The first half of 2006 was marked by global events such as the high crude oil prices, tightening of interest rates in the US and the Lebanon-Israel political conflict, which on the domestic front led to rising costs and hikes in interest rates to curb inflationary pressures

Buyers and developers adopted a cautious approach in response to the higher cost of borrowing and concerns over high number of condominium units currently under construction in the market, particularly in KL City. However, Mont'Kiara continues to see more launches attributed to better reported responses from repeated clientele for the established developers in that locality.

Investment interest in prime office buildings continued, concentrated in the city's Golden Triangle and of late, KL Sentral, attributable to its recent granting of cyber city status that allows MSC status companies to locate their offices there. Improving occupancies and rental rates have been major factors spurring investment interest with five buildings transacted in the past six months.

The retail market is peaking and market performance has shown signs of stabilizing in the last six months. However, growing tourist arrivals and spending continue to support retail growth. The Malaysia Mega Sales Carnival (22nd July- 3rd September 2006) is expected to boost retail spending. No shopping complex was completed within the review period in KL City. However, in the Damansara locality, Cineleisure was opened in June with the cinema being the first to start operations.

Market Indications

The first half of 2006 saw slower sales as buyers adopted a more cautious approach resulting from concerns over high supply of units coupled with higher cost of borrowing following increases in the base lending rate in February and April this year to 6.5% and 6.75% respectively.

Supply & Demand

In Kuala Lumpur City, The Pavilion Residences and Park View 2-11 Luxury Suites were the only two projects launched in the first half of the year, and both were not located within the KLCC vicinity. The Pavilion Residences lies at the edge of Jalan Bukit Bintang's shopping belt and is part of the integrated commercial development comprising a shopping complex, luxurious serviced apartments, a corporate office tower and a boutique hotel. The project reported having achieved 40% sales in a recent media release that mostly comprised local buyers. Park View 2-11 Luxury Suites is not entirely a new project - it was previously launched as Park View Service Apartment by Mayland Parkview Sdn Bhd in 2004. In that year, a total of 311 units were launched and a recent launch was made for the remaining 95 units and named as Park View 2-11.

Contrary to the KL City market, Mont'Kiara continued to see higher number of new launches encouraged by the reported good response to sales there. Amongst the new launches in Mont'Kiara were Verve Suites, Tiffani by I-Zen and Mont'Kiara Meridin, recording average take-up of above 50%. Verve Suites by Bukit Kiara Properties has thus far recorded a brisk take-up of 70% largely owing to the developer's strong following that contributed to repeat purchasers and its concept that targets mainly young professionals.

The newly completed project in KL City in the first half of the year was Stonor Park (April) whilst in Mont'Kiara, i-Zen@ Kiara 1 was also completed in April. Projects scheduled for completion in the second half of this year are Park View (KL City), Northpoint Residences (Mid Valley City) and Semantan Avenue Suites (Damansara Heights).

The market is expected to continue to record modest sales in an environment where buyers will be spoilt for choice. Bank Negara has recently announced no further increases in the base lending rate which should improve buyers' sentiment.

Table 1: High End Condominium / Serviced Apartment Projects Launched in 1H2006
Project	Location	Area	Total Units	Developer
Pavilion	Jalan Bukit Bintang	KL City	368	Kuala Lumpur Pavilion
Park View 2-11 Luxury Suites	Lorong Perak	KL City	95	Martego Sdn Bhd
Verve Suites	Jalan Kiara 5	Mont'Kiara	240	Bukit Kiara Properties
Tiffani by I-Zen	Jalan Duta Kiara	Mont'Kiara	399	Ireka Land Sdn Bhd
Mont'Kiara Meridin	Jalan Kiara 1	Mont'Kiara	228	Sunrise Berhad
One Menerung	Jalan Menerung	Bangsar	229	BRDB Properties

