City&Country: Challenges ahead

PJ office sector stable for now

Set up as a satellite town in the 1950s, Petaling Jaya (PJ) has become one of the most affluent cities in the Klang Valley, thanks to its location between Kuala Lumpur and Shah Alam.

In recent years, there has been a boom in office space, particularly purpose-built, in the PJ conurbation that includes Subang Jaya and Bandar Sunway. Experts say this could be due to congestion and higher rental rates in KL. Hence, PJ is seen as an attractive and affordable alternative for companies.

While KL, as the capital of Malaysia, continues to draw the MNCs, many of these are also looking elsewhere. In recent years, more MNCs have set up shop in the periphery of the KL city centre, such as in Bangsar and PJ. “The supply of office space in these areas is growing at a much faster rate than in KL because of better accessibility and newer buildings,” says Thiruselvam Arumugam, executive director of consultancy firm PPC International Sdn Bhd.

Y Y Lau, director of YY Property Solutions Sdn Bhd in association with Cushman & Wakefield, notes that  several MNCs opened offices in what she describes as “PJ’s Golden Triangle”, which covers Bandar Utama, Mutiara Damansara and Damansara Perdana, in 2H2010. For example, Schlumberger Ltd, Kraft, Quintiq and Scomi opened in 1 First Avenue in Bandar Utama, while Procter & Gamble relocated to Surian Tower in Mutiara Damansara.

According to the Commercial Property Stock Report 4Q2010, published by the National Property Information Centre (Napic), space at privately owned purpose-built office buildings in PJ (including Subang Jaya, Sunway City and Kelana Jaya) stood at over 13.7 million sq ft with about 10.4 million sq ft occupied. The average occupancy rate for PJ offices was about 75.9%.

There were no completions, building starts or new planned supply of purpose-built offices in PJ in 4Q2010. Throughout 2010, only four office buildings in PJ, with about 2.9 million of net lettable area (NLA), were listed under incoming supply and under construction while planned supply comprised three buildings with a combined NLA of over two million sq ft.

According to Jerome Hong, managing director of agency & corporate services at PA International Property Consultants (KL) Sdn Bhd, the office buildings scheduled for completion between 2011 and 2012 are PJ Exchange, Section 52 (304,152 sq ft); Prima Avenue at Dataran Prima, Jalan PJU 1/28 (145,893 sq ft); Oasis Ara Damansara, Jalan Lapangan Terbang (977,060 sq ft); Sunway Corporate Precinct Tower 1 (530,731 sq ft); VSQ Twin Towers, Jalan Utara (313,118 sq ft); The Paradigm, Kelana Jaya (1.75 million sq ft); Point 92, Damansara Perdana (158,993 sq ft); Tierra Crest, Jalan SS6/3A (186,893 sq ft); Olives Commercial in Subang Jaya (447,660 sq ft); and Plaza 33 on Jalan Semangat (500,000 sq ft).

“The completion of these buildings will increase supply from the current 13.7 million sq ft to about 19 million sq ft by 2012/13, representing growth of 38.69%,” says Hong.

As more supply comes onstream, there will be stiff competition for tenants.

“The Klang Valley office market, including PJ’s, is currently facing a situation where supply generally outstrips demand in selected locations,” says Hong. “The existing purpose-built office space and new supply are seeing modest levels of absorption, which is creating a tenant’s market with continued pressure on both rents and occupancy.”

A growing supply of office space in Kuala Lumpur’s Central Business District (CBD) and Golden Triangle may also have a knock-on effect on PJ.

According to CB Richard Ellis (Malaysia)’s recently released MarketView Kuala Lumpur Office 4Q2010 report, office supply in KL’s CBD and Golden Triangle is about 39.7 million sq ft. “Our latest projections suggest as much as 4.2 million sq ft of office space will be completed in Kuala Lumpur by end-2011,” says the report.

DTZ Research, in its Property Times Kuala Lumpur 4Q2010 report, says the office sector is expected to remain soft in the next few years. According to the consultancy, “there is about 13.23 million sq ft of new office space in the pipeline between 2011 and 2013”.

