SABAH, affectionately known as the Land Below the Wind, has seen a spurt of economic growth in the past few years. It is blessed with natural resources such as oil and gas, and fertile agricultural land. The state has the third largest population in Malaysia, with 32 ethnic groups. According to the Department of Statistics, Sabah has a population of 3.5 million, with an average annual growth rate of 2.3%.
Kota Kinabalu, once a sleepy town, has been transformed into a thriving hub of activities. According to Alexander Lee, associate director of Laurelcap Sdn Bhd, the capital of Sabah has a historical population growth rate of 2.42%.
“It is estimated that the population of KK alone will reach nearly one million by 2020. The city has experienced rapid growth and properties are mushrooming everywhere to cater for the high demand and it is one of the fastest growing cities in Malaysia,” says Lee.
Dr Daniele Gambero, CEO of the REI Group of Companies, believes the emergence of KK as a property investment destination is due to the surge in tourist arrivals and the timing.
“Things happened at the right time for KK. The property market needs economic drivers and for the city, tourism is the best possible one. The palm oil, rubber and oil and gas industries also contributed to the economic development of the state. In the last few years, property investment has become a trend in Malaysia, and the state government and property developers have been smart enough to tap into this market.”
He says the idea of “you build it and they will come” does not apply to property development.
“There must be a fundamental growth that will attract businesses and people. Only then will the property market grow. This is precisely what has happened in KK and the property market has been booming since the middle of the past decade and will continue to do so for several more years.”
Ginn Lai, associate director of Knight Frank Sabah, notes that as many of the developed cities in Asia struggle with heated property markets, Sabah is at a tipping point, due to the confluence of Borneo’s unique offerings and strong property drivers.
He attributes the boom in Sabah’s property market to the diversification of investment post financial crisis.
“Many traditional equity investors shifted towards real estate after the global financial crisis and found Sabah properties to be less volatile than financial markets. Sabah is also becoming a regional hub. The completion of KK International Airport in 2008 paved the way for the city to be the regional hub of Borneo, providing a gateway to 15 international and 12 domestic destinations. It quickly became the second busiest airport in Malaysia,” says Lai.
He also notes that with a population growth rate of 2.3% per annum, there is limited supply of residential properties in the state.
“There is a growth of about 80,000 people per annum in the state, and 11,000 people per annum in KK. The demand for housing has placed pressure on supply, which in turn has spurred development. With an average of 5.5 persons per household in KK, there is demand for 2,000 new homes per annum in the capital alone. The completion of residences in the primary market is estimated at 4,318 units by end-2017, so demand is outstripping supply.”
Apart from the growing population, Lai says the demand for residential properties come from upgraders and buyers of second homes, with a shift in preference towards lifestyle, condominium living, and a growing number of expatriates relocating to Sabah for employment or retirement.
Surging growth and shifting trends
Sabah, particularly KK, has seen a rapid surge in property prices over the past five years. According to Lee, property prices have appreciated an average of 80% to 100%, with some locations experiencing more than 120% increment.
“New home prices in the state have soared, sometimes more than double, particularly in KK, since 2000. Properties in good locations are still sought after and the limited supply of new developments across most sectors have seen secondary market prices moderately increasing throughout the year.”
He notes that new launches are now reaching a price tag of RM1,000 psf in KK’s central business district (CBD), on par with prices in Kuala Lumpur.
“Demand in residential, retail and commercial sectors remain strong with a healthy upwards trajectory and a mix of domestic and foreign buyers. KK has proven to be a popular retirement location and holiday destination for many. Property prices in KK are still lower than Hong Kong and Singapore, making it attractive to foreign investors. The implementation of the Sabah Development Corridor (SDC), supported by soaring palm oil revenue, has also pushed up demand.
Domestic demand comes mostly from Malaysians with larger cash reserves who are buying primarily for their own stay or for investment. The domestic demand has been steady as KK is deemed a small Kuala Lumpur with internal migration from small towns in the state to KK for work. This will contribute to the demand for properties,” Lee opines.
Knight Frank’s Lai says there is a growing number of foreign buyers from China, Japan and Korea who buy for investment or under the Malaysia My Second Home programme. The numbers of retirees from the UK and Australia are also growing.
“Foreign investors around the region are starting to take notice of Sabah as their markets continue to overheat and affordability becomes an issue. A property in Sabah is still comparatively less expensive, geographically close and one of the few destinations where foreigners can freely purchase a property in their own name and obtain bank financing. Coupled with more foreign developers entering the market, the exposure of Sabah’s property industry internationally is growing.”
