Why you should stay away from commercial properties now?

Despite what shopkeepers might be hoping, things are going to get much tougher for retailers. Amid fear of a protracted downturn and rising numbers of the unemployed, consumer spending has fallen and affected retailers. And that in turn, means that commercial property prices have much further to fall.

While the festive season had kept consumer spending fairly buoyant, Retail Group Malaysia’s managing director Tan Hai Hsin said it had been lower compared with last year.

“The shopping centres and major commercial centres are still very crowded with shoppers but it is obvious that spending has dropped. Retailers could be looking at significantly slower sales post-Lunar New Year.”

A quarterly survey by the Malaysian Institute of Economic Research (MIER) showed that in the fourth quarter of 2008 (4Q08), the Consumer Sentiments Index dropped to 71.4 points, down 17.5 points from 88.9 points in 3Q08 as households felt the pinch from a softer economy.

While Malaysia’s inflation rate has cooled to 4.4% in December from 5.7% in November on falling oil prices, consumer sentiment has remained subdued on fears of the country entering into a recession amid the deteriorating conditions of the global economy.

Retailers are facing emptier tills. That’s bad news for cashflow. And that means it’s hard to pay the rent. Most stores still have to shell out 1 month’s rent, in advance, to their landlords every month. For those retailers that were feeling the heat at the end of last year, December’s rent day was a big test. Finding the cash for March’s rent day is now likely to be even more stressful.

This year’s going to be really dire for retailers. Most will have survived through Christmas and Lunar New Year but from February onwards it’s going to hit the hardest.

Bad news for shopkeepers is bad news for commercial landlords
Retailers having it tough isn’t much of a surprise. But the knock-on effect means things are going to get much worse for commercial landlords too.

Commercial landlords will have to take some huge hits. Some of their tenants simply won’t be able to pay up.

Both shopping centre and retail warehouse rents also declined year-on-year. What’s more, some shopping malls are having to cut service charges, further reducing their income.

And unfortunately for the landlords, retailing is just one problem. Their overall rent book is being squeezed hard across the board, with things looking particularly bad in the City, where a mix of job cuts and oversupply means rental falls are likely to accelerate. Hence we forecast of a 20%-30% fall in commercial property values this year.

What this means for investing in property
For investors the message is very clear. Retail: don’t touch – well you knew that anyway. And as for commercial property – there’s still a long way to go before we’re anywhere near bargain-hunting time.