City & Country: The long-term prospects of KLCC

KLCC, the darling of Malaysian real estate, may seem to have lost a bit of its shine due to the recent global economic crisis. Nevertheless, there is no doubt that KLCC remains among the most exclusive addresses in the country. The iconic Petronas Twin Towers, the verdant KLCC Park and the world-class KLCC shopping centre have turned this part of the city into an international real estate investment destination.

At the height of the global financial meltdown in the final quarter of 2008, the KLCC condominium market was hit hard as investors fled the market and expatriate tenants vacated. A year on, sentiment has improved somewhat and the general consensus is that the global economy is recovering. As confidence returns, so has investor interest in the condo market in KLCC.

However, while the situation seems to be on the mend, how do we view the long-term prospects of the KLCC real estate market? City & Country consulted two market experts and received contrasting views.

The optimistic view
For Previndran Singhe, CEO of Zerin Properties, the market bottomed out early this year and things can only get better from thereon. Based on Zerin’s data, demand for KLCC condos has been improving since April, especially among local buyers and overseas Malaysians. Foreign investors, too, are returning to the market. “Values have gone up compared with a year ago. For example, some units in Marc Residences were going for RM800 psf during the crisis last year, but prices today are around RM1,100 psf,” says Previndran. Even newly launched developments such as Pavilion Residence 1, which hasrecorded a 50% take-up rate, saw initial prices quoted at RM1,100 rise to as high as RM1,500 psf today, he adds.

Generally, asking prices for completed condo units had dipped 25% from their peaks when the market bottomed out but since then, the market has improved and prices have risen by about 10% to 15%, says Previndran.

“The KLCC condo market has become sustainable now and will continue to be stable next year, with values possibly moving up by 3% to 5%. Good products will return to peak levels or higher. At Dua Residency, for instance, owners are raising prices again, with many holding on. Occupancy is over 90%, with mainly Malaysian owner-occupiers.”

The average occupancy rate for high-end condos in KLCC, however, is around 60%, which means that there are other projects which have rather low occupancy rates. This also means that investors have to look at each project individually before purchasing.

Some factors to consider include the reputation of the developer, facilities, accessibility to KLCC and the concept of the project. It does not help to have an excellent view of the twin towers if the maintenance of the building is not up to par.

The overall lower occupancy is also due to expanded supply from a few newly completed projects this year such as One KLCC and Avare, which will take some time for owners to move in or rent out. A fair indication of real occupancy can be assessed in the middle of next year, offers Previndran.

“We are cautiously optimistic about the overall property market in 2010. Investors have to be selective,” he says. Transactions are down 25% to 30% from last year and next year, things can only get better. He is optimistic that prices will continue to rise. Yields are currently at 5% to 6%.

Meanwhile, the office market has been consistent with above 90% occupancy for grade A office buildings, with rents ranging from RM5.50 to RM8 psf. Previndran thinks that there is still a lack of supply of Grade A office buildings. Although some new supply of office space will be coming onstream next year, he feels that there will be no oversupply, as long as the Malaysian economy continues to grow.

The KLCC condo market has become sustainable now and will continue to be stable next year, with value possibly moving up by 3% to 5%. - Previndran

Land prices
Generally, land prices have held in the KLCC area, with prices varying, depending on factors such as proximity to the twin towers, frontage, and plot ratio, says Previndran. “Developers are always looking out for land in KLCC, but landowners can be overoptimistic about prices.”

Just over a week ago, Dijaya Corp Bhd announced a proposed acquisition of the Bok House site next to Wisma Angkasa Raya at RM2,200 psf. In May last year, Sunrise Bhd acquired the 24-storey Wisma Angkasa Raya for RM2,588 psf. The building is on a strategic 1.56-acre corner lot located between Jalan Ampang and Jalan P Ramlee. “It has a view of the twin towers, a KLCC frontage and being a corner site, it also enjoys a higher plot ratio. Besides, while the developer takes its time to plan for a new project on the site, it is accruing income from the current tenancy,” says Previndran.

A month before Sunrise’s acquisition, YTL Group forked out RM85 million, or RM2,000 psf, for a nearly one-acre site on Jalan Stonor in the KLCC vicinity.

A short distance away is the 2.6-acre Lai Meng Primary School site on Jalan Ampang that Magna Prima Bhd proposed to acquire for RM148.15 million. Based on the selling price of RM148 million alone, the Lai Meng land is valued at RM1,300 psf. The so-called discount was given on condition that Magna Prima relocate the school and kindergarten to a 5.49-acre site in Bukit Jalil, Selangor, held by Ho Hup Construction Co Bhd’s 70%-owned subsidiary Bukit Jalil Development Sdn Bhd.

Previndran expects more land acquisitions to come soon. He knows of “two or three” more possible transactions around the KLCC area, with one of them to be concluded before the year ends. However, he believes that the price paid for the Bok House plot will remain the benchmark price for land in the KLCC area for a while.

“Say what you want about KLCC but there is a certain sense of pride for companies undertaking developments in KLCC,” says Previndran.

At best, it is going to be a stable market for the next few months. No rich pickings and no quick increase in prices. - Ang

Realistic pricing
Early this year when uncertainties reigned amidst the global economic crisis, Rahim & Co had said that prices of completed KLCC condo would be down by 30% this year. A few months later, managing director Robert Ang says although the market has improved since the beginning of 2H2009, prices are still about 20% to 30% down from their peaks.

Interest in real estate investments has been on the rise in recent months due to the low interest rates and the improving global economy. The asking prices of completed condos in KLCC have crept up but not much, says Ang. Condo prices now range from RM700 to RM2,000 psf (Binjai on the Park).

Prices are also stabilising. “Unlike the years before the economic crisis, prices have become more realistic. We are also seeing compressed yields. In the early 2000s, yields were about 6% to 7% for the condos in KLCC. Today, you should be more than satisfied to earn yields of 4% to 5% because it is well above fixed deposit rates,” says Ang.

One nagging concern for Ang is an oversupply of condos in KLCC, especially with the completion of several new projects in the past few months, including The Oval, One KL and Hampshire Residence. “Before these were completed, the earlier completed ones were already hunting for tenants. If rents can be maintained, the market will be stable,” says Ang.

Ang notes that good projects with high occupancy may see values climbing, while the bad ones will decline further. “At best, it is going to be a stable market for the next few months. No rich pickings and no quick increase in prices,” he adds.

Unlike the boom years, buyers today are more realistic in their expectations as well. “With a return of confidence among investors, those with cash in hand have begun seeking out investments and property remains one of the most stable forms of investments. As long as there are reasonable yields above fixed deposit rates, KLCC will still be a good investment market. But for how long it will remain so, is uncertain,” says Ang.

Besides, buyers have more choices now with properties in Australia and UK becoming more attractive as prices decline during the downturn. “This could affect demand for properties in Malaysia,” says Ang.

In contrast, the values of land in KLCC have been steadily appreciating over the years due to its scarcity. “Developers acquire land here but not for immediate development. The opportunity to acquire land does not come all the time, so for cash-rich developers, if they have the chance, they will grab it,” says Ang.

As for the KLCC office market, Ang believes it will also face a glut like the high-rise residential sector. “The impact will be more evident at the end of next year when millions of sq ft of space come onstream. Average rents for grade A buildings, currently ranging from RM6 to RM8 psf, are on their way down. If the economy does not improve, we will have a problem filling up the space.”

However, Ang stresses that similar to the condo market, performance will vary with each project, depending on the quality of buildings, facilities and management. There are the good ones and the bad. So, when investing in KLCC, the best advice is: Be selective.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 784, Dec 7-13, 2009.