Kuala Lumpur RetailAsian Cities Report – 1H 2020

REPORT

Savills Research

savills.com.my/research

Kuala Lumpur Retail

COVID-19 has transformed the retail trading environment

THE IMPACT OF COVID 19 ON THE RETAIL SECTORTo contain the spread of the COVID-19 virus, the Malaysian government imposed a Movement Control Order (MCO) beginning 18th March 2020, which included border entry bans, travel restrictions and temporary closure of all businesses across all industries deemed non-essential.

According to Department of Statistics Malaysia, retail sales in March 2020 dropped by 6.6% YoY (+6.9%: March 2019) and fell by 9.9% MoM (-3.4%: February 2020), largely contributed by the plunge in non-essential retail sales. Retailers in malls report sales having fallen between 50% to 90%, with retailers trading in tourist zones describing a drop of at least 70%. In response to this, retailers are seeking for rental assistance from landlords, in the form of rent relief or rental deferment. This is however expected to be a trade-off between extension of leases and rebased rents. Responses to these requests have varied between landlords, who seem to prefer working with individual tenants, typically evaluating on a case-to-case basis as far as short-term rent relief packages are concerned. To safeguard the small and medium enterprises (SME), the government has taken the pre-emptive measure in off ering fi nancing assistance to support growth.

As a step towards reopening the economy, the government replaced the MCO on 4th May 2020 with a Conditional MCO (CMCO) that will last until 9th June 2020. This new order allows almost all businesses to reopen, with strict conditions and government-issued standard operating procedures (SOP) to be adhered stringently, and with entry and interstate (and international) travel bans still in place, while schools are still closed. Nevertheless, some of the malls that have reopened have yet to operate at their full capacity as businesses that involve close physical contact and are deemed mass gatherings such as cinemas, hair salons, beauty and wellness related centres, bazaars and conferences and exhibitions have not been allowed to reopen yet. Additionally, suburban malls with high-rise residential dwellings are recovering faster than city centre malls, as most workplaces in the city centre are currently operating at reduced capacity given the continued encouragement of home-based work.

RETAIL MALL PROJECTS EXPECTED TO EXPERIENCE DELAYS IN OPENINGTropicana Gardens Mall opened in January 2020, netting 1.0 million sq ft of lettable area. Located in the suburbs of Kota Damansara, it is the only mall that was completed in Q1/2020 and brings the Greater KL total retail stock up to about 66.3 million sq ft of NLA.

Greater KL will be seeing an additional 13.5 million sq ft of NLA within the next two years, with the bulk of it (63.6%) expected to be completed in 2021. As MCO has brought works at projects and construction site to a standstill, an extension of timing for completion of these new malls is to be expected. Additionally, with social distancing likely to create a “new normal” for shopping, mall owners have quickly started to rethink and innovate to meet the required SOP and the changing shopping habits – with installation of thermal scanners and implementation of more rigorous cleaning procedures in place, among other measures to encourage shoppers back to the malls.

GRAPH 1: Retail Trade Sales In Malaysia, YoY Growth, January 2018 to March 2020

-10

-5

0

5

10

15

20

0

10,000

20,000

30,000

40,000

50,000

60,000

Jan

Mar

May Ju

l

Sep

t

No

v

Jan

Mar

May Ju

l

Sep

t

No

v

Jan

Mar

*

2018 2019 2020

Retail Trade Sales (LHS) % Changes YoY (RHS)

RM

MIL

LIO

N

%Source Department of Statistics Malaysia

* Preliminary

GRAPH 2: Cumulative Retail Supply In Greater KL, 2010 to 2022E

40 4246 48 49

54 5761 62 64 65 66

70

78 79

0%

2%

4%

6%

8%

10%

12%

14%

0

10

20

30

40

50

60

70

80

90

KL City KL SuburbsOuter KL Greater KLSupply Growth (RHS)

MIL

LIO

N S

Q F

T

Source Savills Malaysia Research

DEVELOPMENTNET LETTABLE AREA

(SQ FT)