Lai says the development in KK is mainly concentrated in the northern and southern corridors of the city due to development constraints.
“The city centre itself is largely developed and mature. Likewise, the eastern suburban areas are very well established, predominantly with landed residences and satellite shophouses and malls. Waterfront re-development is a major focus as KK modernises into a coastal city of international standards,” he says.
REI’s Gambero concurs. “The main areas are still located near the CBD and along the left and right shorelines. As for types of developments, we will have a concentration of mixed-use developments with a preference for commercial/serviced apartments due to the higher ratio,” he says.
Lee notes that as KK has the distinct advantage of expansive and often spectacular views of the South China Sea, most developments are concentrated in the city centre.
“The multi-million-ringgit Jesselton Quay and KK Waterfront will change the city’s landscapes with the addition of new luxury hotels, high-end condominiums, office towers, lifestyle malls and a cruise terminal.”
Lee adds that there is no significant landed developments in the pipeline due to scarcity of land and rising land cost within the 351 sq km of KK. This has led to an increased number of high-rise residences.
“Young urbanites have experienced condo living with security and facilities in big cities like KL and Singapore, thus making it an increasingly acceptable and attractive alternative to traditional landed homes.”
The shifting trend to high-rise living was observed by Sabah Housing and Real Estate Developers Association (Shareda) in its 2013 Property Development Annual Report. Shareda said landed properties are no longer an attractive option for developers due to the lower return on investment.
Shareda’s recorded statistics showed that some 4,692 apartment and condo units were launched in 2013, with a gross development value of RM1.651 billion. These developments are located within a 12km radius of the city centre and prices range from RM380 to RM500 psf.
According to Lee, the sub-sale price for Puteri Damai by Wah Mie Group averaged RM560 psf in 2013, compared with RM342 psf in 2009, while Jesselton Condominium by Bina Puri Properties Sdn Bhd rose to an average of RM533 psf last year from RM298 psf in 2009.
“Properties with sea frontage will fetch higher premiums, especially those located along the Tanjung Lipat and Likas Bay area. Prices for The Peak Vista I and Peak II (SBC Corp Bhd) average at RM700 psf and RM790 psf respectively. The sea view units command a higher asking price of RM900 to RM1,000 psf,” says Lee.
Shareda says there are a few condominiums within a 5km area from the city centre that are priced at RM650 to RM1,175 psf due to their premium locations that offer views of the sea. Among the developments are Bay 21 at Likas Bay by Remajaya Sdn Bhd and The Loft at KK city centre by Asian Pac Holdings Bhd. It said that premium prices for these developments are justified because of the high cost of land within 5km of the city centre.
However, due to the limited supply of such choice locations, Shareda believes it is unlikely the KK property market will see many of these high-priced premium condominiums. It expects the market price of high-rise residences to hover around RM500 psf.
Flourishing mall culture
Retails malls in KK have mushroomed in the recent years, with new launches seen in 2013 as well as ongoing developments in suburban areas such as Tuaran By-Pass, Menggatal and Penampang.
Shareda expects the market to experience a substantial increase in retail space and stronger competition in the retail sector upon the completion of the developments. The majority of the new supply are mixed-use developments, typically retail malls and residences.
Some of the upcoming retail completions include Imago Mall @ KK Times Square, with a net floor area (NFA) of 800,000 sq ft; Oceanus Waterfront Mall in the city centre with an NFA of 260,000 sq ft; and Pacific Parade @ PacifiCity in Likas Bay with an NFA of 630,000 sq ft. Imago will be the only fully owned and managed mall in Sabah upon completion.
Knight Frank estimates that there is an existing 4.6 million sq ft of retail space across 17 buildings in KK, with an average occupancy rate of 86.3% and some attrition due to tenancy movements to new malls.
“KK is in a period of unprecedented supply of new retail space with 2.62 million sq ft of retail space completing between 2014 and 2016. We believe the take-up rates from these malls will be sluggish over the first 12 months of opening, but the sector will perform well in the medium to long term,” says Lai.
Lee says the retail malls are often supported by strong tourist arrivals, especially from China, and in terms of supply, KK is third behind Penang and the Klang Valley.
According to Sabah Tourism Board, tourism receipts of RM3.069 billion from international travellers and RM3.615 billion from locals were recorded last year.
