KUALA LUMPUR: Malaysia’s real estate market may see reduced absorption rates across all commercial property segments, with downward pressure on rental growth, following the revised Sales and Service Tax (SST), said JLL Malaysia.
Its head of research and consultancy Yulia Nikulicheva said to counter this trend, landlords will likely increase tenant concessions to attract and retain occupiers.
“In the investment market, transaction activity may diminish as capital values and yields undergo adjustment to establish a new market equilibrium,” Nikulicheva added.
The government expanded the SST framework from July 1 this year. This expansion introduced an eight per cent service tax on commercial property leasing and rental services, alongside a new six per cent SST on previously exempt construction work services.
The expanded SST applies to commercial properties including offices, shopping malls, shop lots, and warehouses for landlords with annual revenue exceeding RM1 million.
The new tax regime is expected to reshape the country’s property landscape, JLL Malaysia said in a statement today.
“The expanded SST scope increases the operating expenses for existing tenants. Office tenants now face the dual challenge of higher rental costs and increased fit-out expenses due to the new construction services tax.
“These changes will likely influence relocation decisions and strengthen resistance to standard rental increases upon renewal,’ it added.
JLL Malaysia said tenant may respond to these changes by maintaining current space strategies, relocating to lower-rent locations and extending stays at current locations.
In the retail sector, impact varies by tenant size. Malls with higher SME representation will experience less disruption. JLL interviews indicate most mall operators will avoid additional rental increases, recognising tenants are already absorbing SST costs.
For logistics and industrial tenants, where fit-out costs are less significant, rental increases may lead to greater use of tenant incentives.
Impact On Landlords
While landlords face less direct impact, their operating expenses will increase due to the expanded SST scope, JLL Malaysia said.
Buildings with higher vacancy rates, whether new or old, will likely be more sensitive to these changes, compelling owners to offer more favourable terms to attract tenants.
However, government landlords gain a competitive edge through their tax-exempt status, it added.
Developer Challenges
Developers face compressed profit margins as construction costs rise.
JLL Malaysia said the combined effect of higher costs and tenant resistance creates significant pressure. Many developers may pivot toward shorter timeline projects or postpone larger developments.
Township developers will likely pass costs to buyers, while commercial and industrial segments face challenges implementing similar strategies.
“Developers of properties currently under construction face both increased costs and potentially weaker demand,” it said.
Investment Outlook
JLL Malaysia said the real estate investment landscape requires adjustment as landlord revenue growth projections decrease.
Real estate investment trusts and investors must account for these changes in their valuation models, with yields likely experiencing slight compression.
“Property management expenses are simultaneously rising due to higher electricity tariffs, minimum wage increases, and SST on various services,” it added.
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