BY Henry Butcher Malaysia
Like the rest of the country, Penang’s property market was adversely affected in 2020 caused by the common enemy of the Covid-19 pandemic. Every property sub-sector has experienced a sudden shift in momentum and is forced to adjust and adapt to the changing sentiments. But Penang’s appeal as a strong manufacturing hub especially in the electronics and electrical space continued to be supported by its competitive costs, established infrastructure and readily available talent pool. Factors such as these have helped Penang Island hold its ground despite the onslaught of the Covid-19 pandemic. In particular, with rising demand for medical and pharmaceutical products and equipment, the manufacturing sector has experienced a favourable market movement in 2020 as some E&E players have sniffed out opportunities to capitalise on transitioning into the medical equipment and devices industries.
Along the way, these niche areas have also motivated the logistics sector to rise as demand for warehouses and last-mile connectivity to complete the ecosystem are emerging to be more important. But because of the undersupply situation of such facilities in Penang, demand should continue to exist in the coming future. The same is seen over on the mainland in Seberang Perai with more courier related companies taking up new commercial units to meet the surging online demand.
The industrial sub-sector in Seberang Perai has also held itself well and seemed undisrupted by the pandemic as prices are still at the pre-MCO level and in fact, has charted the growth in 1H 2020. As such, it is expected to remain active moving into 2021 with potential hotspots in Taman Perindustrian Bukit Minyak, Penang Science Park and Batu Kawan Industrial Park. Both the total volume and value of transactions are expected to increase slightly in 2021.
The interesting development in the industrial sub-sector coupled with NAPIC’s data on the residential market has kept Penang from being jolted more than it is necessary although the full-year performance may expect an overall 15 per cent decline in the total volume of transactions compared to the 17,118 units transacted in 2019. But the positive sentiments on the ground in the final quarter of 2020 are good indicators of a modest market going into 2021 with recovery expected in the second half of the year while in Seberang Perai, the market is expected to remain firm in 2021. However, with the announcement of the reinstatement of the Movement Control Order (MCO) again beginning 13 January 2021, any expectancy of recovery is to be pushed further into the horizon by at least another six to twelve months, pending again on the progress in containing Covid-19 and the stability of the country’s political situation.
Factor to watch in 2021
● A new trend of work from home (WFH) and online purchases seem to be the norm nowadays, not forgetting meetings via Zoom, Microsoft Teams and other online platforms particularly for the young millennials have become more popular. Baby boomers are still learning and adapting to these changes while the millennials and the younger Zoomers (Gen-Z) are considered digital natives.
● The volume of investments in 2020 declined year-on-year, a reflection of border closures and inter-state travels. Most property sellers were also holding on to pre-Covid-19 prices in hopes of a quick market rebound.
● Many corporations (MNCs, SMEs, SMIs) have large amounts of capital tied up in real estate that can be leveraged upon to provide ready cash with a sizable of them looking into it to generate working capital and some have divested through the sale-and-leaseback transactions allowing companies to adopt asset-light business models which offer more efficient uses of corporate capital.
● Investors are rotating capital away from mainstream asset classes facing cyclical headwinds (eg. office, retail, hotels) to those providing reliable income in a down-trending market (eg. logistics, last-mile warehouses, pharmaceutical, healthcare-related outlets).
● Asset values have been supported by a combination of transient factors including government support programmes, bank policies and healthy corporate balance sheets etc., but there is a growing concern among investors about the inevitable market corrections.
● Hotels followed by experiential retail were the hardest hit since the tourism business and leisure travel was banned in light of Covid-19. Travel bans prevented investors from physically visiting prospective purchases and have had the greatest impact in markets with a high proportion of international Investors.
Bright spots for 2021
● Due to Penang’s strong manufacturing base, logistics became a favourite among investors. It’s the sole asset class with fundamentals improved during the pandemic given online retail’s surging demand.
● A trend of pricing standoff exists, pending further market clarity with buyers underwriting lower values and higher cap rates on the back of lower or no growth assumptions, and expectations of declining rents. Generally, owners are financially sound and it precludes the “forced sales” option, leading to steady pricing for core assets as they hold out anticipating early pandemic and economic turnarounds.