Shareda notes that the commercial and retail spaces have progressively moved towards the suburban areas with a captive catchment market along the main roads due to intense competition in the city centre and the soaring land prices.
“Most mixed-use developments are located in suburban areas 10km from the city centre, fetching prices of RM527 to RM1,200 psf. The strong take-up rate in Grand Merdeka Mall in Bandar Sierra, Menggatal, is encouraging as this type of neighbourhood mall concept with smaller-size space is welcomed by the suburban community. It will establish itself as an upcoming trend as traffic congestion in the city centre worsens and deters suburban dwellers from visiting malls there,” says Shareda.
REI’s Gambero believes the existing and incoming supply of retail space is in line with the demand, and can generate rental in the range of RM15 to RM25 psf.
Moving towards purpose-built offices
There is a growing trend towards purpose-built offices as opposed to traditional shoplot offices, which have now been relegated to the suburban and outskirt areas as land prices increase and land in the city becomes scarcer, says Lai.
Knight Frank puts the current office occupancy at 91.3% with no new supply of commercial office space in 2012, 2013 and 2014. It expects some 814,613 sq ft of new purpose-built office supply to be completed, which will relieve pent-up demand.
“The lack of new completions in the past three years means the existing supply is limited at over six million sq ft. This has put pressure on the occupancy rate as there is demand for office space. However, the significant amount of new completions in 2015 will elevate the pressure,” says Lee.
Among the notable new incoming office buildings, says Lee, are Menara Hap Seng by Hap Seng Consolidated Bhd in the city centre, Aeropod in Tanjung Aru by S P Setia Bhd, Riverson Suites in Southern KK by Riverson Corp Sdn Bhd, and Sutera Avenue — Signature Office Suites in Southern KK by Mah Sing Group Bhd.
“KK Times Square is currently the only new office space that has been experiencing healthy rental. It commands an average rental of about RM2.50 to RM3 psf,” says Lee.
According to Gambero, the outlook for the office market in KK is positive with stable rental yields, which have been consistently above 5.2% since 2010. However, he cautions that the authorities will have to keep monitoring the demand and supply situation to ensure the market stays healthy.
While there is a shift towards purpose-built office buildings, shopoffices continue to do well.
“Shopoffices are seeing an increase in price as well. Recently, a four-storey shopoffice in Jalan Gaya was sold for over RM5 million on the secondary market. This shows that the market is still vibrant with investors on the lookout for properties in good locations, “says Lee.
According to Shareda, a total of nine developments comprising 2 to 3-storey shopoffices were launched in 2013 with prices ranging from RM300 to RM500 psf, depending on the location. Two of the launches were 3-storey shopoffices in Pintas Avenue in Jalan Penampang (selling at RM1.48 million to RM1.7 million), and 4-storey shopoffices C-Park in Jalan Pintas (selling at RM2 million to RM2.4 million).
On the horizon
The volume of transactions will drop but prices will hold strong in the coming months, says Lee.
“Developers are still buying land in good locations despite the high price tag, which means that the market is still actively growing. This can be seen in recent transactions of several land parcels in KK. A 0.914-acre land in the heart of the city was sold for RM20 million while another parcel measuring 2.75 acres in a mature area of Luyang was sold for RM41.5 million.”
The condominium market segment will face an increase in supply as most will be handed over in 2015 and 2016.
“With the sudden increase in supply, the market may find it tough to absorb the number of units, putting pressure on rental rates. Owners may be forced to accept lower rents, which will affect the yields,” says Lee.
He expects KK to see more demand for smaller-size units to compensate for the higher per sq ft price in the future.
“Developers will be building based on the need of the market. And if property prices remain high, future homes will get smaller and smaller. Properties in prime locations such as Luyang, Penampang, Damai, Likas, Jalan Lintas and Jalan Bundusan are expected to see high demand,” says Lee.
“The planning of the 299ha Tanjung Aru Eco Development as a premier tourism destination with residential, leisure and commercial components in a beachfront site will have a significant impact on the industry. Likewise, the development and activities from the Sabah Oil and Gas Terminal located in Papar and Beaufort is expected to spur property development as well as enhance market activities in the state.”
However, on the downside, he feels that the increasing house prices have driven homes beyond the reach of many ordinary Sabahans, which has stoked resentment and a sense of inequality among the lower and middle-income groups.
The tightening of lending conditions will continue to impact loan approval rates for investors as well as buyers of first homes, says Lai.