ESTIMATED YEAR

OF COMPLETION

KL East Mall 384,000 2020

Setia City Mall Phase 2 400,000 2020

The Exchange TRX 1,350,000 2021

Mitsui Shopping Park Lalaport 861,000 2021

Pavilion Bukit Jalil 1,800,000 2021

Pavilion Damansara Heights 935,000 2021

Warisan Merdeka Mall 900,000 2021

IOI City Mall Phase 2 1,000,000 2021

TABLE 1: Selected Retail Malls In The Pipeline, As Of Q1/2020

Source Savills Malaysia Research

GRAPH 3: Prime Retail Rental Index, 2010 to Q1/2020

Source Savills Malaysia Research

100

150

200

250

Q4

/20

05=

100

Kuala Lumpur Retail

OCCUPANCY AND RENTS HAVE YET TO SEE SIGNS OF ADJUSTMENTGreater KL average occupancy rate declined slightly by 0.9% to 87.2% in Q1/2020. While prime retail malls registered many years of good performance, smaller neighborhood malls and some recently- completed and newly-opened retail malls that are poorly located, managed and designed have been slow to entice suffi cient retailers, resulting in average occupancies of less than 70%. Despite the declining trend, average occupancy rate remained stable underpinned by well-managed malls that are constantly adapting and responsive to the changing retail environment.

Massive business closures are unlikely to happen at least in the established malls while mall owners have stepped up in strategizing and introducing new commercial terms to maintain occupancy levels. Nevertheless, closures may be encountered by some retail brands as part of their rationalization initiative and readjustments of resources and operations. It is reported that about 50,000 or 15% of retail stores in Malaysia will cease operations towards the end of the year, particularly the small and local chain stores. Retail leasing activity is expected to remain subdued as most brands have put on hold any expansion plans for this year and perhaps even next year.

On another note, prime rental is expected to remain stable as none of the prime malls have indicated any kind of cut back in rental.

Despite the declining trend, the average occupancy rate remained stable underpinned by well-managed malls which are constantly adapting to the changing retail environment.

EMBRACING THE ‘NEW NORMAL IN RETAILING’Social distancing and cautious spending patterns have reshaped the trading environment across all sectors. Visits will be more purposeful and shoppers will be more value conscious. Window shopping will be less, as fi tting rooms are as yet still closed to public during CMCO. In this time of uncertainty, the certain thing is that the way people shop has changed. As deliveries and takeaways continue to be the preferred option, F&B and fashion retailers have pivoted their businesses and pushed themselves for a stronger online presence, as the pandemic accelerated online shopping. Landlords and retailers are now putting emphasis on omni-channel retailing, looking to seamlessly integrate both online and offl ine experiences for the shopper. The result of this will enable the gathering of actionable insights to understand and reach customers even better through the desired channels.

INVESTMENT ACTIVITY IS LIKELY TO SLOW DOWNThe rapid change in shopping trends coupled with the impact of social distancing and uncertain job conditions will collectively have an impact on the performance of retail malls over the short to medium term. Investment transactions will be limited as seen in the past two years, with investor confi dence and activity expected to be muted for the remainder of this year. Nevertheless, opportunistic investors may perceive this period as an attractive opportunity to deploy their capital despite the challenges.

GRAPH 5: Major Retail Malls Transaction Volume And Value, 2010 to 2019

0

1

2

3

4

5

6

7

0

1,000

2,000

3,000

4,000

5,000

6,000

2010 2011 2012 201320142015 2016 2017 20182019

NO

. OF

TR

AN

SA

CT

ION

S

TR

AN

SA

CT

ION

VA

LUE

(R

M M

ILLI

ON

)

Transaction Value (LHS) Transaction Volume (RHS)

Source Savills Malaysia Research

GRAPH 4: Average Occupancy Rates In Greater KL, 2010 to Q1/2020

82%

84%

86%

88%

90%

92%

94%

96%

Source Savills Malaysia Research

Savills MalaysiaLevel 9, Menara MilleniumJalan Damanlela, Bukit DamansaraKuala Lumpur 50490Malaysia+603 2092 5955