Table 2: Possible High End Condominium / Serviced Apartment Projects to be Launched in 2H2006
Project	Location	Area	Total Units	Developer
The Oval	Jalan Kudalari	KLCC	140	Kool Growth Sdn Bhd
Unnamed Condo	Jalan Stonor	KLCC	177	Malton Berhad
U-Thant Residence	Jalan Madge	Ampang	77	IGB Corp
Casa Kiara 2	Jalan Kiara 3	Mont'Kiara	206	Sunway City Berhad
10@ Mont'Kiara	Jalan Kiara 1	Mont'Kiara	340	Sunrise Berhad
Cerian Kiara	Jalan Kiara 3	Mont'Kiara	238	YNH Property Berhad
Zehn	Jalan Bukit Pantai	Bangsar	187	187 Juta Asia Properties (in collaboration with CapitaLand)
Ken Bangsar Serviced Residences	Jalan Kapas	Bangsar	80	Ken Holdings Berhad

Another eight condominium projects are expected to be launched in the second half of 2006 offering a total of 1,445 units. Mont'Kiara continues to lead offering more choices with 784 units. The market is expected to be tougher as competition mounts. Projects in good locations that are backed by reputable developers with good track records are expected to be able to resist the current somber sales trend.

Prices & Rentals

There were fewer transactions of existing condominiums in the past six months. Prices of units in prime developments continued to appreciate especially in the established Bangsar and Damansara Heights. Prices in KLCC and Mont'Kiara have been reported to be stable. Average occupancy is about 90% and rents have been stable.

Table 3: Rentals and Prices of Existing High End Condominiums
Locality	Gross Rent (RM psf/month)	Capital Values (RM psf)
KL City	3.00 - 5.00	450 - 700
Ampang Hilir / U-Thant	2.50 - 4.70	400 - 600
Damansara Heights	3.40 - 4.50	450 - 600
Kenny Hills	2.50 - 4.00	500 - 600
Bangsar	2.60 - 4.50	400 - 650
Mont'Kiara	2.50 - 4.00	400 - 580

Outlook

New launches of high end condominiums are anticipated to be slower than the brisk sales enjoyed in the past two years. It is anticipated that prices of new launches which has in the past been 10% to 20% higher than existing-unit sales, will narrow. Average gross yield which has been about 8% is anticipated to reduce as rents become competitive in the wake of new supply entering the market.

Market Indications

The office market has continued to generate interest from both local and foreign investors particularly for prime buildings. Investment interest has been underpinned by improving take-up rates, occupancy and rents in the last six months. There is a shortage of quality and modern office space in the city and with the limited new office completions, rentals were treading upward in the first half 2006.

KL Sentral has garnered much interest attributed to it recent status as 'cybercity' allowing MSC status companies to locate there to continue to enjoy tax breaks and privileges, similar to the multimedia super corridor.

Supply & Demand

The current office supply in Kuala Lumpur totals at 63 million sq ft and KL City constitutes about 62% (39 million sq ft) of total space with Decentralized KL (Damansara Heights, Bangsar, Mid Valley and KL Sentral) contributing another 13% or 8 million sq ft. One building obtained its Certificate of Fitness for Occupation in the first half of this year (Taipan Star at Jalan P.Ramlee) and buildings nearing completion in KL City are Menara Marinara (Jalan Tun Razak) and Irat office buildings (Jalan Conlay) with a net lettable area of 224,000 sq ft and 284,000 sq ft respectively. In Decentralized KL, there was only one building completed in the first half of 2006 which was Plaza Sentral (Phase 2) offering 650,000 sq ft of space.

Buildings currently being constructed in KL City are Lot 170 (Jalan Perak), Menara Commerce (Jalan Raja Laut) and Capital Square (Jalan Munshi Abdullah). These buildings are expected to be completed in 2008 with a combined total of 1.7 million sq ft. One known landmark project currently being constructed along Jalan Tun Razak (next to Tabung Haji HQ) is Goldis. It is an integrated project comprising office, serviced apartment and hotel with total gross built-up of 1.17 million sq ft.

In Decentralized KL, buildings under construction comprise Northpoint and Centrepoint in Mid Valley City as well as Lot N in KL Sentral. Northpoint will be completed in the second half of this year whilst Centrepoint and Lot N are due for completion in 2007. Northpoint is expected to contribute a total of 382,200 sq ft whilst Centrepoint with 450,000 sq ft and Lot N with 350,000 sq ft respectively.

