sq ft NLA has registered about 7% pre-commitment rate to date. It is slated to open in March 21 (Table 1). The proposed IOI City Mall in Putrajaya with 1. million sq ft NLA reported that it had secured two major tenants to its mall. Scheduled for completion in 21, the mall is part of a mixed project which also features an entertainment park and two office towers, and a hotel to be added in 21. Looking forward, the retail sector is likely to continue to grow moderately supported by relatively cautious consumers spending and tourist arrivals. With more retail space entering the market and uncertainty in the global economy, in the next five years, there will be a challenge to fill up the additional retail space that will be completed. Offices The office market was largely stable with an average occupancy rate of 86%, a slight improvement from 8.8% recorded in the previous quarter (Figure 6). Although net absorption was low at only 129,11 sq ft, no new offices was completed in the quarter (Figure 6). Recently completed buildings such as Petronas Tower, Bank Islam Tower and Menara Prestige recorded improvements in occupancy rate recording 1%, % and % respectively, up from Q 211 occupancy rates of 7%, % and 2%. The total supply of office space in Kuala Lumpur currently stood at 6.6 million sq ft and will see a growth of 19% in the next three years, with an Figure 6 Office net absorption and vacancy rate 2, sq ft 1, (s) 1, - -1, -1, Source: estimated.8 million sq ft expected for the rest of the year. Q1 9 Q2 9 Q 9 Q 9 Q1 1 Q2 1 Net absorption (LHS) DTZ Research Q 1 Q 1 % Vacancy rate (RHS) Q1 11 Q2 11 Q 11 Q 11 Q1 12

6 Prime rents stood at RM6.2 per sq ft per month, unchanged from the last quarter, exhibiting resilience despite weakening market conditions (Figure 7). Major leasing activities noted were from oil and gas giant Technip continuing their expansion with 97, sq ft at Wisma Dijaya, and Nomad Service Office relocating their operations to Menara Prestige from Etiqa Twin. Meanwhile, some of the existing tenants in Petronas Tower 2 relocated to Petronas Tower to make way for the return of Tower 2 for Petronas own occupation. The quarter saw Multimedia Development Corporation, the regulatory authority for the multimedia industry, liberalising their guidelines for the siting of MSC status companies by allowing such companies to be located within areas designated as Cybercities without necessarily being in a specific MSC designated building. This provides flexibility to such companies whilst landlords of properties within such designated areas will benefit from this move without putting additional capital investments to upgrade them to the approved specifications. As part of the development of the Greater Kuala Lumpur Region under the Economic Transformation Figure 7 Average prime office gross rents 7 RM per sq ft per month Plan, the Government is likely to expedite the implementation of the Kuala Lumpur International Financial District in the near future. This will involve the launching of a key landmark office tower. Whilst it will be exciting for the market to see the emergence of a rival office district to KLCC, it will ratchet up the competitive pressure on rents by several notches at a time when oversupply is a major concern. The market is likely to see greater challenges with slower economic growth and an anticipated oversupply in the coming months, as the pressure to find tenants gather more intensity.

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