Kota Kinabalu may soon be known for its "ghost malls” as retail space progressively rises amidst a flat economic growth pattern and a relatively small population of less than 500,000 people in the Kota Kinabalu's Central Business District (CBD). An ominous truth or an unjustified statement?

The total retail space in Kota Kinabalu currently stands at circa 5.65 million sqft with the addition of 74,666 sqft courtesy of the newly completed Jesselton Mall @ Jesselton Residences and approximately 65,000 sqft more from T1 Bundusan. A recent data from the National Property Information Centre (NAPIC) shows that occupancy rates for the retail sector in 1Q2017 recorded a decline to 85.1% for the whole of Sabah from 86% in 2H2016. This drop could be due to the increase in retail supply and the sluggish economy.

According to NAPIC and Knight Frank Research, Sabah registered 18 transactions with a total value of RM20.5 million in 1Q2017 for real estate in shopping malls. While volume of transactions declined by around 44% as compared to the preceding quarter (1Q2016), the value of transactions has increased slightly by approximately 5% as compared to RM19.5 million, recorded in 4Q2016.

Calculating the footfall of shopping malls may give a clearer look at how the market is reacting. However, this is a tedious process and according to SHAREDA President Mr Chew Sang Hai data from NAPIC may be inaccurate and influenced by the high value market. Shop lots, hypermarkets, supermarkets and the likes are not shopping malls says Mr Chew, as these segments are lumped together in NAPIC's research. To accurately calculate footfall of malls in Kota Kinabalu, one must divide the total square footage - excluding shop lots, hypermarkets and supermarkets - by the population of the whole of Kota Kinabalu he explains.

The shopping mall industry has enjoyed a huge growth in retail space from 2007 to 2010. Malls built during that period are City Mall, One Borneo, Suria Sabah, Warisan Square, plus the expansion of Komplex Karamunsing. With these malls, 1.5 million sqft of retail space were created, and the market took almost 36 months to absorb the excess space.

"We do see some retail glut in the market now. What makes it worst is most of them are less than 2km from one another!” says David Lau, Head of Marketing for City Mall. He says that from 2015 to date, there are more than 2 million sqft of additional retail space coming into the market with no less than 5 new malls being built and under construction.

One of the root dilemmas the retail segment face is that tourists are the prime spenders upon which shopping malls survive. There is just not enough people to support the robust growth in retail space. To put it simply, there is no buying power. Last year, Sabah recorded tourist receipts of RM7.25 billion on the back of close to 3.5 million tourists.

Ghost malls haunting the retail industry? Owning and operating a mall is an endearing and challenging task that entails managing the tenant mix, ensuring the property keeps up with trends, offering promotions, maintaining visitor traffic, sustaining relationships with tenants, etc. The economic downturn is one of few contributing factors stifling the realisation of lavish development ideas. Sometimes though, the death of a mall is simply due to bad town planning and mall management.

When a shopping mall starts losing consumer traffic and its tenancy hits 60-70%, it is said to be on a "death spiral” and is widely considered a dead or ghost mall according to a recent article by Focus Malaysia. Retail experts point their fingers at the unprecedented property boom, which prompted developers to build far too many shopping malls.

Mr Chew shared that the "super boom" of the real estate industry that happened between 2009 and 2014, had encouraged developments to sprout over the years and a popular segment was the shopping mall niche. He added that we are currently facing a "market problem” and not so much of a crisis similar to that in 1998. He explained that demand will pick up sooner rather than later as there will be no influx of retail space in the coming future which will in turn spike demand.

Taylor Hobbs' principal consultant Sr Liaw Lam Thye commented that the incoming splurge of retail space is indeed "worrisome”. He too believes that the existing population in Kota Kinabalu is insufficient to support the boom in retail space, especially with the online retail sector growing at a fast pace. As a result, empty retail spaces are being seen in Kota Kinabalu.

Located strategically adjacent to Gleneagles Medical Centre, opposite Imago Shopping Mall, Riverson Walk has fuelled fears as two years since its launch, its some 600,000 sqft of retail remains sparsely tenanted. However, Riverson is supported by a very good location, for one, and may be an attractive prospect once the market adjusts and demand for space returns.

