BMI View: Malaysia's commercial real estate market benefits from t he country's location in Southe ast Asia, as well as the government's welcoming attitude to foreign investment and the developed and transparent nature of its business environment. The country has a developed real estate investment trust (REIT) market, although there is room for this to expand. However as the wider economy is facing some reduced growth, the country's real estate market is also experiencing only subdued demand, despite strong potentials in the medium-term.
Following a strong 6.0% GDP growth in 2014, the Malaysian economy is facing some headwind as growth is reduced to an estimated 4.2% in 2015. This trend is expected to continue as growth only gradually returns to levels of 4.6% by 2019. Monetary tightening and expected interest rate rises are expected to further impact domestic demand. With exports equating to about 90% of GDP, the economy is also vulnerable to the economic decline in key export destinations, as seen in China. However, in the longer term domestic consumption is set to rise, and as economic links with the rest of the Association of Southeast Asian Nations (ASEAN) improve, so too should demand for commercial real estate.
Kuala Lumpur, the Malaysian capital, continues to be the centre for the industrial and service sectors of Malaysia, harbouring the bulk of office and industrial property in the country. Johor Bahru, at the border to Singapore is benefitting from cross-over demand particularly for its lower grad office segment, as well as manufacturing and logistics property. Kota Kinabalu has seen some significant growth in its tertiary sector over the past years, raising demand for office space. Growing urbanization and tourist numbers also boost the city's demand in retail space, with several malls in the pipeline.
The Malaysian office market is suffering on the one hand from a general oversupply, leading to decreasing occupancy rates, and on the other hand from a shortage of premium office space that is causing respective rental rates to rise. Demand has remained relatively stable in the past, however the downsizing trends of oil and gas companies in the wake of falling oil prices have had an effect on office space in the capital's CBD. As economic growth is slowing, we expect demand for office space to also remain subdued, while increasingly focussing on Grade A properties.
Malaysia's retail real estate sector has good long-term prospects, as consumer spending is being driven by a young, affluent and increasingly urban population. The country's retail landscape has changed significantly over the last 10 years with plenty of further growth opportunities. Paired with strong international interest, the market is seeing several developments underway, fuelled through the lack in quantity of high quality retail space. However the wider economy and an increased goods and services tax are weighing on overall demand.
Malaysia's economy is heavily dependent on exports, with overall trade flows decreasing due to lower domestic growth and economic downturns of key trading partners. Demand for both manufacturing, and warehouse and logistics space is hence stagnating. Indeed, the Malaysian industrial property market has seen very limited new supply in the past years, with current trends reaffirming this development. Growth opportunities are arising in light of increasing cross-over from Singapore, particularly in the Isakangar special economic corridor around the city of Johor Bahru.
Malaysia's property market is currently experiencing subdued demand in all sectors due to the wider slowing of economic growth and global trends. Nonetheless, the country offers ample investment opportunities, particularly in Kota Kinabalu, which presents a variety of new developments in retail and office space, paired with comparatively high rental yields.