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City & Country: Rental rates resilient, occupancy improves

OFFICE rental rates held steady with improved occupancy during the review period. Meanwhile, incoming office supply is expected in the fourth quarter.

“Prime office rent is expected to see moderate growth, albeit at a slower pace, due to stable demand and constrained supply of existing and new Grade A dual-compliant space, as well as the completion and entry of higher quality office space,” says Knight Frank Malaysia managing director Sarkunan Subramaniam in presenting The Edge/Knight Frank Klang Valley Office Monitor for the third quarter of 2014.

No completions were recorded during the review period but well-located, good grade and dual-compliant office space continue to command higher rents.

According to Sarkunan, this is because Greater Kuala Lumpur remains the destination of choice for multinational corporations to establish their regional headquarters, while the growing shared services and outsourcing (SSO) industry in the region, together with various government policies and incentives to attract companies to set up office in Malaysia, will also augur well for the office market.

Major leasing enquiries on office expansion and relocation are also expected from the oil and gas industry as well as the financial and IT sectors.

However, Sarkunan notes that overall rental and occupancy rates are expected to face downward pressure post 2014 as the gap between supply and demand is expected to widen further, with office space increasing by over 800,000 sq ft in 4Q2014, while the average annual net absorption rate recorded a decrease of 46.6% decrease quarter on quarter and 31.7% year on year.

Still a resilient quarter

With no completions during the review period, the cumulative supply of office space in Kuala Lumpur remains at 70.1 million sq ft, with 48.6 million sq ft in the city centre and 21.5 million sq ft in the city fringe.

The cumulative supply of office space still under construction stands at 12.1 million sq ft, of which 4.3 million sq ft are in the city centre and 7.8 million sq ft in the city fringe.

In 4Q2014, more than 800,000 sq ft of office space are expected to come onto the market. The incoming supply will include Menara Hap Seng 2, Crest Jalan Sultan Ismail, Menara Centara and Menara MBRB. A 17.3% increase in office supply is also projected in the next four years from 4Q2014 to 2017.

Occupancy rates continue to show improvements, with the city centre and city fringe recording overall occupancy of 84.4% and 84.3% respectively. The city centre recorded a 1.2% increase q-o-q and the city fringe, 0.72%.

The occupancy rate in the Golden Triangle (GT) rose 0.48% to 83.2% from the last quarter, and in the central business district (CBD), by 3.96% to 89.2%. This resulted in an overall improvement in the city centre of 1.2% from the last quarter, to 84.4%. The overall improvement is due to movements at Menara Darussalam, Integra Tower, Menara Prestige and Menara IMC in the GT, as well as at Menara TH Perdana and Menara MARA in the CBD.

In the city fringe, KL Sentral (KLS) recorded a 5.02% increase in occupancy rate from last quarter to 69% due to movements at Nu Tower 1 and Menara Kembar Bank Rakyat.

However, Mid Valley City (MVC)/Bangsar/Pantai fell 0.42% to 94.4%, with movements at Menara BRDB and Centrepoint South. The occupancy rate in Damansara Heights (DH)/TTDI remained unchanged at 80.9% from the last quarter. The overall occupancy rate of the city fringe was 84.3%, a 0.72% increase from last quarter.

Despite the challenging environment, the review period recorded a positive net absorption of about 350,000 sq ft, contributed by improved occupancies in buildings such as Menara Prestige, Menara TH Perdana, Nu Tower 1 and Menara Kembar Bank Rakyat. The net absorption of office space is estimated at 348,704 sq ft for 3Q2014, a contraction of 46.6% q-o-q and 31.7% y-o-y.

The average rental rate in city centre inched up 0.16% to RM6.09 psf and in the city fringe, by 0.18% to RM5.58 psf.

The average rental rate in the GT was RM6.39 psf, up 0.16%, and in the CBD, RM4.82 psf, a rise of 0.42%.

In the city fringe, DH/TTDI and MVC/Bangsar/Pantai recorded improvements of 0.67% and 0.54%, to RM4.49 psf and RM5.58 psf respectively. However, KLS saw a 0.73% dip from the last quarter, to RM6.77 psf.

Notable announcements

Malaysian Resources Corp Bhd (MRCB) plans to inject Platinum Sentral into Quill Capita Trust (QCT). The value has been revised from RM750 million to RM740 million, a downward adjustment of 1.33%. Following the revision in value, QCT has announced to Bursa Malaysia that its purchase consideration for the property will be RM740 million.