A higher average occupancy was noted in the last six months. In KL City, average occupancy was recorded at 84%; an increase of 2% compared to the average occupancy of 82% in 2005. Prime buildings in KL City such as Petronas Tower 2 and Menara Citibank achieved higher occupancies, credited to their strategic locations in the Golden Triangle and the expansion of oil & gas companies as well as financial institutions. Notwithstanding that, selected secondary buildings too attracted tenants with their lower rentals.

Near full occupancies were recorded for Petronas Twin Towers, KL Sentral (Phase 1) and Mid Valley (Phase 1). Take up was good for Northpoint Office Suites with all units being fully sold out.

Prices & Rentals

Asking gross rentals for prime office space continued to move upward; ranging from RM5.00 to RM10.00 per sq ft per month for prime buildings with super prime buildings such as Menara Maxis and Petronas Twin Towers at the higher range. Asking gross rentals for prime Decentralized KL office space ranged from RM3.50-RM5.00 per sq ft per month. Rental growth has been positive reflected by its increases of 5% to 7% over mid-2005 rates.

In KL City, three buildings were transacted in the Golden Triangle with prices ranging from RM400 to RM557 per sq ft. In Decentralized KL, transacted price were between RM313 and RM371 per sq ft. The transacted prices were lower in Decentralized KL when compared to office buildings in the Golden Triangle mainly due to factors such as location, occupancy, rentals, building condition and facilities.

Table 4: Office Investment Sales in 1H2006
Building Name	Location	Approx. Lettable Area (sq ft)	Consideration (RM) / (RM psf)
Menara HLA (Tower REIT)	Jalan Kia Peng	396,800	221,000,000 (557)
Menara Genesis	Jalan Sultan Ismail	134,000	53,600,000 (400)
Bangunan MAS	Jalan Sultan Ismail	270,000	130,000,000 (480)
HP Towers (Tower REIT)	Damansara Heights	350,000	130,000,000 (371)
Wisma TM	Jalan Pantai Baharu	223,200	70,000,000 (314)

Table 5 : Selected Grade A Office Asking Rentals
	Asking Gross Rental(RM psf) per month
Menara Maxis	7.50
Menara Prudential	7.00
Menara IMC	7.00
Menara Dion	6.00
Rohas Perkasa	5.50
Menara Citibank	6.50
Menara Standard Chartered	5.50
Menara MNI Twins	5.00
Menara HLA	5.50
Menara Millenium	5.00

Outlook

Kuala Lumpur office market is looking positive with good rental appreciation, capital growth and strong investment demand. The investment demand is largely led by existing and potential REIT issuers. Foreign funds have also recently started to take greater notice of the potential of the Kuala Lumpur office market and are currently seeking good investment grade buildings as well as opportunities to develop new buildings and/or refurbish older buildings in prime locations. Net yields are forecasted to remain between 6.5% and 7% and are expected to slowly move upwards in tandem with the rising cost of funds.

Market Indications

The retail market was relatively slower over the past six months and this has been blamed primarily on lower consumer spending. The increase in petrol prices has had inflationary impact whilst rising interest rates has affected affordability. Interest rates rose from 6.5% (December 2005) to 6.75% (April 2006) whilst petrol prices climbed another RM0.30 per litre in February 2006. This has led to more cautious consumer sentiment and a tightening in spending, particularly for out-of-home entertainment, fashion, clothing and big ticket items.

Buffering the impact of lower consumer spending will be higher tourism spending particularly from Middle East tourists who are anticipated to bring in about RM800 million in tourist receipts through an estimated average spending of about RM4,700 per tourist. Tourist arrivals from Middle East countries are estimated to rise this year by 30% to 190,000 persons from the previous 147,000 persons, especially during the summer holidays from July to September. The popularity of Arab tourists has prompted the creation of an Arab Square known as 'Ain Arab' at the Bukit Bintang area.