“Currently, office space in KL is still enjoying occupancy rates of about 90% but with the incoming supply, there is a threat to this that could lead to a drop in rental and occupancy rates,” says PPC’s Thiruselvam.

This could also mean trouble for the PJ office market. “If there is a glut of office space in KL, it will affect PJ as well. As rents in KL drop, companies with offices in PJ may want to consider moving to KL or demand lower rents in PJ if they stay on. Whatever the case, it will cause rents and capital values in PJ to drop as well. It is a chain reaction,” says Thiruselvam.

Occupancy and rents stable
So far, however, there is no slowdown in the demand for PJ office space. “There is constant demand for purpose-built offices,” says See Kok Loong, director of Metro Homes Sdn Bhd.

See’s research shows occupancy rates hovering between 70% and 90% for existing buildings. However, 10 buildings that were ready in 2009 and 2010 — Surian Tower and Menara KLK in Mutiara Damansara; PJ Trade Centre’s four blocks in Damansara Perdana; PJ City’s two blocks along the Federal Highway near the Avon building; Tropicana City Office Tower and 1 First Avenue in Bandar Utama — have an average occupancy rate of 50%, except for Surian Tower which is 90% leased after nabbing Nestle as its anchor tenant.

“These new offices added 2.3 million sq ft of space to the market. New buildings need time to fill up,” says See, adding that this is normal.

In general, rents for PJ office space range from RM3.50 psf to RM4.50 psf compared with RM5.50 psf to RM7.50 psf in KL, says See. Rents for PJ office space have been stable for many years, he adds.

“Rents will continue to remain stable as incoming supply will provide companies with plenty of choices. Individual investors are keen on office investments as they are easy to manage. You deal with tenant companies or a corporation instead of individuals and there are usually minimal renovations to be done unlike for residences such as condominiums that need to be fitted out for lease and possibly involve maintenance problems after some years.”

There was active transaction of office buildings in 2010 with the sale of five buildings — Dana 13 Commercial Centre, Block C Oasis Damansara, Wisma Goodyear (Block B), Menara PKNS and Menara Sunway. Between 2007 and 2009, nine buildings were sold.

“Generally, all sectors of the property market in all locations saw a bull run in 2010,” says Thiruselvam of PPC International. “Furthermore, businesses moved to newer locations from the traditional city centre due to less congestion, better infrastructure and better rental rates in the newer buildings. That is why we have seen new commercial projects in the periphery of the city centre, such as in Bangsar and PJ, where land cost is still relatively cheaper than in the city centre. The older office buildings sold are generally refurbished and occupied by the owner or kept for investment.”

Real estate investment trusts or institutional investors like the Employees Provident Fund are also always on the lookout for en-bloc sales for stable income investment.

“Institutional investors seem to prefer en-bloc purchases for better tenant and building maintenance control while individual purchasers go for strata offices in view of budget constraints,” says Lau of YY Property Solutions.

The outlook
PJ’s advantage over KL is a huge population of skilled labour and good infrastructure. Local public-listed companies also seem to prefer PJ because it is less congested and has a bigger working class.

“PJ has a large supply of skilled professionals,” says See of Metro Homes. “Also, PJ is mature and basic amenities like banks, schools, infrastructure, F&B outlets, hospitals and houses are all close to KL’s standards, making it an attractive option.”

Hong of PA International concurs. “It is seen as an affordable alternative office location for local SMEs as well.”

Lau says the traffic congestion in KL, the decentralisation trend among companies of moving their offices to the fringes of KL and suburbs like PJ — coupled with the growing economy and supply of vacant land for office development, which developers have taken advantage of — have drawn not only companies but also investors to PJ.

“MNCs whose core business is manufacturing and trade distribution will be keen to set up shop in office buildings located in these prime PJ areas as they have access to logistic facilities and serve a large population base,” Lau observes. This results in a “good place for investors to incorporate into their real estate investment strategy”.

Lau identifies Bandar Utama and Mutiara Damansara as investment hot spots. “The office market in Bandar Utama and Mutiara Damansara has proved to be a successful corporate address. With the limited supply of land for further office tower developments in these two townships, which are supported by well-established retail centres and amenities, coupled with the positive impact of the proposed MRT stations in these areas, the office market here is expected to enjoy stable demand over the next 10 years.”

