Cautious but poised for upturn

After a generally lacklustre year so far, the Klang Valley office occupancy and rental market will likely stabilise and improve in 4Q2009, says Knight Frank Malaysia executive director Sarkunan Subramaniam.

“Despite the lacklustre office market performance anticipated earlier, we expect activities to increase in the later part of the year towards 4Q as businesses regain confidence,” says Sarkunan when presenting The Edge/Knight Frank Malaysia Klang Valley Office Monitor for 2Q2009.

“It seems that the worst of the economic slowdown is over. The US economy is recovering, and Asian markets will follow the trend. With this recovery, the downward trend in occupancy and rents will ease, maintaining at its current level,” he adds.

Despite that, Sarkunan says: “The overall office market remains cautious, with businesses still adopting a ‘wait-and-see’ approach and putting off any expansion plans until they are really certain of an economic recovery. This will contribute to the anticipated lacklustre market mentioned earlier.”

He also says several new growth areas such as Bangsar South will act as a catalyst in creating competition within the Kuala Lumpur city fringes, both in terms of office occupancy and rental rates.

Rents
Sarkunan says that in 2Q, overall rental rates decreased marginally by 0.8% to RM5.14 psf per month in the areas under survey — the Golden Triangle (GT), Central Business District (CBD) and Damansara Heights (DH). This drop follows the first decrease since 2005 seen in 1Q2009, when overall rents for these areas fell 0.6% to RM5.18 psf per month.

“Although there is a further drop in terms of overall rents, it is marginal and we foresee rents stabilising without further drop for all areas under survey in the next half of the year,” he says.

Compared with 1Q2009, the average rents for the GT, CBD and DH dropped 1.2%, 0.7% and 1.1% to RM5.90, RM3.97 and RM4.37 psf per month respectively. The CBD covers the Jalan Dang Wangi area, part of Jalan Ampang, Jalan Tun Perak, Jalan Petaling, Jalan Kinabalu, and Jalan Raja Laut and its fringes.

Of the three areas, average rents in the GT dipped the most in 2Q, with a reduction of 1.2% to RM5.90 psf per month compared with RM5.97 psf per month in the previous quarter. “Rents in the GT have eased further due to the downturn rental revision by several office buildings taking into consideration the current market conditions and lack of occupier demand,” Sarkunan explains.

For the CBD, although most office buildings maintained their rental rates, some have lowered rates to attract new tenants. This happened mostly in the secondary grade buildings, as rents dropped from RM3.65 psf per month in 1Q2009 to RM3.57 psf per month in 2Q2009.

In the DH area, the average rents for both its Prime A and secondary grade buildings fell from RM5.25 and RM4 psf per month in the previous quarter to RM4.93 and RM3.83 psf per month respectively in 2Q.

“Some office buildings in the DH area have further reduced rents to attract tenants, but the dip of their average rents has also been caused by the addition of new buildings into our sampling list to increase data accuracy,” explains Sarkunan.

On another note, he says new offices completed in 2Q2009, such as Bangsar South’s The Horizon (Phase 1) and Menara UOA Bangsar — both developed by UOA Holdings Sdn Bhd — coupled with offices completed in 1Q2009, will translate to more choices for tenants and a more competitive market among landlords.

Sarkunan adds that new office buildings slated for completion in 2H2009, such as GTower and The Icon at Jalan Tun Razak, have reduced asking rents accordingly to remain competitive as they get closer to completion. “GTower is currently asking for RM6.50 to RM6.80 psf per month while The Icon is asking for RM6.50,” he notes.

Most of the established buildings, such as the Petronas Twin Towers, Menara Maxis, Menara IMC, Menara Dion and Menara Citibank, are still holding their rents, backed by the existing tenancies locked in earlier, with average indicative asking rents ranging from RM6.50 to RM9 psf per month, says Sarkunan.

Occupancy
In terms of occupancy, the overall average occupancy for all areas (the GT, CBD and DH) has remained constant at 94% in 2Q2009 compared with the previous quarter. Based on the sampling for 2Q, the average occupancy rate for the GT has been maintained at 95% since 1Q without any further dip.

As for the CBD, where occupancy has always been stable, the average occupancy climbed 1% to 97% in 2Q, contributed mainly by the increase in occupancy among its secondary grade offices, with an improvement of 3.1% to 99% in average occupancy in 2Q.

This increase also means that the CBD’s secondary grade offices have for the first time since 2005, achieved the highest average occupancy at 99% in 2Q, compared with its Prime A offices at 98% in 2Q, unchanged from the previous quarter.

Of the three main areas surveyed, only the DH area reported a dip in its overall average occupancy, from 94% to 93% in 2Q. Sarkunan attributes this — referring particularly to the Prime A buildings — to the refurbishment works done on some office buildings which resulted in some tenants moving out.  

The drop in occupancy for Prime A buildings within the DH area, 4.2% to 94% from 98% in 2Q, represents the steepest decline among all other grades of office buildings surveyed within the GT, CBD and DH areas.
 

Staying put
In current market conditions, tenants generally prefer to remain in their existing locations rather than relocate to new buildings, which will probably involve unnecessary high relocation costs, says Sarkunan.

“Tenants are also trying to renegotiate rental rates with their landlords before the existing lease agreement expires to secure the best deals and also to remain in the existing space.

“New office buildings will have to wait until the ‘realistic’ period, when tenants are comfortable with market conditions supported by good incentives offered by owners,” he says.

Sarkunan also says new “green” office buildings are expected to receive warm response from companies, which see this as part of their corporate social responsibility in preserving the environment.

Significant green office buildings include the GTower (expected to be completed in 2H2009), Menara Chua (2011), 348 Sentral (2012) and the Naza Tower (2013), he adds.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 770, Aug 31-Sep 6, 2009.