Commercial property:Cautious confidence

Weaker market sentiment as demonstrated by fewer enquiries for space as well as in some cases the easing of rents, and a cautious stance towards new developments best sum up the present mood in the commercial property market.

Even property players would concede that while the sluggish market sentiment as a result of the global financial crisis has been felt across all sectors of the property market, the commercial sector has been hard hit.

Although government data indicates that the vacancy rate for purpose-built office buildings in the country has moderated slightly in 1Q2009 compared to 4Q2008 (see tables on Page 14), in the Klang Valley, some building owners find it tough to fill up their properties.

On the flipside, it needn’t be all doom and gloom; opportunities abound for both the savvy investor and tenants. “Prices of strata office suites and shopoffices in selected areas have eased by 10%. Sellers in general are much more willing to listen to offers. Borrowing costs, at below 5%, are at their lowest and supportive of a wide range of property investments found in the market today that offer a net return of at least 6%. Developers have also thrown in packages that we don’t normally see during good times. In the mid to long-run, your investment would bring rental and capital returns,” points out Landserve Valuation and Consultancy managing director Chen King Hoaw.

Knight Frank Malaysia’s executive director Sarkunan Subramaniam agrees, adding that the lower borrowing costs and attractive financing schemes offered by developers translate to a lower entry cost for today’s buyers compared to a year ago.

Does this mean there may be light at the end of the tunnel for the commercial property market? “The brake seems to be released slowly and activities are beginning to come back to the market,” observes KGV Lambert Smith Hampton director Anthony Chua.

 A few commercial developments launched in the second quarter this year have recorded encouraging take-up rates. One example is Sime Darby Property Bhd’s d’Vida Bukit Jelutong that was launched last month. At press time, 40% of the 93 units of 2 and 3-storey shopoffices have been sold. Sime Darby Property managing director Datuk Tunku Badlishah Tunku Annuar sees in the response an indication that buyers are still confident in commercial property. “A good concept will create interest, and can result in high demand and that will be the opportunity that developers are looking for to improve pricing,” he says.

Indeed the importance of having the right product and concept cannot be overstated.  Dijaya Corp Bhd managing director Datuk Tong Kien Onn points to its TSB Commercial Centre in Sungai Buloh as an example. Sales of the third phase (comprising 3 and 4-storey shopoffices pegged from RM1.45 million and RM2.1 million respectively) that was launched in March this year has notched a take-up of 50%, says Tong. He attributes the brisk sales  to the development’s concept and its emphasis on landscaping.

Property consultants feel that this would be a good time for developers to replenish landbanks. “Prices have stabilised and the fierce competition to grab land in the city centre, especially around KLCC has eased up,” says KGV Lambert’s Chua.

Notwithstanding the ups and downs of a property cycle, he says prime land will continue to attract potential buyers. “The recent transaction of the Lai Meng school along Jalan Ampang proved this point,” he adds. (In March this year, Magna Prima Bhd announced that it would buy the 2.6-acre tract on which the 44-year-old Lai Meng Primary School and Lai Meng Kindergarten currently sit on for RM148.2 million.)

Certainly while there may be opportunities, the outlook is one of cautious optimism. “Generally, many think the market is not likely to fare any worse but they also do not expect a surge in both activities and prices,” says Chua.

Bandar Raya Developments Bhd (BRDB) CEO Datuk Jagan Sabapathy points out that while the market may be cautious about en bloc office tower purchases under current market economic conditions, the opportunity for long-term leasing remains good. “Comparing prices in Asia-Pacific, Malaysia continues to be an attractive destination for MNCs to house their regional and HQ offices,” he adds.

Nonetheless, the consensus for the short-term outlook is sobering. Knight Frank’s Sarkunan projects that rents and prices are expected to ease further in the second half of the year with the expected completion of several buildings in KL city centre and KL Sentral.

