Dual-compliant buildings continue to do well

THE office market is expected to remain stable in the short to medium term, particularly for well-located good grade office space, with overall rental rates and occupancy levels likely to hold firm.

"The availability of substantial new and impending office supply has yet to translate into a decline in overall average rental rates," says Sarkunan Subramaniam, executive director of Knight Frank Malaysia, in presenting The Edge/Knight Frank Klang Valley Office Monitor for 3Q2012.

This quarter saw the completion of two prime office buildings in the city centre ­- Menara Binjai (330,000 sq ft) in Jalan Binjai and Menara Darussalam (185,874 sq ft) in Jalan Pinang — raising the total supply of office space in the city centre to 47.5 million sq ft. The city fringes have a current office supply of 17.5 million sq ft, with 11.69 million sq ft expected to come onstream by end-2014.

A further 1.5 million sq ft is expected to be available by year-end with the completion of The Integra Tower at The Intermark in Jalan Tun Razak and Aloft Tower at Lot G KL Sentral.

The occupancy rate for new buildings such as Menara Binjai and Menara Darussalam is estimated to be about 10%. Notable tenants are the British High Commission in Menara Binjai and Regus, the world's largest provider of flexible workspaces, in Menara Darussalam. The asking rent is RM7.50 psf for Menara Binjai and RM8.50 psf for Menara Darussalam.

"I think the office market will still hold steady next year in terms of rents while occupancy in older buildings will slip. The main test will be in KL Sentral (KLS), which will see a marked increase in supply next year. The Golden Triangle (GT) and central business district (CBD) market will be more affected in 2014 as a large supply comes in while the fringes are will face pressure in 2014/15," says Sarkunan.

Dual-compliant office space (Green Building Index and Multimedia Super Corridor (MSC) Cybercentre status) continues to perform well, with buildings such as G Tower in Jalan Ampang and Platinum Sentral in KLS achieving almost full occupancy at an average rental rate of RM8.50 psf.

With Jaya33, a mixed commercial building in Section 13, Petaling Jaya, obtaining MSC Malaysia Cybercentre status, there are now 26 MSC Malaysia cybercities and cybercentres in the country. They house more than 3,000 local and multinational MSC Malaysia-status companies involved in various ICT clusters, namely infotech, shared services and outsourcing and creative multimedia.

According to Sarkunan, Electrolux Home Appliances Sdn Bhd was the first tenant at Jaya33 Cybercentre to be awarded MSC status for its global shared service centre.

Despite the increasing number of MSC cybercities and cybercentres, Sarkunan does not foresee an oversupply but believes the market will be more competitive.

Cybercentres in the city and city fringes include Bangsar South, KL Sentral and Mid Valley City, while further out is i-City in Shah Alam.

"With a number of upcoming office buildings being dual-compliant, further pressure is put on developers and owners to take proactive measures to remain competitive," says Sarkunan.

Quarterly performance
Overall average rental rates in the Kuala Lumpur city centre (GT and CBD) rose 2.3% in 3Q2012 to RM5.81 psf. The GT recorded a 2.5% increase from last quarter to RM6.15 psf while the CBD rate remained unchanged at RM4.48 psf.

In the city fringes, overall average rental rates rose a marginal 0.7% from the last quarter. Damansara Heights (DH) posted a 0.7% increase at RM4.44 psf, KL Sentral (KLS) is up 3.6% to RM7.25 psf and Mid Valley City (MVC)/Bangsar/Pantai rose 0.4% to RM5.49 psf.

Overall average occupancy in the city centre however, dipped 2.8% to 79.3%, with the GT registered a dip of 2.9% to 79.6% and the CBD was down 2.8% to 77.8%.

Sarkunan attributes the decline to the newly completed buildings in the GT and the notable decline in occupancy of selected office buildings in the CBD.

"Generally, the trend is for companies to leave older buildings for newer and better buildings even if the rents are higher as they can negotiate good rent-free terms that make it viable to move," he says.

