The Sabah property market continues to grow, but not boom as much in the last half year; 2013 was an exceptional year and some consolidation is expected in both the Malaysian and Sabah property markets. A tighter monetary policy and macro prudential measures will attempt to cool the market. Housing prices grew, with a 7% average growth in Malaysia, but Sabah outperformed with some prices almost doubling.

The boom came from a strong domestic activity-driven economy, low interest rates, and favourable market conditions. However, interest rates may rise amid higher inflation. Inventories are low, but are building up.

• Major new projects will encompass the growth of offshore oil & gas exploration. Shell is moving its main office from Miri to KK in early 2015.

• Tourism continues to grow, however two kidnappings by pirates from southern Philippines from the east coast offshore island resorts have resulted in a lower number of chartered flights from mainland China (one of those kidnapped, since rescued, was from China). Some tourist arrival improvements are seen from the Japanese, Korean, and Australian markets.

• SP Setia, has partnered with the state government to launch the RM2bil, 60-acre Aeropod, offering 3 hotels, 280,000 square feet of retail space, 5,000 residential units and the new Sabah Railway Department headquarters, over a total of 5 phases.

• Suria Capital Holdings Bhd is developing a 24-acre project next to the Kota Kinabalu port and the just launched Sabah International Convention Centre (SICC). The mixed development will include two hotels (total of 800 to 1,000 rooms), plus commercial, retail, and residential lots. Separately, there will be another two hotels within the SICC development.

• Mah Sing Group plans to develop 4.26 of 8.67 acres of land in the central business district of Kota Kinabalu along the Coastal Highway. This project, named Sutera Avenue, was delayed to start in the last quarter of 2014, and will offer street mall retail units and service apartments alongside multistorey offices and shops.

Retail market continues to grow, now third in Malaysia

The retail sector in Kota Kinabalu continues to grow strongly, and is now estimated to be the third highest performing location for most retailers in Malaysia, after the Klang Valley and Penang. Continued demand from retailers reflects this growth, as does the fact that newer retail centres offer professional retail management and imposition of tenant and trade mixes, something not seen earlier.

Office market developing, but demand remains mostly local

Growth and sophistication in the Kota Kinabalu office market lags behind that of the retail sector, but an increasing presence from financial institutions and foreign companies is likely to result in the development of better grade office space in the coming years. Most notable buildings enjoy over 90% occupancy, although rents are less than half that of the Klang Valley.

Condominium market is booming and appears the sector of choice.

Average transacted prices in most condominium projects have grown year-on-year since 2008, with no sign of slowing. While average market prices are still well below those in Greater KL, Penang, or Johor (lskandar), a luxury condominium market appears to be forming in Sabah, with selling prices at selected projects having exceeded RM1,000 psf. Take-up rates at new launches are strong.

Demand for property is driven by local investors

Market evidence suggests that transactions are being driven by wealthy locals, primarily purchasing for investment purposes. There are significant pockets of affluence within Sabah, and the supply of high-grade properties was limited until recently. There also appears to be an element of interest from foreign buyers, especially East Asians, and some Europeans considering retiring in Malaysia under the MM2H scheme.

Retail in Sabah

The household income in Kota Kinabalu is observed to have increased and the tourism sector is growing robustly, all of which makes for a strong retail environment, and the view now is that Kota Kinabalu has taken its place as the top spot outside of Kuala Lumpur and Penang for retail. In terms of retailers’ sales turnover, Kota Kinabalu comes in third after Kuala Lumpur and Penang, and ahead of Johor Bahru, Kuching, and Malacca. Currently there are 17 malls in Kota Kinabalu offering a total net lettable area of 4.59 million sq ft.

We understand leasing has also begun at lmago, the newest addition to the KK Times Square development.

Initial signs are encouraging, with a major department store chain already committed as the anchor tenant. Also started with Sunsea Pavilion next to KK waterfront, with the Hardrock café. Discussions with major foreign and local fashion and entertainment operators are continuing.

Nine other retail centres are poised to be completed by 2016, although we would expect to see delays at some. Centres that could have a significant impact on the existing retail landscape in the city include Pacific Parade, Imago, Aeropod@Tanjung Aru and Lifestyle Mall@Jesselton Waterfront. Further afield, planning for Sutera Avenue is currently underway, with a tentative completion date of 2018.

Occupancy rates at most centres are observed to be reasonable at above 85%. These recent occupancy figures suggest that, despite the steady supply increases expected over the next 3-4 years, the Kota Kinabalu retail market is healthy, especially as we continue to see interest from major domestic and foreign retailers.

Shopping centres 1 Borneo, Wisma Merdeka, and Suria Sabah enjoy higher rents over other centres, although these rents are still just 20-25% of the rents seen at top retail centres in KL City Centre, and 40-50% of the rents seen in suburban KL areas. The supply of high-rise residential units is growing very strongly in Kota Kinabalu, although the sector accounts for just a quarter of total residential supply of 51,214 units. Total existing supply of 13,203 high-rise residential units represents supply growth of over 50% since 2007.

Average transaction prices in most schemes have shown positive growth over the past 4-5 years, led by projects such as The Peak & Peak suites near to KK city centre.

Buyers’ profiles

Sales and anecdotal evidence suggests that buyers are a combination of domestic and foreign purchasers. Kota Kinabalu has proven to be a popular retirement holiday destination for many East Asian countries due to the weather, improved infrastructure, scenic beauty of the state and reasonable living costs. Domestic demand is mostly from wealthy East Malaysians with large cash reserves and limited alternative investment opportunities.

Capital values for high-rise residential projects in Kota Kinabalu, despite the recent increases, are still very affordable when compared to the Klang Valley or even Johor or Penang.

We are also seeing the emergence of a luxury residential market in Kota Kinabalu, as projects such as Pelagos Designer Suites is 100% sold out even though the asking prices have exceeded RM1,000psf. Strong sales performance has also been observed at Jesselton Residences, which is reported to be over 70% sold, despite reaching prices of over RM750psf.

As the capital city of Sabah, Kota Kinabalu is the seat of the state government, and most major ministries and government agencies are located here. The city serves as the main commercial hub in Sabah and has seen strong growth over the past decade, especially in tourism, which remains an important economic driver, along with oil & gas, industry and manufacturing. A number of foreign financial institutions can now be found in Kota Kinabalu.

More recent completions include the Signature Office@KK Times Square (2008) and Warisan Square (2006). Both developments are low- to medium-rise and smaller format (i.e., either shopoffices or office suites). There appears to be a limited market for modern purpose-built buildings, and developers of commercial space remain eager to build-and-sell, as opposed to retaining assets for recurring income. This is partly due to a dearth of large-scale corporate occupiers in the city as most demand for larger-format office space is from government agencies.

The outlook for 2015 continues to be favourable with increase in Sabah-based offshore oil and gas activity, continued reasonable palm oil prices, and growth in tourism arrivals.