City&Country: The Edge/Knight Frank Klang Valley office monitor (4Q2010)

Offices on the fringe put pressure on city rents

Decentralised offices on the fringes of the Kuala Lumpur city centre are giving those in the city centre a run for their money as supply and demand continue to grow.

Aside from traffic congestion and pollution in the city centre, rents on the fringes of the city centre are more competitive, says Sarkunan Subramaniam, executive director of Knight Frank Malaysia, in his presentation of The Edge/Knight Frank Kuala Lumpur Office Monitor for 4Q 2010.

The upcoming mass rapid transit (MRT) system will change the decentralisation trend along its lines and further out of the city centre, he adds.

Areas such as Bangsar are gaining popularity, thanks to ample choices in F&B outlets and close proximity to the light rail transit (LRT), while older office spots like Damasara Heights are losing out due to the lack of public transport.

However, despite the lack of public transport in Mont’Kiara, the newly opened 1Mont’Kiara Office Tower, which offers a net lettable area (NLA) of 184,000 sq ft, and 1Mont’Kiara Business Suites, with NLA of 396,000 sq ft, are expected to do well.

“Mont’Kiara, being a high-end enclave with popular hangouts, is a trendy area and that makes it a good location to attract talent and tenants,” says Sarkunan.

He estimates the average rent for the Mont’Kiara offices to range from RM4 to RM4.50 psf. The current occupancy rate is about 30%, with most of the office space taken up by the vendor Ireka Corp Bhd.

A case of oversupply
Between now and 2013, more than 13 million sq ft of new supply is expected to enter the market. In 2010, some 2.4 million sq ft was added to the market, bringing the total in Kuala Lumpur to 59 million sq ft.

“Looking at the numbers, rents in the Kuala Lumpur office market are unlikely to increase for another four to five years,” says Sarkunan.

This is likely to result in the continuation of a tenant-favoured market environment, possibly forcing owners to offer more incentives than opt for rent-free periods as the market remains competitive.

Nevertheless, the Economic Transformation Programme (ETP), launched in September 2010, the setting up of an oil and gas hub and the development of the MRT and LRT extension lines will help cushion the impact of the incoming supply.

However, there is one uncertainty — the expected general election, which may cause some companies to remain uncommitted until the political situation is clearer, says Sarkunan.

It is noted that existing and under construction supply on the fringes of Kuala Lumpur has grown at a significant rate since 2005, registering an 89.5% increase compared with 12.8% for the city centre.

Sarkunan expects the Kuala Lumpur city fringe to grow at double the rate of the city centre in the next three years. This projection excludes the proposed 100-storey Merdeka Tower.

“Good grade office buildings in well-located areas supported by amenities and public transport will continue to be favoured by both tenants and investors alike,” says Sarkunan.

Favoured, too, are offices within integrated developments that offer complementary support components, such as retail and hotel facilities as well as MSC cybercentres.

Among the buildings expected to be completed in the KL city centre this year are Lot C KLCC (NLA: 840,000 sq ft), located next to Suria KLCC; Crest Sultan Ismail (NLA: 259,000 sq ft) in Jalan Sultan Ismail; Hampshire Place (NLA: 219,000 sq ft) in Jalan Ampang; and Menara Worldwide (NLA: 273,000 sq ft) in Jalan Bukit Bintang.

In the city fringe, the incoming supply includes The Horizon (Phases 2 and 3), comprising eight blocks of office buildings in Bangsar South (total NLA: 1,065,000 sq ft); KL Sentral Park (NLA: 381,000 sq ft) and Dua Sentral Corporate Tower (NLA: 419,000 sq ft), located in KL Sentral and Jalan Damansara respectively.

4Q performance
The sampled overall average rent for 4Q 2010 remained unchanged from the previous quarter at RM5.09 psf.

Rents in the Golden Triangle and Central Business District (CBD) remained at RM5.84 and RM3.93 psf respectively while those in Damansara Heights registered a drop of 0.7% to RM4.27 psf.

The drop in rents in Damansara Heights was mainly due to lower rents — down from RM4.50 to RM4.30 psf in 4Q — in HP Towers.

Sarkunan notes that the gap between asking rents and achieved rents for new take-ups is widening, differing by about 10% to 15%.

Meanwhile, average occupancy in the quarter under review dropped 1% from 3Q 2010 to 91%. The Golden Triangle registered a marginal increase of 0.1% from the previous quarter while the CBD recodred 95%. Only Damansara Heights recorded a drop, down 5.7% from 3Q 2010 to 88% in 4Q 2010.

“During the review period, we saw one of the sample building’s — HP Towers — occupancy decline to 80% from 95% due to the movement of major and minor tenants,” says Sarkunan.

He adds that HP Towers is currently in talks with several parties to take up vacant space.

As for the investment transaction market, Sarkunan expects it to remain active, with investors, particularly real estate investment trusts (REITs), continuing to look for good buys.

“With low financing at about 4% to 5% and returns of 6% to 6.5% on commercial properties, REITs can gear about 50% of a property in order to increase returns on the property,” says Sarkunan.

The quarter under review also saw two office transactions — Equine Capital Bhd’s disposal of Wisma KLIH, a 14-storey office building located in Jalan Bukit Bintang, to Wonderful Vantage Sdn Bhd for RM58 million, including RM10 million for renovations and refurbishment, and Axis REIT’s acquisition of FSBM, a 5-storey office building in Cyberjaya for RM51.25 million.

In a move to remain competitive in the current market, several existing buildings are being upgraded. These include Menara KH (previously known as Menara Promet) in Jalan Sultan Ismail and Menara Tun Razak in Jalan Raja Laut by Tradewinds Corp Bhd, Bangunan MAS in Jalan Sultan Ismail by Permodalan Nasional Bhd and Menara Pan Global in Lorong P Ramlee.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 844, Feb 7-13, 2011