KL office market expected to remain healthy

"RENTAL rates in the city centre are expected to be stable, with renewed tenancies seeing marginal increases due to provisions in renewal clauses, while rents for offices in the city fringe will rise in the next half year due to increasing demand for well-located office space in decentralised locations as well as the availability of better grade office space in new completions," says Sarkunan Subramaniam, managing director of Knight Frank Malaysia, in The Edge/Knight Frank Klang Valley Office Monitor for 4Q2012.

Despite concerns about oversupply in the city centre, which may contribute to a slower rental market, office space in the city fringe and suburbs such as KL Sentral, Petaling Jaya, Shah Alam and Damansara appears to be seeing a good take-up in general.

"Going forward, there may be growing pressure on occupancy due to the high incoming supply in locations such as KL Sentral (KLS)," says Sarkunan.

The quarter in review saw the completion of Integra Tower @ The Intermark, with an estimated net lettable area (NLA) of 760,000 sq ft, which brings the cumulative supply of office space in the city centre to 48.3 million sq ft. Existing supply of office space in the city fringe remains unchanged at about 17.5 million sq ft.

There is a projected 21.5% increase in new supply over the next three years, amounting to 14.15 million sq ft. With a wide range of choices already available in the current tenant-favoured market, developers and owners are expected to take proactive measures, such as upgrading buildings that have inferior specifications and offering various incentives like rent-free periods, tenant fit-out and so on to remain competitive.

KLS is one of the decentralised locations anticipated to see downward pressure on occupancy as an estimated 5.2 million sq ft of new supply is expected to come onstream in the next two years, making up the bulk of new supply in the city fringe. Nevertheless, the short-term threat from these new completions is expected to be mitigated as a few buildings have secured multinational corporations (MNCs) and banks/financial institutions as their anchor tenants.

"Furthermore, the opening of Nu Sentral mall in 3Q2013 is expected to improve integration between the various completed components (offices hotels, condominiums/serviced apartments and so on) within KLS and add further appeal to the transport hub as a popular alternative office location for large corporations and MNCs. This will lead to improved demand and absorption rates," says Sarkunan.

Growth of decentralised locations

Sarkunan notes that there is a growing trend of companies moving into office spaces in integrated developments that come with complementary components such as retail outlets and hotels, as having a high car park ratio is one of their key considerations.

Such integrated developments include Bangsar South, Mid Valley City (MVC) and Pavilion Tower in Bukit Bintang. Sarkunan attributes the improved occupancy in these developments to factors such as good grade office space at competitive rents, the availability of public transport links, complementary components such as retail outlets and hotels, and dual compliance (MSC and green certified) that appeal to a wider tenant market.

"Older and dated standalone buildings in less favourable locations may experience further pressure on rental and occupancy rates. In order to remain competitive, these buildings are expected to undertake refurbishment or redevelopment exercises to enhance their marketability and increase their appeal to a wider pool," says Sarkunan.

Quarterly performance

During the quarter under review, overall rents in KL city and the city fringe saw a marginal increase, owing to new completions which generally command higher rental rates.

The overall average rental rate for the city centre stands at RM5.90 psf, an increase of 1.5% from the previous quarter. The Golden Triangle (GT) area registered a 1.3% increase to RM6.23 psf, while the central business district (CBD) registered a 2.2% increase to RM4.58 psf.

In the city fringe, the overall average rental rate increased 0.6% q-o-q to RM5.41 psf. The average rent in Damansara Heights (DH) and KLS remained unchanged at RM4.44 and RM7.25 psf respectively. Meanwhile, the MVC, Bangsar and Pantai areas recorded a 0.7% increase to RM5.53 psf.

There was a marginal decline in the average occupancy rate in the city centre due to the entry of Integra Tower @ The Intermark, registering about 78.9% (-0.5% q-o-q), while the city fringe continued to perform well, recording a slight increase of 87.1% (+1.3% q-o-q).

The occupancy rate in the GT area dipped 1% q-o-q to 78.8%, while in the CBD it declined 1.7% q-o-q to 79.1%. In the city fringes, DH recorded an increase of 3.2% to 86.2%, while the MVC, Bangsar and Pantai areas saw an increase of 1.2% to 86%. The occupancy rate in KLS remained at 95.8%.

Notable developments in 4Q 2012

The landscape of Jalan Sultan Ismail is set to undergo a dramatic change over the next 10 years with the demolition of several ageing buildings to make way for new structures.

Following the demolition of Equatorial Hotel Kuala Lumpur in July last year, there are now plans to bring down the 40-year-old Crowne Plaza Mutiara KL as well as the 30-year-old Kompleks Antarabangsa by early 2013. Kuala Lumpur City Hall (DBKL) has reportedly received an application for a development order for Crowne Plaza Mutiara and Kompleks Antarabangsa. To be named Tradewinds Centre, it will comprise Grade A+ offices, retail offices and serviced apartments.

