City & Country: KL office market - supply outstrips demand

The Kuala Lumpur office market is expected to remain lacklustre until later this year as supply exceeds demand. Businesses are also cautious about their expansion plans amid heightened risks from a looming eurozone debt crisis, says Knight Frank Malaysia executive director Sarkunan Subramaniam when presenting The Edge/Knight Frank Klang Valley Office Monitor for 2Q 2010.

However, Sarkunan expects the recently announced 10th Malaysia Plan — which emphasises 12 national key economic areas (NKEAs), particularly the oil and gas (O&G), financial and business services — to generate office demand in the near future. The O&G industry is also in the midst of consolidation, with contracts worth about RM88 billion up for grabs over the next four years.

“This may lead to more business and job opportunities, as well as demand for office space,” says Sarkunan. Also since there has been interest from new US-based set-ups . These companies are looking for reasonable-class offices with about 5,000 sq ft to 20,000 sq ft of space.

“Most of these companies will come in small and grow from there. I believe this interest will eventually translate into demand. However, it is difficult to predict when this will happen,” says Sarkunan

Overall average occupancy of sampled office buildings declined 1.1% to 92% in the quarter under review.

Average occupancy in the central business district and Damansara Heights remained at 95% and 93% respectively.

Overall average rents declined further by 0.4% to RM5.09 psf, albeit at a smaller margin than in 1Q 2010.

Sarkunan attributes the decline to the reduced rents at Menara Citibank from RM7 psf to RM6.50 psf.

“Rents at all the other buildings are very negotiable right now. When a major competitor like Menara Citibank lowers its rent, others will have to follow suit to remain competitive,” explains Sarkunan, adding that it is unlikely rents will decline any further for now.

Although more than 10 million sq ft of new supply is expected to enter the market over the next two years, the supply pipeline has slowed down.

“Some proposed projects are being shelved. No one is going to build in the current uncertain economic conditions. Developers will only build if there is some sort of commitment from purchasers or tenants,” says Sarkunan.

He adds that the situation is unlike previous years when developers would build first because they thought the market was insatiable.

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“This is good as it shows we have a mature market,” says Sarkunan.

Despite a slowdown in supply, occupancy is likely to decline slightly. 2Q 2010 saw the completion of 175,000 sq ft in net floor area (NFA) at HSBC Bank’s annexe building in Kuala Lumpur.

Also completed were MIDA’s building (NFA: 280,890 sq ft) and Companies Commission of Malaysia headquarters (NFA: 283,000 sq ft) at KL Sentral, as well as Menara Kencana at Solaris Dutamas (NFA: 255,000 sq ft).

Sarkunan noted that interest in good grade office buildings offering attractive yields remains.

According to Sarkunan, investors currently see net yields of 7% as reasonable yields, but if there are buildings with good potential for asset enhancement, some buyers are willing to go as low as 5% net yield.

“Some buildings may be old, with lower occupancy and rents, but if the owner can refurbish the building, he can get more than 7% net yield in the long run,” says Sarkunan

The quarter under review saw several notable acquisitions in the Klang Valley office market, including that of Wisma Time on Jalan Tun Razak by Johor Land Bhd from STLR Sdn Bhd, a wholly-owned unit of Khazanah Nasional Bhd. The 12-storey freehold building, with an net lettable area of 171,611 sq ft, was sold for about RM78 million or RM454 psf.

The Federal Territories and Urban Wellbeing Ministry acquired Menara PjH in Putrajaya from Putrajaya Holdings Sdn Bhd for RM167 million. Block 1 of Menara PjH houses the corporate headquarters of Putrajaya Holdings, while Block 2 is tenanted to various companies, including the ministry.

Naza TTDI Sdn Bhd, the property arm of Naza Group of Companies, sold an office building en bloc at its Laman Sari Business Park in Shah Alam for RM60 million. The 12-storey office block, with a gross floor area of 130,000 sq ft, was sold to Al-Wahida Marketing Sdn Bhd.

Also in 2Q 2010, Hap Seng Consolidated Bhd announced plans to build an office block on its newly acquired 1.1-acre freehold tract adjacent to Menara Hap Seng on Jalan P Ramlee. The parcel was acquired from Eastern & Oriental Bhd’s wholly-owned subsidiary Radiant Kiara Sdn Bhd for RM103 million in December 2009.

The construction of the office block will start in 4Q 2010 and is expected to be completed in 2½ years.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 818, Aug 9-15, 2010.

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