Sarawak's supply of retail space expanding rapidly

During the 1980s, when the state’s income per capita was as low as RM700 ($213) and the poverty rate hovered around 60%, modern shopping complexes in Sarawak were few and far between, and those in existence confined to the main cities of Kuching and Sibu. In the decades that have followed, Sarawak has undergone an economic renaissance and by 2013 per capita GDP had expanded to reach RM40,000 ($12,170), while the poverty rate was reduced dramatically to below 3%. The economic upswing saw lifestyles change and demand for plazas and malls grew among more time-conscious consumers seeking a one-stop shopping experience.

By 2030 Sarawak aspires to achieve the status of a high-income economy, and as spending power rises further and development spreads to new development nodes, so too should the opportunity for retailers to expand their footprint and introduce new retailing concepts to the market. Tempering the growth somewhat, however, are logistics and operational challenges that come with East Malaysia’s geographic separation from the peninsula and the distances and challenging topography that distribution networks must overcome to transport merchandise between major population centres. Kuching itself, meanwhile, has seen much new stock added to the market over the past few years, leading to a surge in vacancy rates and prompting predictions by some analysts that property developers might adopt a more cautious and deliberate approach moving forward.

SUPPLY INFLUX: In 2008 Kuching’s retail credentials received a major boost with the opening of The Spring, a 350,000-sq-ft two-storey mall that was designed by a New-Zealand-based architect firm and housed some of the state’s first international retail brands, like Starbucks and Esprit. Most malls were locally designed with a predominantly domestic tenant mix, but occupancy rates and footfall at The Spring signalled to residents and developers alike that the city of 600,000 was a modern retail centre.

Over the succeeding years, on the back of newfound developer optimism, a number of large-scale retail projects for the city were announced. The 1. 7msq-ft Boulevard Shopping Mall opened its doors in mid-2012. Already anchoring a hotel and two apartment blocks, the project’s second phase included a roller rink, cinemas and the addition of more parking bays. It launched in late 2014.

CityOne Megamall, meanwhile, offers 650,000 sq ft of net retail space and 400 outlets that form part of a larger 1.5m-sq-ft, mixed-use commercial complex that also includes an exhibition centre. The mall opened in 2013 and was joined that same year by the launch of ST3, a four-storey 250,000-sq-ft shopping complex situated below an eight-storey serviced residence located opposite to The Spring.

The aforementioned new mega-malls, as is common in many expanding cities, are located in suburban residential areas. One exception, contributing to the revitalisation of Kuching’s historic district, is Plaza Merdeka, a 550,000-sq-ft development opened in 2012 that is nestled among some of the city’s older tourist sites and attractions.

Coupled with Summer Mall, a 1.1m-sq-ft retail precinct located in the town of Samaharan, about a 30-minute drive from Kuching that opened in late 2013, the total supply of retail space in greater Kuching reached 4.54m sq ft as of end-2013, according to CH William Talhar Wong & Yeo – a figure that the property agency measures to be more than double the total stock in existence five years prior.

RENTAL PRESSURE: CH William reports rent per sq ft peaked in 2012 at an all-time high of RM24,000 ($7600) per sq ft, a figure that has subsequently dropped to RM20,000 ($6084) per sq ft as the influx of new supply has prompted landlords to lower their rents in order to attract new tenants and retain existing ones. The vacancy rate for 2013, according to CH William, increased to 28% from 26% five years prior. “Since 2012 many more malls have sprouted up and competition has become far more aggressive. More major projects are coming and the sector is moving too fast. Supply is overcoming demand and development in Kuching needs to slow down,” Timothy Wong, the general manager at CityOne, told OBG.

With four retail complexes, each expected to offer over 100,000 sq ft of net leasable area coming online in 2015, it appears that the pace of new supply will not taper off in the short term. Accordingly, competition for tenants and footfall is likely to intensify. “Malls in Kuching currently have around a 70% occupancy rate, which is expected to drop as the increase in retail space is not proportional to the increase in population. Although marginally increasing purchasing power offsets this discrepancy to some degree, it is not enough to fully compensate,” Christine Ling, The Spring’s general manager, told OBG.

OUTSIDE KUCHING: Outside of the capital, Miri, the state’s second-largest city, has a long established retail industry that has historically catered to foreign visitors. 2.7m Bruneians were recorded as having crossed the border into Sarawak in 2013, and a significant portion would have done so as day trips into Miri for shopping and recreational purposes.

Commencing operations in 2013, the four-storey MYY Mall, located 10 km from the city centre, contains 406,000 sq ft of gross floor area. It complements the Boulevard Shopping Complex, with 100,000 sq ft of floor space, as the city’s prime modern retail complexes. Bintulu is earmarked to become the state’s fastest-growing city as it serves as the residential base for a large proportion of the Sarawak Corridor of Renewable Energy’s current and planned industrial activity. The developers behind The Spring, for example, have indicated to OBG that they are planning to open a Bintulu branch in the future. “In contrast to the oversupply of malls in suburban Kuching, Bintulu is in immediate need of modern retail options,” said Wong. Several integrated development projects are in the pipeline for Bintulu, including the Bintulu Paragon and Town Square Bintulu, which are set to feature retail, office and residential components, and should provide the city with a modern facelift.

“Bintulu makes for an exciting market, as the city is growing off the oil and gas industry. Land is much cheaper and the initial investment much lower, allowing for stronger margins,” Yip Phooi Leng, a director at CH Williams, told OBG. Sibu, as with Bintulu, has also traditionally been dominated by shop-houses and is undergoing a transformation as mixed-use precincts, including the Sibu Town Square Commercial centre that opened in 2013, begin to spring up.

TENANT MIX: Ling told OBG that while international brands are increasingly exploring secondary Asian markets for growth in lieu of more established destinations approaching saturation, Sarawak is not yet perceived as a highly lucrative market and for the most part it is the mall owners who invite foreign brands to set up in the state, rather than brands approaching them. “Although purchasing power has increased, the consumer base is still quite picky and not yet ready for an overdose of foreign brands, especially luxury ones,” Ling said. Aside from demand drivers, the lower representation of international brands compared to Peninsular Malaysia has to do with logistical constraints, as retailers need to establish a separate supply chain into East Malaysia because of its geography. This is particularly challenging and costly when dealing with groceries and perishable foods.

OUTLOOK: Lacking the retail sophistication and proliferation of Peninsular Malaysia, Sarawak’s retail landscape is fast playing catch-up as new modern mega-malls open up throughout the state. Urban Sarawakian consumers are heavy travellers, frequently visiting retail hotspots, such as Kuala Lumpur and Singapore, where they have become exposed to retail brands that they would likely visit were they available in their hometowns. As foreign direct investment into the state arrives and Sarawakian income levels grow, local and international retail chains are taking note and exploring opportunities for setting up shop.