Another building slated for demolition is Bangunan MAS, for which Ahmad Zaki Resources Bhd (AZRB) won a RM673 million contract to redevelop. The plan is to build a 50-storey hotel and upgrade the existing 35-storey office building. There has also been talk about redeveloping the 21-year-old Hotel Istana in the near future.

Malaysian Resources Corp Bhd (MRCB) expects to start work next year on a mixed-use development worth more than RM1 billion opposite the Kuala Lumpur Sentral commercial hub in Brickfields. The 2ha development will comprise residential, retail and office components. MRCB struck a deal in 2011 with the government to undertake public infrastructure projects worth RM128.71 million in Brickfields at its own cost in exchange for the land.

GuocoLand (Malaysia) Bhd is developing Damansara City, a flagship integrated development, in Damansara Heights. The 3.4ha freehold development adjacent to the Damansara Town Centre will have a total development area of about 2.2 million sq ft. It will comprise two Grade A office towers, two luxury condominium towers, a lifestyle mall and an international-class hotel. The development has been identified by the government as one of the key Entry Point Projects under the Economic Transformation Programme to transform Malaysia into a high-income nation by 2020.

Glomac Bhd aims to build more Grade A office towers in the Klang Valley as part of its expansion. There is a trend now of MNCs moving out of the central business district. The developer is thinking of building office towers at some of its ongoing projects in Greater Kuala Lumpur. According to Sarkunan, despite fears of oversupply, projects such as Glomac's, which are smaller offices on a strata basis, still appeal to investors.

Engtex Group Bhd plans to build a 23-storey office building on a freehold parcel in Aman Puri, Kepong. Engtex acquired the 80,245 sq ft parcel for RM19.3 million or RM241 psf in November last year.

In December, Magna Prima Bhd entered into a conditional sale and purchase agreement (SPA) with Tropicana Desa Mentari Sdn Bhd to acquire 36 subdivided leasehold lots measuring a combined 76,757 sq ft for RM23.03 million or RM300 psf. It plans to develop terraced retail offices on the site, which is located off Jalan Kelang Lama.

Meanwhile, Hua Yang Bhd entered into a conditional SPA with Mentari Hari to acquire five vacant parcels of leasehold land measuring 29.21 acres in Petaling Jaya for RM158 million. Located to the immediate south of Puchong West Toll Plaza of Lebuhraya Damansara Puchong, it is approved for commercial development of 68 units of stratified 4-storey cluster shopoffices, petrol station site, public facilities and amenities. On completion of the acquisition, Hua Yang intends to apply for a change in planning approval — to a mixed-use development comprising serviced apartments, offices, a clubhouse and amenities, with an expected gross development value (GDV) of RM1.52 billion.

Fraser & Neave Holdings Bhd is planning to launch a property project in Petaling Jaya's Section 13. The mixed-use development will comprise hotels, offices, retail outlets and residential suites, with a GDV of RM1.6 billion, and will be developed over seven years. Its first phase is expected to be rolled out in 2013.

MKH Bhd has plans for huge, integrated high-rise developments in Kajang comprising serviced apartments, SoHo suites, office towers, retail units and a hotel, with a total GDV of RM2.48 billion. The first of these developments will be MKH Boulevard, comprising SoHos above the 30 three to six-storey shops in the podium block. It has a GDV of RM172 million and will be launched in 1H2013. MKH is taking a step-by-step approach to its high-rise launches as the MRT stations along the Kajang line are expected to be completed only in 2017.

Also in Kajang, Protasco Bhd plans to develop a 100-acre site into a township called De Centrum City. It will comprise residential and commercial components, offices, educational institutions, a convention centre, hotels and entertainment outlets. The site is located about 6km from the proposed MRT station in Kajang. The township, which has a GDV of RM5 billion to RM6 billion, will take 10 to 15 years to develop.

S P Setia Bhd launched Setia International Centre in KL Eco City in Bangsar to allow buyers and investors to view the group's investment-grade products, both local and international, under one roof in November last year. The KL Eco City, a joint project by S P Setia and DBKL, is an integrated green mixed-use development featuring several residential and office towers, including a new DBKL block, retail space and hotel.

UOA Development Bhd has proposed to sell an 18-storey office tower to UEM Group Bhd for RM173.25 million. The leasehold commercial tower is located at Bangsar South along Jalan Kerinchi.

Malaysia Building Society Bhd (MBSB) has entered into a conditional SPA with PJ Sentral Development Sdn Bhd to buy a Grade A 27 to 30-storey office building for RM239.24 million or RM850 psf based on an NLA of 281,455 sq ft. The office building is part of the first phase of the proposed mixed-use development PJ Sentral Garden City. The development, which will house MBSB's flagship banking hall, will comprise five office towers and a 1.61ha central park.

This story first appeared in The Edge weekly edition of Mar04-10, 2013.

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