Oceanus Waterfront Mall, which houses Sabah's first Hard Rock Café, has also fallen short of expectations as foot-traffic declined alongside occupancy. This is set to be corrected with the appointment of Azmi & Co as its new management, officially taking office on 1 September 2017.

1Borneo Hypermall, Sabah's largest mall with a net lettable area (NLA) of approximately 1.5 million sqft, is also experiencing a decline in footfall, with some retailers switching to newer malls while others succumb to economic pressures and are forced to close.

What makes a mall? There are many factors that define a good shopping mall. The mall business is a whole new ball game. The purpose of a good mall is to be able to serve the target market with the right tenant mix. But that's a very text book based answer, there are more factors that mall management must take into consideration such as its location, demographic, culture, spending habits, income level, to name a few. "A good mall does not mean that it is a successful mall. Another important factor is to create a USP (unique selling point) to differentiate one mall from other competitors" says David.

Look at the market sector as a whole. Each mall will have its own speciality and demographic and it can range from the low-medium, medium market and finally the tourist market, which can be divided into two categories; domestic and international market.

How is a mall categorised? It starts off with its size. A retail development with a built up of less than 300,000 sqft is considered as a suburban mall, catering to 15km of its catchment area. A mall is considered as a regional mall if the built up exceeds 500,000 sqft, with its catchment area of 30km.

"The retail mall market is suffering and has its own challenges to overcome. One would need to go back to the start and see which sector is oversupplied”, said Mr Chew before adding that most people only talk or report on the catchment area per sqft of the malls.

"We (GM) did a study on cinema seatings in the Petaling Jaya region. Take Paradigm Mall for example, the LDP Highway has numerous malls along the way" says Mr Chew. The case study shows that in that region, the ratio of cinemas seats to people is 20 persons to 1 seat. The study on Kota Kinabalu's cineplex was recorded at 300 persons per seat.

Grand Merdeka Mall contributed to the retail segment with approximately 270,000 sqft of NLA since opening its doors in June. To date, Grand Merdeka said that 40% of the mall's units are sold to various buyers, and the rest are owned by the developer. Occupancy is a definite challenge being a suburban mall.

Grand Merdeka Mall aims to serve the needs of approximately 380,000 people living at the Northern part of Kota Kinabalu who are within 15 minutes from the mall. In any strata mall, especially a suburban mall, to fill up the space with 80% -100% of the mall is impossible. General Manager, Emily Chew says, "Grand Merdeka Mall is a stratified mall and majority of the retailers would not be interested in stratified malls due to the possible tenancy complications with unit owners, but we are not deterred by the negative feedback from the public because we will work hard in making this mall a success”.

To stay on top of the game, over the course of the year, City Mall managed to increase their footfall by revamping their entertainment zones through the introduction of a new cineplex among others. On a micro level, space constraint is the current challenge for City Mall, but David is confident that with upgrades to the aging equipment and a little facelift here and there, the mall will be able to serve the ever-growing market better. "It is important for the mall management to identify and react fast enough to plug the leak. City Mall has come a long way and she just had her 10th anniversary" says David.

Suria Sabah is tightly controlled by the developer, who owns more than 88% of the NLA. Key locations and floors are held by the developer and its sister company. Suria Sabah will be 9 years old come 2018 and she is currently undergoing some major restructuring to bring in special and established brands such as Dragon Palace Dim Sum and Seafood Restaurant from Perth, New WK Restaurant, Kuo Man Restaurant, a 24-hours McDonald's, Ichizo Ramen, Taiwan Original Cake, I Love Yoo and more.

"Understanding the need to evolve and adapt to the rapid changes in retail, the mall management has also worked with shop owners on a long-term lease back, to provide flexibility to manage the retail mix for the mutual benefit of unit owners and the mall" says Mr Tan King Way, General Manager of Suria Sabah.

In February this year, Pacific Sanctuary Holdings announced the latest addition to its list of confirmed anchor tenants - Harvey Norman, an Australian-based multi-national retailer with a wide range of world renowned brands in home furnishings and bedding, computers, communications and consumer electrical products, to its PACIFICITY Shopping Mall. News of this received much traction and shows how much of an impact good anchor tenants can have on the perception of "success” of a shopping centre, even before the doors actually open.