Singapore-based Oversea-Chinese Banking Corp (OCBC) Group plans to divest Menara Prudential through an open tender. The 24-storey prime commercial building, located opposite Shangri-La in the GT, sits on 19,289 sq ft of freehold land and has a net lettable area (NLA) of 164,706 sq ft. The building is made up of two levels of banking halls and basement vault, 17 levels of office space, three levels of multipurpose halls, hawker centre and recreational facility floors, and a five-level basement car park. Prudential Assurance (M) Bhd is the anchor tenant for the 13-year-old building, which enjoys high occupancy. According to industry sources, the building could fetch between RM155 million and RM170 million.

In KLS, CIMB Group Holdings Bhd plans to buy Menara CIMB from CIMB-Mapletree Real Estate Fund 1 (CMREF1) for more than RM600 million. Menara CIMB is jointly owned by CMREF1, which has 60% equity interest, and Singapore-based Mapletree Investments Pte Ltd, which holds the remaining 40%. The 41-storey grade A office building is designed to meet the standard of Singapore’s Building and Construction Authority Green Mark Gold and Malaysia’s Green Building Index (GBI). The current anchor tenant is CIMB Investment Bank Bhd, which occupies 20 floors or 70% of the 609,000 sq ft in NLA. Other tenants include Regus’ serviced offices and the American Malaysia Chamber of Commerce. The building has a high occupancy rate of 87% and commands rents of between RM8 and RM8.50 psf, including service charge.

The investment arm of the Federal Land Development Authority, Felda Investment Corp Sdn Bhd, is working on plans to build a 68-storey building in the city centre. The existing Wisma Felda, which occupies 3.11-acre site at the corner of Jalan Perumahan Gurney and Jalan Gurney Satu, is set to be demolished and replaced with a 68-storey office tower that will include a helipad. The developer is Synergy Promenade Sdn Bhd, whose submission to Dewan Bandaraya Kuala Lumpur (DBKL) includes plans for 56 floors atop a podium with three floors of office space, eight levels of above-ground car park and two levels of basement car park.

The development of Fiamma Holdings Bhd’s 23-storey Menara Centara in Jalan Tuanku Abdul Rahman is slated for completion in the fourth quarter. Meanwhile, the company will keep some 30% of Menara Antara in Jalan Bukit Bintang as property investment assets. This will strengthen its pool of rental income-generating assets in addition to the existing Wisma Fiamma.

UOA Group’s Bangsar South development, a MSC Malaysia Cybercentre, is seeing sections of The Vertical being built. The Vertical comprises two blocks of 32-storey and 35-storey strata offices known as The Vertical Office Suites, a 500-room five-star hotel and two 38-storey office towers known as The Vertical Corporate Towers. Another two office towers are being planned. The Vertical Office Suites offer unit sizes of 735 to 13,903 sq ft, priced from RM950 psf, and has achieved a 70% take-up rate since sales began 1½ years ago, The two corporate towers, with 700,000 sq ft each, and the hotel will be retained for investment purposes. Meanwhile, Phase 2 of The Horizon, which comprises eight blocks of 13- to 20-storey office towers, is now Malaysia GBI-certified (provisional gold).

At TTDI, Ken Holdings has invested RM120 million to build a 13-storey tower with 215,278 sq ft of lettable area. The office tower is expected to rake in an estimated rental of RM15 million a year after its completion in 2015.

In DH, GuocoLand (M) Bhd, the property arm of the Hong Leong group, is targeting to complete its RM2.5 billion Damansara City by mid-2016, just in time with the integration of the mass rapid transit (MRT) station at Pusat Bandar Damansara. The 6.02ha Damansara City, which is being built, is the first high-density mixed-use development in the area, and will comprise 370 units of luxury serviced apartments, two grade A office towers, a five-star boutique hotel and a four-star retail mall.

Notable movements

A few notable movements were recorded at prime buildings, among them, Menara Darussalam, which will see Suria KLCC Sdn Bhd moving in and occupying 14,000 sq ft.

Menara Prestige is moving in several tenants that will occupy approximately 50,000 sq ft. The tenants include Interactive Intelligence Inc’s Asia-Pacific headquarters.

Two new tenants, Tenaga Nasional Bhd and Allianz Malaysia Bhd, are moving into Nu Tower 1 and will occupy around 70,000 sq ft.

Menara Kembar Bank Rakyat will see several tenants that are subsidiaries of Bank Rakyat moving in that will be occupying 54,000 sq ft.

The review period also saw two tenants — Interactive Intelligence and Blue Coat (M) Sdn Bhd — moving out of Menara IMC, where they occupied 14,000 sq ft.

Meanwhile, Menara TH Perdana saw the relocation of the Malaysia Department of Insolvency and the expansion of the National Department for Culture and Arts. Both tenants occupy 100,000 sq ft in the building.

For movement in secondary buildings, Jabatan Hal Ehwal Khas moved out of Menara MARA, where it occupied 30,000 sq ft.

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This article first appeared in City & Country, The Edge Malaysia Weekly, on November 10 - 16, 2014.

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