Low demand to impact businesses

THE Kuala Lumpur office market will remain restrained in the near future despite opportunities for investors, institutional funds and real estate investment trusts.

“Demand for office space is not expected to show positive growth in the coming quarter as the business operating environment remains difficult. This will impact the bottom lines of businesses and many will be cautious about expansion,” says Knight Frank Malaysia managing director Sarkunan Subramaniam when presenting The Edge/Knight Frank Klang Valley Office Monitor (3Q2016).

He attributes the availability of fitted office space in the current market to the restructuring and consolidation of oil and gas-related companies. Nonetheless, the soon-to-be-completed Phase 1 of the mass rapid transit (MRT) Line 1 would be a “catalyst for the market”, he adds. “Existing decentralised office locations along the transport route, such as Mutiara Damansara, Phileo Damansara and Pusat Bandar Damansara, are expected to benefit from this improved connectivity.”

Sarkunan adds, “Despite the negative market sentiment, good grade and dual compliant, especially Multimedia Super Corridor (MSC) and Green Building Index-certified, buildings will continue to perform well. For example, the newly completed Menara Hap Seng 2 in Jalan P Ramlee has recorded continuous growth in occupancy [of above 70%]. The same applies to The Ascent @ Paradigm in Kelana Jaya. It has recorded healthy occupancy [of above 75%] since its completion in 2Q2015.”

In 4Q2016, overall occupancy is expected to dip with the impending completion of more purpose-built office buildings, including Menara Public Bank 2 and SunGeo Tower.

“In general, it takes at least a year or two for newly completed buildings to achieve good occupancy. For example, the scheduled completion of Menara Public Bank 2 and SunGeo Tower will add 612,900 sq ft of office space to the market. This will heighten competition between existing and new buildings,” Sarkunan points out.

“Therefore, landlords will be under pressure to offer more incentives, such as longer rent-free periods and attractive rental packages, to retain existing tenants and attract new ones. These measures may collectively translate into negative rental growth.” Also expected to be completed in 4Q2016 are UOA Corporate Tower in Bangsar South (formerly Vertical 38), Menara Suezcap 1 in KL Gateway, and Signature Tower (Block H) and Iconic Tower (Block N) in Empire City. Collectively, the upcoming offices are expected to add 3.7 million sq ft of office space to existing stock.

According to Sarkunan, some of the up-and-coming developments in the office market in Kuala Lumpur are UOA Business Park in Shah Alam and Sunway Geo at Sunway South Quay in Bandar Sunway.

“Formerly known as Kencana Square, UOA Business Park comprises nine blocks of boutique offices and a row of retail shops, and was fully completed in 1H2016. Having Federal Highway frontage and direct access to the Subang Jaya LRT and KTM Komuter stations, this development is anticipated to become another major office location similar to Bangsar South,” he says.

“Sunway Geo at Sunway South Quay is an integrated development comprising 1 to 3-storey retail shops (Sunway Geo Retail), a two-block condominium (Sunway Geo Residences), a block of office suites (Sunway Geo Flexi Suites) and a purpose-built office tower (SunGeo Tower with net lettable area of 160,890 sq ft). The development can be accessed via six major highways, the bus rapid transit Sunway Line that is set to connect to the KTM Komuter and LRT stations and free shuttle bus service from nearby amenities at Sunway Resort City. Upon its completion next year, this development is expected to further improve the attractiveness of Bandar Sunway.”

According to the monitor, the office market in KL City, KL Fringe and Beyond KL (Selangor) remained lacklustre in 3Q2016. Despite improved occupancy in selected localities, there was a decline in the overall rental indices for both KL City and KL Fringe.

“There has been a widening gap between supply and demand, where newly completed buildings [even those completed more than a year ago] have yet to achieve significant occupancy levels, as well as consolidation and downsizing of some businesses,” says Sarkunan.

The review period witnessed higher net absorption in KL City and KL Fringe (about 125,308 sq ft), reflecting an increase of 97.93% quarter on quarter and 136.48% year on year.