Landserve’s Chen too feels that the outlook for the commercial segment for the rest of the year will remain subdued with the exception of selected shopoffices in established locations. But if the economy picks up by year-end, the market is likely to make a quick comeback. “Given our strong fundamentals, the commercial property market should pick up gradually from mid-2010 onwards,” he says.

Challenging environment

The Klang Valley’s commercial property market for the first five months of this year has been sluggish, says Chen. “Moderate pressure was felt on rents of purpose-built offices in Kuala Lumpur and Petaling Jaya as well as on shops and shopoffices in secondary locations throughout the Klang Valley. Some recent renewals of tenancies in selected purpose-built office buildings in KL city centre were concluded at 10% lower than previous rents. Landlords are finding it more challenging to get their space filled as the number of enquiries and viewings by prospective tenants has dropped amidst a slowing economy.

“Similarly, some owners of shopoffices in areas like Puchong, Dataran Mentari and Kota Damansara accepted rents that were about 10% to 15% lower than those achieved previously. Owners of newly completed shopoffices in these areas had also accepted rents that were about 10% below what they were originally hoping for,” he adds.

The situation was markedly different to that at the start of 2008, he observes. “In 2008, predominantly during the first nine months, rents of office space in KL city centre and Petaling Jaya recorded increases of 5% to 18%. The impact of the US subprime mortgage crisis on our commercial property market in the Klang Valley was not quite felt. When the property market in general began to moderate in 4Q2008, the commercial sector remained steady as rents determined during good times were locked in for the whole duration of tenancy.

“Even when Lehman Brothers declared bankruptcy and Merrill Lynch was bailed out by Bank of America in September 2008, which shattered global confidence and subsequently brought many developed countries into recession, the commercial property market in the Klang Valley was largely unscathed. At the end of 2008, occupancy rates of purpose-built offices in KL stood firmly at 82.4% (2007: 83.5%), and Selangor at 85.3% (2007: 84.5%),” he says quoting data from the National Property Information Centre’s Property Market Report 2008.

Confidence shaken
While the commercial market may have remained steady at the onset of the global financial crisis, on the ground, confidence was shaken.

KGV Lambert’s Chua says the initial reaction to the global financial crisis was one of sudden halt to activities in the property commercial sector. “During the initial stage, some of our clients experienced almost no enquiries regarding the leasing and/or purchase of their properties,” he says.

As a result, some rented out their units at a discount for fear of being unoccupied for a long time. Those who wanted to sell resorted to renting while waiting for demand and prices to pick-up, he adds. “Some landlords have granted temporary relief to their tenants, especially the good ones, by giving rent reduction for a period of six months to a year while some have chose to maintain the same rate when the tenancy is up for renewal,” he adds.

Knight Frank Malaysia’s tracking of the commercial sector for the first quarter of the year (1Q2009) shows that while prime rents of selected buildings are still holding as they were agreed to earlier, asking rents have eased by 5% to 10%. Executive director Sarkunan says that while for the moment occupancy levels are stable, the completion of new commercial space is likely to drag occupancy levels down.

Chen says the entry of 1.64 million sq ft of new office space in KL in 4Q2008 has already had an impact on the market, with slower take-up rates apparent in the first five months of 2009.

With more buildings nearing completion this year, Sarkunan believes these are likely to struggle in the pre-leasing stage unless the buildings are strategically located and have convenient accessibility.

Glomac Bhd group managing director and CEO Datuk FD Iskandar agrees, pointing out that the economic slowdown has meant that businesses are not expanding and in some instances are scaling back on space requirements to cut back on costs. Iskandar, who is vice-president of the Real Estate and Housing Developers’ Association (Rehda) and chairman of Rehda Selangor says reports indicate that the last three months of 2008 and the first three months of 2009 have been “bad” for the commercial sector.