● Demand will likely remain strong for the right assets particularly with long term appeal given that loan financing is still available selectively.
● While the downside is not expected to be severe, investors are looking at relatively stable asset prices in 2021.
Residential review 2020
According to NAPIC’s data for January to September in 2020, Penang recorded a total of 10,521 property transactions with a value of RM5.4 billion. The residential sub-sector recorded the highest level of activity at 73 per cent in terms of the total volume of transactions and 55 per cent in total value of transactions despite being cornered during the MCO.
The commanding position witnessed an increase of 6.35 per cent (206 units) of transactions in Q3 2020 to a total of 3,446 residential properties compared to 3,240 units in Q3 2019. In terms of the value of transactions, it went up by RM82 million to RM1.297 billion in Q3 2020 compared to RM1.215 billion in the corresponding period in Q3 2019. It is likely that part of the statistics here were purchases generated during the muted activity period of the MCO but could only be registered in Q3 2020.
Generally, more newly-launched units were sold in Seberang Perai compared to Penang Island given the more affordable prices offered by developers. Although the numbers were encouraging state-wide in Q3 2020, the total volume of residential transactions declined 29.68 per cent in 1H 2020 (with 2,346 units on the mainland) from 3,336 units transacted in the corresponding period in 1H 2019. The total value of transactions also dropped by 26.16 per cent to RM731 million in 1H 2020 compared to RM995m in 1H 2019.
This increase could be due to the good response received for properties under construction during the Home Ownership Campaign (HOC) 2020-2021. Although operating under a challenging climate, creative solutions deployed through innovative technology and attractive incentives from the developers were well received and boosted sales. Buyers in that regard were also not hesitant to buy virtually from reputable and trustworthy developers.
Notable ongoing residential developments which enjoyed some level of success amid the pandemic are Sinaran @ Utropolis by Paramount Property Development Sdn Bhd; Vivo Executive Apartment and Viluxe by Aspen Group; Havana Beach Residences, Imperial Grande, The Amarene and Queens Residence by Ideal Property Group; Glisten Hill by TKS Group; Metropol by Ramana Property Sdn Bhd; Eco-Bloom, Eco-Horizon, Eco-Camdon by Eco World Development Group Bhd and Palm Garden, Begonia Villa and Aster Villa by Tambun Indah Land Bhd.
The increased sales volume however did not contribute much to the lowering of the overall overhang properties as the unsold condominium/apartment shot up from 2,180 units in Q1 2020 to 2,946 units in Q2 2020 and before settling at 2,968 in Q3 2020. In contrast, overhang landed properties declined marginally from 857 units in Q1 2020 to 841 units in Q2 2020 before dropping slightly more to 746 units in Q3 2020. Most of the overhang properties are located in the North-East District of Penang Island with a record of 1,818 units of condominium/apartments. Prices of some stratified properties in inferior locations on the southern part of the island have also dropped slightly owing to an oversupply situation, poorer occupancy and take-up rates.
The compound average growth rate (CAGR) of the prices of condominiums/apartments, semi-detached and detached houses for the past ten years from 2010 to Q3 2020 performed better compared to the past 10 years ending 2019. Perennial favourite terraced houses used to be the best performing sub-sector but it, however, declined in 2020.
Although the residential sub-sector has experienced a period of inactivity during the MCO, it will nevertheless continue to be the powerhouse to sustain Penang’s property market due to the support from the government such as the HOC 2020-2021 and the stamp duty exemptions. A modest pace of recovery hence could be on the cards for Penang in 2021 whereas, in Seberang Perai, residential property transactions are expected to improve in 2021 with prices holding level as 2020.
Before the second round of the MCO, there were possibilities of new launches occurring in 2H 2021 or early 2022 if the market inclines positively but this could now be shelved a little longer. Either way, any new launches in the market in this era shall be executed on a smaller scale as a way to gauge the market’s appetite. Potential hotspots on the mainland remain pointed to Batu Kawan given its appeal as a relatively new township but already count Ikea, Penang Design Village, some MNCs, university and college as Neighbours.