Sarkunan puts the average rental rate for lower grade and non-dual compliant buildings at below RM5 psf.

The overall average occupancy rate in the city fringes on the other hand, recorded a 7.5% increase from last quarter to 86%. The occupancy rate in DH went up 4.4% to 83.5%, while KLS saw a 0.7% dip to 95.8% and MVC/Bangsar/Pantai increased 11.8% to 85%.

Sarkunan sees the increase in average occupancy rate in the city fringe as an indication of strong demand for office space in decentralised locations.

Notable developments in 3Q
The Tun Razak Exchange (TRX), formerly known as the Kuala Lumpur International Financial District (KLIFD), was launched on July 30. With an indicative gross development value of RM26 billion, the 70-acre TRX will have a total of 26 buildings, with approximately 9.6 million sq ft of office space.

The 15-year project is to be spread over four phases and is expected to comprise office buildings (48%), and residential (31%), retail (10%), hospitality (10%) and institutional (1%) space. To woo tenants, incentives offered include 100% income tax exemption for 10 years, stamp duty exemption on loan/service agreements, incentives for industrial building allowance and accelerated capital allowance and income tax exemption of 70% for five years for eligible property developers.

The British High Commission in Jalan Ampang is relocating to the 35-storey Menara Binjai,with a tenancy agreement signed for the 27th floor.

The relocation is expected to be completed next year. Its current premises, with a land area of 3.08 acres, is up for sale. The tender closed on Sept 13 and the results are expected to be announced soon.

Permodalan Nasional Bhd (PNB) has obtained the development order from Kuala Lumpur City Hall to build the 100-storey Menara Warisan Merdeka. The building, which will be officially launched by year-end, has received pre-booking enquiries for over 60% of its lettable space. It has a net floor space of 2.2 million sq ft. The 10-year development will cost about RM5 billion and when completed, will be over 600m tall, higher than the Petronas Twin Towers, which stand at 453m.

Emkay Group has launched the first phase of the 18-acre Star Central, a mixed-use development with a GDV of RM1.8 billion in Cyberjaya. The first phase, known as Corporate Park, has a GDV of RM420 million and will offer 17 blocks of 8-storey semi-detached offices with a net floor area (NFA) of 1,881 to 2,838 sq ft per floor, priced from RM550 psf to RM650 psf. The freehold project will be developed in seven phases spread over 7 to 10 years, with the first phase expected to be completed in 2015.

See Hoy Chan Sdn Bhd (SHC) is developing Phase 2 of Damansara Uptown on the remaining 15-acre freehold parcel previously used as an open-air car park. The prime commercial precinct in Damansara Utama will be further transformed with a RM1.5 billion mixed-use development comprising two blocks of serviced apartments, a neighbourhood mall, serviced residences and an office tower. The final component in phase 2 is the 38-storey office tower, which will have an NLA of 460,000 sq ft. The building will be GBI and MSC compliant.

SHC is also targeting to establish a real estate investment trust (REIT) one year after the completion of Uptown Phase 2. The REIT will include Uptown 1, 2, 7, the new office building, neighbourhood mall and Somerset Serviced Residence, with a total value of about RM2 billion. At present, the overall occupancy for Uptown 1, 2 and 5 is above 90%, with rental rates ranging from RM4.00 psf to RM4.50 psf.

Lembaga Tabung Haji is buying a 13-storey boutique office building in Bangsar South for RM102.2 million (RM700 psf) from UOA Development Bhd. The price was obtained after taking into consideration a gain of about RM20.9 million against the current book value.

Pelaburan Hartanah Bhd (PHB) has increased the total value of its assets to about RM1.5 billion with the acquisition of three office buildings, two retail buildings and two levels of basement car parks in Peremba Square, Shah Alam. PHB has signed the sales and purchase agreement with the vendor, Axaregal Sdn Bhd, which will give PHB 86% ownership of Peremba Square (Blocks A, B, D, E, F and G). Block C is owned by another company.

This story first appeared in The Edge weekly edition of Nov 19-25, 2012.