The number of upcoming shopping malls in the Klang Valley are at an all time high, even while other relatively new shopping malls are shutting down or delaying their launch with next to no warning. Just in early August, Perda City Mall in Bukit Mertajam shut down after only one day’s notice to its tenants without any explanation, and in 2015 the infamous SS2 Mall and Bukit Bintang Plaza closed down for redevelopment.
As if to further emphasise the point, the much awaited for Melawati Mall by Sime Darby Property and CapitaLand Malls Asia postponed its opening from end of 2016 to the second quarter of 2017 while the equally as anticipated Empire City Mall in Damansara Perdana delayed its opening from end-2015 to Q4 of 2016.
The closing for redevelopment and delay in launching of new malls speak much about the oversupply of retail space, lack of response from consumers, a changing preference in consumer behaviour and intense competition for tenants.
Furthermore, the latest data from the National Property Information Centre (NAPIC) revealed that Malaysia had a total of 148.85 million sq ft of retail space with another 11.08 million sq ft being planned and another 16.2 million sq ft on its way in.
Of the total retail space available, a good number of it is concentrated in the Klang Valley (Kuala Lumpur, Putrajaya and Selangor) with a total of 241 shopping centres totalling 64.1 million sq ft and an average occupancy of 80.4%.
It is noted that the bulk of shopping malls are located within the Damansara area, in form of the 1 Utama Shopping Centre and Atria Shopping Gallery among the more popular ones, and to join them soon are Empire City Mall, Damansara City Mall and the Starling.
Voices of the Experts
Experts from the retail industry say that this is one of the most challenging times in history, with it being worse than it was in the 1997/98 crisis as there is so much more competition now. Even during that period, Suria KLCC was launched in May 1998 followed by Mid Valley Megamall in November 1999. But now in the year 2016 with the amount of competition in the retail industry, there is so much more variables and competition.
The more established shopping malls such as Mid Valley and 1 Utama Shopping Centre are however not likely to be much affected, unlike smaller newly launched neighbourhood malls. Shopping mall giants such as Suria KLCC are however taking steps to be more consumer-centric while playing to their strengths of its excellent location among others.
Newcomers to the retail business outside of the Klang Valley should be less affected, but they will fill the pinch nevertheless.
Power Shift from Landlords to Tenants
According to industry experts, gone are the days of “build and they will come”. In current times, landlords (mall owners) have to play an active role in keeping their tenants happy, and to help drive business to the shopping malls. They have to perform activities such as host festive events, host on-the-ground shows and various other promotional activities to draw consumers to the mall.
According to a retail consultant who declines to be named, a good asset manager is one that knows how to add value and improve tenant mix to the mall. They know that it is not about the cosmetic enhancements.
According to Sunway REIT’s Ng, the tenant mix in shopping malls are however becoming more and more similar, hence the offerings are also almost indistinguishable. Newcomers to the sector will need a strong differentiating element, and perhaps reach out to the niche or underserved market.
According to Henry Butcher Malaysia, “Many shopping centre owners had to offer rental rebates in order to retain tenants while many new shopping centre managers needed to extend rent-free periods for tenants as it took longer to draw shoppers to their centres.”
Unlike the good old days, there are different forms of rentals nowadays as well. The tenant may be charged a fixed rate along with service charges, or a base rate and a percentage of the turnover; whichever is higher.
But in the end, it all boils down to - who needs who more. When it comes right down to that, the party that needs the other more will have stronger negotiation power. For example if the shopping mall absolutely needs to have that tenant, then the tenant will have stronger bargaining power.
It is hence not uncommon that Grade A (crowd puller) tenants actually pay a lower rental rate while getting preferential treatment. An example of preferential treatment is, say a bookshop is strong enough, they can demand that they be the only bookshop in the entire shopping mall.
Even some of the smaller preferred tenants such as preferred mini anchors, are beginning to demand for capital expenditure where the mall has to bear the renovation costs for the shop.
In lieu of all this, the rental rates excluding anchor tenants dropped from RM13.03 psf to RM12.09 psf in Kuala Lumpur last year, but held stable in Selangor at RM10.12. The occupancy rates for both regions however fell to 82% from 83.2% in Kuala Lumpur, while Selangor saw a fall to 79% from 81.7%. It is however only the newer shopping malls that are facing difficulties.
During the good old days, mall owners could expect a yield of between 15% and 20%. However in current times, according to RCMC Chan, the yields which have fallen to between 6% and 8% are considered to be decent.
While rental is considered to be the bulk of the income, mall owners can however obtain income from other arenas such as from utility management, service charges, pushcart rentals, carpark management, event areas and al fresco areas. According to Chan, with the addition of all these ancillary income, a mall owner’s income can increase to about 20% to 30% if it is well managed.
Not all is Lost
Despite the challenging times, not all is lost. Newcomers still have a chance if they do their homework, they just need to refine their game and strategy. The management just needs to be strong and well planned to grab opportunities and run the mall profitably.
The most important factor is to go back to basics and understand the demographics of the area, and what the residents want. According to Savills Malaysia’s Soo, “Shopping is no longer about going somewhere to buy something. It is all about the experience.”
Shopping malls are now an evolving culture which takes into account the income, education levels, lifestyle preferences and aspirations of the shoppers. Technology also plays a part, especially in form of social media platforms which can be used to attract shoppers. Data analytics is also a helpful tool for mall managers.