As for Imago Shopping Mall, it is still gaining its momentum by maintain a mix of renowned retailers such as Morganfields, Cortina Watch, Baskin Robins, Pandora and Ripcurl, to name a few. The occupancy rate in Imago Shopping Mall improved from 85% in 1H2016 to 87% as of 2H2016 and is still regarded by many as the best commercial centre in Kota Kinabalu.

Staying in the game Jesselton Mall, a small mall located in Jesselton Residence, has recently obtained is OC and will see it housing high-end brands. The ground floor of the mall is also duty-free. Another mall in the pipeline is Inanam Mall, which will approximately add 100,000 sqft of NLA.

The State Government's controversial mixed development project, Tanjung Aru Eco Development (TAED), with a gross development value (GDV) of RM7.1 billion is believed to have been recently awarded to contractors and works on the development is expected to commence soon. This development will contribute another 645,000 sqft of boutique retail and F&B space.

Sr Liaw says, in order for a mall to stay in the retail game in Kota Kinabalu, it must have a USP or cater to a specific niche market. He mentions Komplex Karamunsing's IT arcade as an example and Plaza 333, which is known for its wide selection of F&B.

It is a given that malls with an entertainment element tend to surpass its competitors. Imago Shopping Mall, which houses the famous MBO Cinema is a prime example. Similarly, Suria Sabah and 1Borneo malls house GSC Cinemas, while City Mall and Centre Point have home-grown cinema brands and PACIFICITY Shopping Mall is expected to tie-up with TGV Cinema. Grand Merdeka is also planning to open their own cinema, with a seating capacity ranging from 80 to 180 across six halls, each with its own theme façade.

Such is the climate to be special and offer a degree of uniqueness for the crowd, International Technology and Commercial Centre (ITCC) features an exhibition hall and a grand ballroom as well an in-house chapel.

Suria Sabah will be elevated to offer more affordable luxury items such as leather goods, renowned watches and jewelleries, cosmetics and the only full-ledge MANGO store catering for men, ladies and children. "Stores such as Coach, Pandora, Esprit, Sushi Tei and Watson (to name a few) have upgraded their units, refreshing it into a more modern concept" says Mr Tan adding that with the current market challenges today, it is only natural for the company to restructure and look into incorporating retail and F&B sectors to the mall.

Light at the end of the tunnel In a statement made by CH William, Talhar & Wong's Director (Sabah) Cornelius Koh, he agrees that the growing number of malls in Kota Kinabalu is a cause for concern, but he says that "property is not built overnight.”

"If developers were to wait for the market to be up and running to start building, they will lag behind competitors”, he said adding that while the economic sentiments may be dampened right now, it will definitely recover in future, seeing a more prominent recovery towards the later part of 2018.

To survive the hard times, Cornelius says many malls are turning to "creative rental schemes” to attract retailers and beefing up promotional campaigns to draw footfall. He says creative rental schemes such as rent-free periods are a crucial sweetener to entice the right tenant mix.

"It's all about mall management and survival of the fittest. If you have the capital and you're threading your business carefully, of course, you can succeed because by doing things right, you're gaining the public's confidence. And that's a very important thing, public confidence," said Mr Chew.

"Demand can change overnight, supply cannot," says Mr Chew in a firmly adds before saying that the glut is not only in Kota Kinabalu, but everywhere. It is a challenging industry to be in now. Developers must be in the industry for long-term, not short-term gain.

With the escalation of cost of living, shoppers are reluctant to spend as freely as before, forcing malls to carefully introduce merchandises that would suit the shoppers' budget level. "With the advancement of mobile technology, shoppers get great deals from Lazada and Taobao which adds salt to the wound”, says David, adding that this is the key challenge for brick and mortar stores. He also shared that his group is also planning to build and run another suburban mall in the West Coast in the near future.

Moving away from the chestnut Developers that want to maximise profits often seek a magnet for their developments in the form of shop lots or a retail mall. But with NLA at saturated levels, property consultants are calling for more creative options.

Many hope the commercial development idea will be ditched altogether in favour of more marketable options like self-contained living and leisure type villages that are targeted at specific tourist groups frequenting Kota Kinabalu.