Property players agree that a prolonged economic downturn is one of the greatest challenges facing the sector. Landserve’s Chen says as a result of the recession, Malaysia’s manufacturing, construction and mining sectors have shrunk due to contraction in exports, fewer infrastructure developments and lower oil and gas output. “The rising retrenchment of workers, especially in manufacturing is a concern. In the event the global financial turmoil remains unresolved and the A(H1N1) flu pandemic worsens, our services sector, which is our country’s major engine of growth, will soon face the same fate. With that, and with economic recovery widely perceived to be unlikely in the near future, business confidence will slide further. Companies would then resort to more drastic cost-cutting measures such as downsizing and relocating. Occupancy rates will dip further, putting greater pressure on rent levels,” he adds.

Trend for suburban addresses
Newer properties, particularly those in suburban locations are also competing with existing commercial spaces, says Sarkunan. He says while in the past, Grade A buildings were mainly located within the Golden Triangle and KL city centre, recent years have seen developers becoming more aggressive; building such properties in suburban locations. By transforming suburban areas into prime commercial addresses, prospective tenants now have more choices, and as a result, suburban addresses — traditionally not office locations — are now competing with city centre addresses.

While he sees competitive supply as a challenge for commercial property owners, decentralisation, he points out, is a definite trend. This is something the owners of Menara Kencana in Solaris Dutamas, KL, are banking on. Kencana Capital Assets Sdn Bhd is marketing its 21-storey Grade A office tower to prospective tenants who are looking for easily accessible office space that at the same time also has all the amenities and facilities of a city address. “The KL city centre has many Grade A buildings but many tenants these days feel that they do not need to be located in the city… people also want to spend less time travelling to work,” says director Datuk Mokhzani Mahathir.

BRDB’s Jagan agrees, adding that this is one of the selling points of the 12-storey BRDB Tower that’s currently open for leasing enquiries. He says the 223,000 sq ft Grade A office tower, that’s scheduled for completion at the end of the year, is ideal for companies that do not have a real need to have a presence in the city centre, such as professional service providers. “Locations on the fringe of KL will make it convenient for their employees, clients and customers to travel to,” he adds.

Aside from the challenges in the purpose-built office building segment, KGV Lambert’s Chua says particular attention has to be paid on the shopoffice segment. “The overplay on shopoffice developments in the Klang Valley presents a challenge in sifting the good ones from the mediocre. It is folly to presume any shopoffices will eventually attract tenants, giving good returns. Careful consideration of the location in terms of accessibility and catchment size is essential,” he says.

IOI Properties Bhd general manager (group operations) Lee Yoke Har agrees, pointing out that the encouraging sales at its IOI Boulevard development in Bandar Puchong Jaya is proof that the developer has read the market right. “We understand the Puchong population well, which is why we felt that Puchong was ready for a development like IOI Boulevard,” she adds.

Riding out the storm
While development activities appear to have slowed with the onset of the global financial crisis, with many having held back their launches, construction and submissions for building plans approval since 2008, Chen says well-located developments by credible developers with excellent track record will do well in sales. “Otherwise, as history has taught us, deferring the launch is a safer bet.”

But what do you do if you’re an existing building owner? “Existing building owners need to take the necessary steps to retain their tenants. Sound property management, giving due emphasis to landlord-tenant relationship for customer satisfaction and cost efficiency in day-to-day maintenance, is something that can be done. Landlords can also take advantage of this low period to refurbish their buildings,” suggests Landserve’s Chen.

KGV Lambert’s Chua agrees, pointing out that for larger commercial buildings, upgrading works or even repainting go a long way to project a better image. “Landlords of individual units can also consider providing some services to retain tenants without resorting to substantial rent reduction. For example, providing cleaning services to common areas on a periodic basis that can be obtained at a very reasonable cost or installing access card system for each unit to improve security,” he adds.

“If the purchaser is already a property owner, perhaps they can consider the property for their own use. If not, they may have to provide incentives such as absorbing the maintenance charge or offer rent-free periods so that the unit is not left empty,” says Knight Frank’s Sarkunan.

This article appeared in Commercial Property, the Special Focus pullout of The Edge Malaysia, Issue 761, June 29 - July 5, 2009.
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