Another important factor is the mass rapid transit system, where every time you see a train line built connected to a shopping mall, the footfalls for that mall increases dramatically.
Tier two shopping malls outside of the Klang Valley which do not have competition have great opportunities. A good example of this is the Kluang Mall in Johor, which saw a record 5.7 million visitors in 2015 and an average 10% year-on-year increase in traffic.
The mall owner attributes this to their four new fashion mini anchors, H&M, Uniqlo, Cotton On and Brands Outlet, which came in at the end of 2015. Because of these four new mini anchors, other tenant sales have also recorded a double digit growth.
Kluang Mall enjoys a primary catchment of 314,000 people and a secondary catchment of 700,000 people within a 45-minute drive. The next closest mall to Kluang Mall is a 90-minute drive away in Johor Bahru.
Mall Spike Slowdown
With everyone jumping on the shopping mall bandwagon, NAPIC saw a spike in planned retail space from the year 2012. The numbers doubled from 1.6 million sq ft in 2012 to 3.2 million sq ft in 2013 - and then a tremendous surge to 10.23 million sq ft in 2014. Due to economic uncertainties, the numbers however dropped by half to 5 million sq ft in 2015.
Due to the excellent profitability to be obtained from being a mall owner, property developers and construction companies have been very interested in the shopping mall sector.
Among some of the companies that already own shopping malls are Mah Sing Bhd (Star Avenue Lifestyle Mall in Sungai Buloh), UEM Sunrise Bhd (Publika Shopping Gallery in Solaris Dutamas, KL), Glomac Bhd (Glo Damansara, KL), OSK Holdings Bhd (Atria Shopping Gallery, Damansara Jaya), JAKS Resources Bhd (The Evolve Concept Mall, Ara Damansara) and PPB Group Bhd (Cheras Leisure Mall, KL).
Of the privately owned ones are First Nationwide Group (1 Utama Shopping Centre in Bandar Utama, Selangor), Mammoth Empire Holdings Sdn Bhd (Empire Shopping Gallery in Subang Jaya and developing the Empire City Mall in Damansara Perdana), See Hoy Chan Sdn Bhd (developing The Starling in Damansara Uptown) and so forth.
The attraction of owning a shopping mall lies in its recurring income, which can help to tide companies over when times are bad. Bigger property players may however not see a significant income from their shopping mall, as the amount may be relatively small as compared to some of their other earnings.
Many of the upcoming integrated developments however incorporate a shopping mall into their project, such as Eco World Development Group Bhd’s which joint-ventured with Bukit Bintang City Centre to build a lifestyle mall to complement its office towers, serviced residences and hotel, I-Bhd which is constructing a one million sq ft NLA shopping centre as part of its Central i-City project and Tropicana Corp Bhd’s three projects also feature malls.
According to Savills Malaysia managing director Allan Soo, building a shopping mall within an integrated development and then relying on its population of perhaps a few thousand to sustain it is however a bad idea unless the mall is located in a large enough township or urban area.
A shopping mall needs an entire population within a 5- to 15-minute drive, as a 300,000 sf to 500,000 sf shopping mall needs a market of between 200,000 to 300,000 people.
Aside from the population size, the income level of the citizens is also important. According to Soo, “You want a primary income level of at least RM5,000 a month household average because if it is below that, it is hard to do anything that is competitive.”
Another factor to look into is the competition in the vicinity. If there is competition in the vicinity and they are not doing well, then it may be a bad idea to build a mall there unless you know for a fact that your competitor is not running his mall well, or if you know that you have great potential there.
One of the questions asked is whether retail assets can be a buffer in times of property market slowdown. According to a retail consultant, this is not necessarily the case as a lot of developers want to own malls, but prefer to ‘build-then-sell’ as opposed to ‘build-and-lease’ which is a different game altogether.
The shopping mall business is coming under pressure in Malaysia, with the rising cost of construction. It has come to the point that development, land and construction cost has outpaced rental growth. This was not the case in the past when there was no oversupply, and nowadays 11% in the first year with full occupancy is considered to be very lucky.
This is however quite unfeasible, as new malls nowadays find it hard to be leased out up to 80% upon its opening and it is also quite difficult for shopping malls to start charging the highest rent possible for its area upon its opening. Typically upon a shopping mall’s opening, there is a 20% to 30% discount on the rank rent.
There are already signs from the market that the recurring income from the retail segment cannot be taken for granted.
A good example of this is the KSL Holdings Bhd which owns 3 investment properties - KSL City Mall, KSL City Mall in Klang and KSL Resort hotel in Johor Bahru. These 3 properties contributed a total of 23% to the group revenue in 2015.
But in March 2016, the company took a slight hit with their pre-tax profit falling at 9.65% to RM20.8 million despite their revenue increasing 1.44% to RM37.29 million.
Nevertheless, KSL pointed out that despite their property investment revenue falling 2.1% to RM155 million, they still posted the best results in 2015 since the opening of KSL Resort and KSL City Mall in the year 2010.
According to KSL chairman Ku Hwa Seng, “Despite the prevailing mixed sentiments in the property sector, we believe our business model of having both development revenue and recurring income is resilient in facing any economic challenge.”