During the quarter, the completion of Menara Hong Leong (NLA: 506,100 sq ft) in Damansara City and Strata Office Suites (NLA: 271,000 sq ft) in KL Eco City added 777,100 sq ft to the existing supply of 24.6 million sq ft in KL Fringe.

With no completions in KL City and Beyond KL, the cumulative supply of purpose-built office space in these regions was unchanged at 51 million sq ft and 19.5 million sq ft respectively.

Total cumulative office space under construction in KL City, KL Fringe and Beyond KL stood at 16.13 million sq ft in 3Q2016. Supply is projected to increase 17% over the next 2¼ years — between 4Q2016 and 2018 — with most of the new completions (39%) happening in KL Fringe. The cumulative office stock in 2018 is estimated at 111.11 million sq ft.

Steady occupancy and rents

Quarter on quarter, overall occupancy dipped 0.2% to 82.8% in KL City and 0.8% to 87.4% in the CBD but held steady at 82% in the Golden Triangle.

In KL Fringe, the rate saw a healthy 1.3% increase to 91.1%. In Damansara Heights and KL Sentral, it rose 4.7% to 85.2% and 0.9% to 90.8% respectively. In Mid Valley City/Bangsar/Pantai, the rate remained steady at 94.8%.

In Beyond KL (Selangor), the overall occupancy rate declined 1.6% to 78.3%. In Petaling Jaya, it fell 1.2% to 86.4% while in Shah Alam, it dropped 23.7% to 47.2%. However, in Subang Jaya and Cyberjaya, it increased 0.6% to 73.3% and 1% to 75.8%, respectively.

“The average occupancy rate in Bandar Utama/Mutiara Damansara/Damansara Perdana/Damansara Uptown declined noticeably to 87% during the review period as newly completed Mercu Mustapha Kamal (Tower 2) remains vacant and a prominent tenant moved out of 1 First Avenue. However, the locality of Ara Damansara/Tropicana/Kelana Jaya recorded an improved occupancy due to several tenant movements in The Ascent @ Paradigm,” says Sarkunan.

“Overall occupancy in Subang Jaya held steady in 3Q2016. Puchong recorded a lower occupancy rate with several tenants vacating Tower 2 of the Puchong Financial Corporate Centre but Menara Sunway in Bandar Sunway recorded better take-up,” he adds.

“Shah Alam saw a sharp decline in take-up due to the newly completed Block 9 of UOA Business Park, which has yet to achieve significant occupancy.

“In Cyberjaya, the anchor tenant at Prima 10 downsized by 40,000 sq ft. However, with notable tenant movements in Skytech Tower 1 and Skytech Tower 2, the overall occupancy in the locality remains steady.”

Rental rates in the KL office market remained stable despite downward pressure. The overall rate in KL City dipped 0.64% to RM6.09 psf while Golden Triangle Grade A and CBD Grade A rates declined 0.7% to RM7.02 psf and 0.6% to RM5.32 psf respectively. The Golden Triangle Prime A+ rate remained unchanged at RM11.33 psf.

In KL Fringe, the overall rent fell 0.17% to RM5.71 psf. Rates for Damansara Heights Grade A and KL Sentral Grade A remained unchanged at RM5.88 psf and RM6.82 psf respectively but the rate for Mid Valley City/Bangsar/Pantai Grade A dropped 0.1% to RM5.87 psf.

In Beyond KL, the overall office rental rate dipped 0.54% to RM4.14 psf. In Petaling Jaya, Subang Jaya and Cyberjaya, the rates slid 0.36% to RM4.38 psf, 0.51% to RM3.88 psf and 0.49% to RM4.10 psf. In Shah Alam, however, the rate rose 2.67% to RM3.52 psf.

This article first appeared in City & Country, a pullout of The Edge Malaysia Weekly, on Dec 12, 2016. Subscribe here for your personal copy.