Nevertheless, consumer spending is expected to improve with MIER's Consumer Sentiments Index (CSI) in second quarter of this year recording a more positive response climbing to 104.2 from 90.1 during the first quarter. This will provide some cheer to retailers as consumers begin to spend after getting accustomed to the rising prices.

Supply & Demand

There was no completion of new retail complexes in the first half of 2006 and current retail space supply in the Federal Territory of Kuala Lumpur remains at approximately 20 million sq ft. Potential new completion in the second half of this year will be from Bangsar Village (Phase 2) by Eng Lian Enterprise bringing in approximately 200,000 sq ft.

In the Damansara locality, Cineleisure Damansara opened what it termed as a 'multi-sensory experiential shopping, entertainment and leisure' complex in June. This 7-level complex is modeled after the Cineleisure Orchard in Singapore and is a joint-venture between Boustead Holdings and Cathay Organisation. Currently, only the 10-screen Cathay Cineplex is open whilst the remaining specialty stores have yet to commence operations.

Average occupancy of retail centres in KL City stands at 85% with some upward movement in centres such as The Weld (targeted to re-open in August this year), Starhill Gallery and Berjaya Times Square. The Weld, which has been undergoing refurbishment since the second half of 2005, will be re-opened with a new façade and retail offerings such as Genki Sushi and Kamimura Japanese restaurant. Starhill Gallery had a major new take up with the opening of Pamper Zone with 50,000 sq ft in May this year.

Sneak Preview

2007 is expected to be an exciting year for the retail market, with approximately 2.9 million sq ft of new space coming on stream from one retail centre in KL city centre and another two in suburban areas. This includes The Pavilion with 1.4 million sq ft located along the shopping and tourist belt of Bintang Walk. There are about 450 specialty stores with Parkson Department Store confirmed as the anchor tenant. Outside KL city, The Gardens (Mid Valley City) with 800,000 sq ft will be anchored by Isetan and Robinson Singapore. The entry of Robinson into the local market should add some variety to the market.

The other suburban complex is Sunway Pyramid Phase 2 which has signed Jaya Jusco as its anchor department store and shall provide approximately 240,000 sq ft of additional space spread over four levels.

In the Klang locality, Harbour Place will be opened by July 2007. Built on 4.3 acres land in Persiaran Raja Muda Musa, the RM115 million shopping centre is developed by Chestar Properties Sdn Bhd. With 280,000 sq ft of net lettable area, Harbour Place houses more than 300 specialty stores and 500 car park bays. The mall will have a strong retail-entertainment focus, with no anchor tenant departmental store to allow more space for specialty stores.

Prices & Rentals

The Selayang Mall transaction in December 2005 was approved by the Securities Commission in July this year. The 364,638 sq ft shopping complex was announced to be sold to Amanah Raya Berhad by SEAL Incorporated Berhad on a sale and leaseback arrangement. This leasehold shopping complex has remaining tenure of approximate 73 years and was transacted at RM120 million or RM329 per sq ft.

Gross rentals for ground floor specialty store retail space in prime complexes in KL City such as Suria KLCC remained stable ranging between RM30.00 and RM40.00 per sq ft per month whilst prime complexes in other locations in the Klang Valley range from RM16.00 and RM28.00 per sq ft per month. Secondary shopping complexes were from RM10.00 to RM18.00 per sq ft per month depending on location and retail mix. The gap between rentals in prime centres and secondary centres is getting larger as prime centres are well managed with more superior tenant mix and centre promotion.

No shopping centre was transacted in KL City in the last six months and net yields remained stable between 7% and 8%.

Outlook

More new malls will be completed in 2007 and it is anticipated the retail market will see some stiff competition. The proposed lift on the freeze for new hypermarkets will see the establishment of more hypermarkets in Klang Valley, particularly at the fringes attributed to the large population catchment.

Average occupancy rate is expected to remain at 85%, albeit more supply coming on stream. Mega Sales Carnival (July-August) is expected to boost retail sales with the anticipated influx of tourists from the Middle East.