Iskandar, at the southern tip of Johor, wraps itself around the coastline facing Singapore. On plan, it is three times the size of Singapore, and twice the size of Hong Kong.

Since the inception of Iskandar Malaysia in 2006 as a master-planned development area, total approved investments have exceeded RM172 billion ($56 billion), with some RM85 billion in projects already completed. The economy is domestically driven, but with a fair contribution from foreign investments (39%).

The services and utilities sector has contributed the most. The sector covers a broad range of industries, including logistics, healthcare, tourism, education, creative industry, finance, retail and industrial properties, emerging technologies and utilities. This is followed by substantial growth in the manufacturing sector as well as residential properties.

Major catalyst projects that have been completed in recent years include Educity, Pinewood Iskandar Malaysia Studio, Johor Premium Outlet (the first in the region) and Legoland Malaysia (the first in Asia), to name a few. Increasing investments are expected to boost the property market by creating more job opportunities, generating higher-income jobs and hence, promoting population diversity.

Much has been said and written about the supply of residential property in Iskandar. We believe with such a large area being master-planned for development, it is only to be expected that statistics will show a high number of “approved” residential developments.

However these are largely in the hands of private-sector developers who are adept at self-regulation and know how to match supply with demand. Moreover, the sell-then-build system of delivery is invaluable in preventing excessive overbuilding.

 

Chart 1

 

Office sector

There has been little focus on office property in Iskandar. However, the high-speed rail link from Kuala Lumpur to Singapore, together with the proposal to extend the Singapore MRT system into Johor Baru, will be transformational.

The rapid development of the service industries in Malaysia, massive new Johor developments such as the 20,000-acre Pengerang Integrated Petroleum Complex, and the opportunity to provide a more economical office solution to Singapore, all spell a great future for modern office space in Iskandar. Set against this exciting backdrop, it may be surprising to learn that virtually no new office space has been built in Iskandar in the last 10 years!

The office market hovered around 5.65 million sq ft from 2004 until 2014, increasing to only 5.89 million sq ft at the end of last year.

New additions, such as the low-rise Medini 6 (50,700 sq ft) completed in 2Q2014 and Medini 7 (106,000 sq ft) completed in 2Q2015, are understandably well occupied. Menara Komtar, which completed renovation work in 2014 and has a total office space of 409,000 sq ft, is fully occupied by Johor Corp and its subsidiaries.

Most of the existing offices are located in the Johor Baru City Centre, while future supply is currently concentrated in growth areas such as Medini Iskandar.

Office rentals in Johor Baru are low, reflecting the age and quality of existing buildings, many of which were completed over 20 years ago. However, new offices in Medini are able to achieve values as high as RM5 psf, and we see this as highly significant.

Moving forward, we expect future tenants, including the numerous MNCs that are scouting the market, will not hesitate to pay a premium for the quality and facilities that the current older generation of office buildings are unable to offer. This spells promising returns for the first few owners of world-class buildings in Johor Baru offering first-mover advantage.

The average occupancy rate for the office sector in Johor Baru is recorded at 73%. Nonetheless, major office buildings such as JB City Square Office Tower, Menara Ansar, Menara Landmark, Menara Komtar and Menara MSC Cyberport are fully tenanted. Just as has happened in Kuala Lumpur, we expect to see a flight to quality once a new generation of buildings becomes available.

 

Retail sector

The retail scene in Iskandar is still relatively small, with a modest middle-income segment and hefty dependence on the state population and Singaporean shoppers. Total retail space is 12.34 million sq ft, or 6.33 sq ft per head, slightly lower than Greater Kuala Lumpur’s 7.8 sq ft per capita.

Iskandar’s new mall space has doubled in the past 10 years, a growth rate similar to that experienced in the Klang Valley.

Numerous new megamalls have been planned, and these will mostly form part of the master plans of major township developments. However, only a few of these have seen the start of construction, demonstrating again the ability of developers to moderate supply.

Larger malls under construction include Southkey Megamall (1.5 mil-lion sq ft), Paradigm JB (1.3 mil-lion sq ft) and Capital 21 (a million sq ft strata-titled mall). Currently, the best-performing mall in JB City Centre is JB City Square, which is directly connected to the Customs Immigration Complex and hence, able to enjoy high footfall.

The average occupancy rate of shopping malls in Iskandar Malaysia is registered at 77%, but this statistic includes a number of older properties that are losing ground to modern, better planned and managed complexes.

Retailers find business in Iskandar good. Population growth, an increase in household income and more Singaporean visitors and bargain hunters augur well for the future and Iskandar will continue to gain ground by offering a comprehensive shopping experience.

 

Chart 2

 

Join Christopher Boyd on Nov 7, 1pm at ‘Gain a winning edge in today’s business world’.

Tickets: www.eventbrite.sg/e/gain-a-winning-edge-in-todays-business-world-tickets-19202058875.

Chris Boyd is executive chairman of Savills Malaysia. He can be reached at chris.boyd@savills.com.my.