Purpose-built office review
Over in the purpose-built office (PBO) sub-sector, the cumulative existing supply was 1,107,000 sqm in Q3 2020 with an incoming supply of 4,590 sqm (about 50,000 sq ft) on Penang Island. The occupancy rate dropped 2.8 per cent from 82.2 per cent in 2019 to 79.4 per cent in Q3 2020. The estimated gross rentals for prime office accommodation within and outside the Central Banking Area (CBA) at Lebuh Pantai are in the range of RM2.00 to RM3.00 per sq ft per month and RM1.80 to RM3.50 per sq ft per month respectively. As for the secondary office accommodation, gross rentals within the CBA range from RM1.30 to RM2.00 per sq ft per month while outside the CBA range from RM1.30 to RM2.00 per sq ft per month.
Many tenants across the region are planning to reduce office space requirements as soon as the existing tenancies expire and any significant decline in demand would create a double-whammy for landlords who are already saddled with large amounts of vacant space and uncollected rents. As such, the future demand for prime office space is thrown into question by a number of competing influences – physical distancing, WFH trend, staff retrenchment and the need to cut costs.
A reduced consumer demand caused by the global recession will inevitably translate to lower demand for space, increased vacancy rates and jitters among investors as they become uncertain about the depth and length of the slowdown. There are however different schools of thought when it comes to workplace solutions but those in the design and technology sectors have shown favour to remote working concepts.
Showing favour to Penang are also seven international players that have come to set up their respective plants in the disruptive year of 2020. Choosing to establish their base in the Free Industrial Zone of Penang are Keysight Technologies Inc., a leading technology company to deliver accredited electromagnetic compatibility (EMC) testing services for manufacturers of electronic devices and mission-critical industries, and B. Braun, one of the largest medical technology companies in the world.
Setting up their base in Batu Kawan is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry Lam Research Corporation, leading global supplier of technology and services Bosch, 160 years old British global medical technology company Smith+Nephew, Nasdaq listed global leader in continuous glucose monitoring for diabetic patients DexCom, and leading developer and supplier of critical subsystems, ultra-high purity cleaning and analytical services for the semiconductor industry Ultra Clean Holdings Inc. Together, these companies are occupying more than 3.25 million sq ft and creating more than 9,800 jobs in the state.
The Penang government had also in June 2020 unveiled “Linear Waterfront”, a 60-hectare reclamation project off the Free Industrial Zone (FIZ) in Bayan Baru with an estimated gross development value of RM1 billion. The project will extend FIZ’s electronics-dominated industrial zone and complemented by a new world-class township complete with fishermen’s wharves, a waterfront resort made up of hotels, restaurants, medical, commercial and mixed development.
According to the Penang Economic Outlook 2021 by Penang Institute, it is heartening to know that Bayan Lepas International Airport had again handled the highest export value in Malaysia and among its cargos were machinery and transport equipment from medium and high-tech industries, that include aerospace, automation, medical devices etc. This is also consistent with Penang’s quick rebound in the manufacturing industry as a direct beneficiary from the persistent US-China trade conflict in 2020. If not bright, Penang’s industrial economy certainly looks like an interesting watch in 2021.
Hospitality & retail
The dynamic duo that used to anchor Penang tourism has seen better days than in 2020. With the absence of tourists and fallen occupancy, some hotels and retail outlets have little choice but to surrender to the pressure and cease operating. Hotel Equatorial Penang is one casualty and its management had announced on 25 January 2021 the possibility of ceasing operation before 31 March 2021 due to the adverse market condition. Even a cafe housed in a four-star hotel in the traditionally non-touristy Seberang Perai has closed for business after the MCO period.
Although there were positive movements in November when the inter-state travel ban was lifted, it is not expected to restore Penang’s tourism back to its glorious days anytime soon, not when the current third wave of the Covid-19 has not seen tangible results for safe travel but has instead been met with the reinstatement of the MCO early in January 2021.
Nevertheless, the Penang State Government had on 11 January 2021 announced its intention to resume the Bukit Bendera cable car project with the private sector which was cancelled in April 2020. The revival will contribute positively to Penang’s tourism as it will help ease congestion at the popular destination, especially during peak hours. – Henry Butcher Malaysia