However, in PJ’s Sections 13 and 14 and Damansara Perdana, an oversupply is anticipated over the next 5 to 10 years mainly because a number of large-scale mixed-use developments with office buildings as one of their main components are under construction or are expected to kick off over the next one to three years. Most of them are expected to be completed by end-2015 or beyond 2015, says Lau. 

Many of these big developments are situated on industrial land converted for commercial use. Accessibility will be a challenge for the developers as the developments are located next to highways and main roads with heavy traffic.

“Transforming these developments into commercial areas with good traffic management and accessibility will be the key to generating demand for office space there,” says Lau.

PA International’s Hong believes the PJ office market will continue to feature prominently with the recent surge in high-quality office developments in vibrant suburbs like Mutiara Damansara, Damansara Perdana and Bandar Utama as well as in Section 13 as a result of PJ’s proposed regeneration programme.

“The decentralisation push will continue in PJ due to attractive rental rates, quality office accommodation with modern facilities and features, a high concentration of educated workforce and proposed improvements to the public transport network, like the extension of the LRT line from Kelana Jaya to Putra Heights and the proposed MRT line from Sungai Buloh to Kajang,” says Hong.

“Thus, well-located office buildings with unique offerings such as green features and MSC status should be able to command good occupancy and rental rates,” he adds.

However, Hong urges caution in investing in current times due to moderating levels of growth and the future supply of office space in the Klang Valley that could lead to pressure on rental and occupancy rates.

The overall property investment environment will also depend on both domestic and global events, for instance the political upheaval in the Middle East and North Africa.

Do some research to ensure sound investments, advises Hong. “Investors should look at established commercial precincts or residential townships in PJ and its fringes that are well populated and offer good accessibility and connectivity. For instance, with the proposed Sungai Buloh-Kajang MRT line, there are designated stations in Sections 16 and 17, The Curve in Mutiara Damansara, 1 Utama, Dataran Sunway and so on. These locations would attract investors due to improved connectivity.”

Challenges
Apart from future office supply posing a challenge, the PJ office market also faces competition from emerging office locations in adjacent Kuala Lumpur suburbs.

“There will be increased competition not only from other new office developments in PJ but also from emerging office locations and developments in the nearby fringes of the KL city centre, such as UOA’s Bangsar South, S P Setia’s KL Eco City and Glomac’s Glomac Damansara in Taman Tun Dr Ismail,” says Hong of PA International.

He adds that offices with Green Building Index certification and MSC status as well as buildings located within integrated projects with good public transport will leapfrog the competition.

Another challenge to the market is the existence of shopoffices and hybrid shopoffices. “The reason some PJ office buildings are finding it difficult to fill their space is that there are 4 and 5-storey shopoffices in the market,” says See of Metro Homes. “PJ has plenty of these. The smaller firms will go for them because you don’t have to pay maintenance fees, can have your own spilt air-conditioning units, do renovations as you like and have signage and frontage benefits. Some even come with lifts.”

Modern incarnations of the traditional shopoffices include those at Jaya One in Section 13 and 10 Boulevard not far from the Damansara toll.

Hong says it is “common for companies to own their own shopoffice to occupy and for investment purposes”. 

Hybrid shopoffices — such as those in Sunway Giza, Kota Damansara — also recently entered the market. These are situated above the ground and lower levels of developments. One of their benefits is the availability of underground or covered parking space. The rent for these hybrids is around RM1.50 to RM2.50 psf while for traditional shopoffices it is between RM1 and RM2 psf.

In a nutshell, real estate consultants believe while competition is growing in the PJ office market, rents and occupancy are still healthy. They have a few suggestions for building owners on how to continue to attract and retain tenants.

See suggests that owners provide attractive after-office air-conditioning rates. This is sometimes a big issue because most businesses in Malaysia do not end work at 5.30pm. Another suggestion is to give the façades of the buildings and the facilities a makeover.

Hong agrees. “Owners of older buildings will have to incur capital expenditure to refurbish and upgrade their properties to remain relevant and competitive in meeting current tenants’ expectations.”

 

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 852, Apr 4-10, 2011