“Similarly, interest rate hikes may deter and prevent cautious property purchasers from entering the market. The implementation of the Goods and Services Tax, increase in fuel and electricity tariffs, land scarcity and increasing land prices are expected to contribute to higher development costs. As a result, the total number of transactions in the primary and secondary markets may face downward pressure. However, we do not envisage property values to diminish,” says Lai.
Security has become a concern following several kidnappings in the east coast of Sabah this year. Lai stresses that steps are continuously being taken to manage the situation.
“The Eastern Sabah Security Command has been established and there is an increase in police forces in the affected areas. The west coast still has a safe environment. According to statistics from Sabah Tourism Board, tourist arrivals from January to May 2014 is up 8.7% to 1.35 million from 1.24 million a year ago,” says Lai.
Where to invest?
For the residential sector, Lee believes condominiums will continue to dominate the sector as land prices are making it too expensive to develop landed homes.
“The Gen Y and young executives prefer to stay closer to the city centre rather than live miles away and having to travel longer distance. So, condominiums are here to stay and will be the trend for the next 15 to 20 years,” Lee opines.
Lai sees properties in popular locations continuing to see solid demand with good growth potential. These are predominantly located in the city centre and peripheral mature suburbs.
Meanwhile, Gambero sees potential in short and medium stay in the tourism industry. “The ‘I want to feel like being at home’ feeling is increasing with international tourists. They prefer short to medium-term stays in private apartments instead of the more traditional all-inclusive packages offered by hotels. The investors who are able to tap into this growing segment of the market will see good returns,” he says.
In the commercial sector, Gambero believes there will be opportunities in the development of educational institutions.
“Education is one of the economic clusters identified by the SDC. Keeping an eye open on what is going to happen will yield opportunities for good investments.”
SDC was introduced by the state government to enhance the quality of life by accelerating the growth of Sabah’s economy, bridging the rural-urban divide, promoting regional balance and ensuring sustainable development of the state’s resources. Programmes under the SDC Blueprint will be implemented over a period of 18 years from 2008 to 2025.
“Commercial properties will always be the first choice for those with financial power. However, there have not been any commercial developments offering products such as shopoffices in the CBD in the last few years. Such developments are now moving towards the Penampang and Kepayan areas. Investors looking to invest in shopoffices may not find many opportunities as developers are now building high-rises,” says Lee.
High-rise offices are precisely where Lai sees the most potential for commercial investments. “Prime purpose-built offices and mixed-use developments in larger masterplanned projects will attract good tenants and yields as the trend of moving away from shopoffices continues.”
Lai advises investors to look at strata city malls in the retail sector. “Strata city malls will in the medium to long-term give good yields and appreciate in value because land scarcity prevents more future developments in the CBD.
However, Lee feels that developers of newly planned retail developments should consider keeping the units so as not to jeopardise their tenant mix in the future. “By owning the malls 100% such as Imago Mall, developers will be able to mix and match the tenants according to the market’s needs.”
As for the hospitality sector, Lai says resort development is a burgeoning growth market. “The Ministry of Tourism, Culture and Environment has said that the state’s hotel occupancy rate sits at 92%, which is the highest in Malaysia. There is a shortage of 5,000 hotel rooms needed to meet arrival demand.
“City hotels in the three to five-star category are much needed. Resort development along the west coast of Sabah stretching from Tuaran to Kudat is needed to cement Sabah as a tourist destination. Similarly, hotels are needed around Sabah’s primary attractions, such as Mount Kinabalu.”
Lai notes that resort and hotels are being planned for Tanjung Aru Eco Development and along the Kinabalu Gold Coast Enclave, which are part of the SDC under the purview of the Sabah Economic Development and Investment Authority.
An upcoming segment of the hospitality sector are hotel suites/residences with guaranteed rental, says Lee. “Some of these developments are Ming Garden, Jesselton Point Hotel and C-Park. This is an unproven segment as only Ming Garden has been completed and that was only recently. Having said that, tourism has always been the backbone of the hospitality sector, and if tourism is doing well, this sector will flourish.”
Gambero believes developers who are able to cooperate with internationally recognised hospitality specialists in a creative and innovative way will be the ones to profit the most.
“The world is fast moving towards higher income status, which will generate more opportunities for the tourism industry. It all comes down to the offer. The country that can offer innovative holiday schemes will attract most of the international travellers.”
This article first appeared in City & Country, The Edge Malaysia Weekly, on October 27 - November 2, 2014.
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