In a statement made by Sunny Kelvin, Smiths Gore Sabah's senior valuer and head of property management to Focus Malaysia, he said that to meet demands, developers need to carefully study the market requirements, adding that he sees a void in the market for self-contained mini villages, fronting the beach.

"Instead of the mundane retail, offices and high-end condominiums, it's time developers looked at creating something different to gain a niche foothold" says Sunny.

Another untapped potential is the outlet malls. Sr Liaw says while there is an insufficient population to meet turnover needs, he believes the 3.5 million tourists who use Kota Kinabalu as a transit hub would compensate for it. "It's just selling branded apparels, but at a fair price. So, this can create a new tourist attraction for the city" he says.

‘Tis the season! For the last 2 years, Imago Shopping Mall achieved its highest sales records during the Christmas period. This year, they promised a visitors Boxing Day Crazy Sales Events, coupled with other interactive activities. The mall's decorations will primarily be the first of its kind in Kota Kinabalu.

"Tenants sales spiked during the Raya and Kaamatan periods and maintained for a few weeks before the hype slowly died down. We saw a spike again during the Halloween period, and we estimate an even higher spike this Christmas. It will most probably be our highest sales month ever" shared Shathish Nair, Marketing Executive of Imago Shopping Mall.

People generally feel good about the end of the year, especially the Christmas period, says David. It is traditionally the time to give good tidings and share with your family and friends. But for shopping malls, it's the time for sales to increase, and retailers hoping to make some good sales to cover up the drought months. Malls that do it right can expect to generate almost half of the sale for the year from pre-Christmas period until Chinese New Year.

"Half of your yearly sales is from this period. If you can't make it during this time, then you're probably not in a very good shape. However, most retailers have started giving out discounts even before the festive season starts, which may adversely affect them" says David and said that with the sluggish market, when one person starts a trend, the rest will follow.

What to expect? From the management's point of view, the retail market will improve in certain sectors but not all. For example, tourist focused shopping malls in KK CBD will continue to do well because of the influx of tourists. F&Bs will remain upbeat whilst fashion retailers will continue to suffer due to the competitions from online shopping.

In the near future, there will be approximately 1.2 million sqft of retail space entering the market, according to Knight Frank Research. There is still concern on the "sustainability” of the retail sector in view of the high impending supply. With heightened competition, the retail sector is said to face more challenging phases and turnovers are expected to be diluted.

According to Knight Frank Research's Assistant Manager, Welton Chin, occupancy rates are anticipated to be affected with new malls coming on-stream coupled with slower take-up rate for new retail space. On the contrary, occupancy rates for well-managed malls with good tenant mix are expected to hold firm.

"The market has started to pick up and there may be slight improvements going into 2018. I think the overall market will remain flat with less than 5% growth for us" says David, adding that with the GST remaining unchanged at 6%, it has removed some uncertainties from retailers.

The evolution of shopping malls in Kota Kinabalu is no longer simply a space to shop. Malls are transforming away from traditional shopping centres into a community within itself, which seamlessly offers both retail and entertainment options, and even services.

Nowadays, shopping to the modern consumer is not only about consumption, but also an experience. "To meet such expectations and be sustainable in the longer-term, shopping malls have to offer good quality public spaces, ease of movement as well as places where people can meet, relax, or be entertained. The increasing demand for ‘shopping experience' is one of the reasons for growth in the number of lifestyle centres" says Welton.

"With my experience in investment banking, I feel that the world economy is coming to an end of expansion soon and hence, there will be an adjustment happening let's say in the next 12-18 months and the effect will reduce the number of foreign travellers visiting the city and indirectly affecting tourists focused malls" says David.

Most newly opened malls, except one, suffer in the retail glut. The retail market will probably take around three years to absorb the existing retail space. Too many developers are following the standard textbook method to develop their malls, not taking into account the changes of lifestyle and trends, customer behaviours and preferences, which may play out to be ineffective.

There are, indeed, a lot of shopping malls around Kota Kinabalu but these pockets of development will take time to boom, given the current subdued market. It is only a matter of how long can they sustain and weather the storm. There is no doubt that in the years to come, with the people's confidence in mind, existing and new shopping malls will be successful, despite some premature obituaries written for them.