Knight FrankTHE Kuala Lumpur and beyond Kuala Lumpur (Selangor) office market remained stationary in 4Q2015, with looming supply casting a shadow on rental and occupancy rates. 

“The stagnant office market in 4Q2015 reflects the growing challenges ahead, which is evident from the significant drop in absorption rate,” says Knight Frank Malaysia managing director Sarkunan Subramaniam in presenting the 4Q2015 The Edge/Knight Frank Klang Valley Office Monitor.

The cumulative supply of office space for KL city and beyond KL increased by 0.55 million sq ft to 92.53 million sq ft, following the completion of KL Trillion Office Tower with 305,000 sq ft of net lettable area (NLA) in KL City and Menara Guocoland with an NLA of 247,000 sq ft.

Meanwhile, the total cumulative office space under construction in KL city, KL fringe and beyond KL stood at 14.13 million sq ft. The supply is expected to grow by 15.3% from 2016 to 2018.

The estimated cumulative office stock in 2018 would amount to 106.65 million sq ft, with most of the new completions expected to come from KL fringe.

According to the monitor’s findings, overall net absoption in KL for 2015 was 812,443 sq ft compared with the previous year’s 1,993,085 sq ft. The sizeable contraction is said to be due to the current state of the economy.

“Currently, laggard rental and occupancy movements are likely due to the lock-in period for existing commercial leases. Market activities [in leasing], particularly for the oil and gas (O&G) sector, started to slow down in the preceeding quarters as more firms cut back on capital expenditure, and [implementing] rationalisation plans with more business consolidation, mergers and acquisition activities,” says Sarkunan. 

“With an increasing mismatch between supply and demand, competition for tenants will increase, which will lead to more pressure on rental and occupancy levels. The office market continues to favour tenants, with ample choices available at competitive terms and rates.” 

Challenging times

Moving into 2016, the KL and beyond office market is expected to be more challenging amid growing domestic and foreign headwinds.

Depressed demand for office space from O&G and related businesses as well from as the financial and services sectors have impacted the market. Companies are reducing cost — including freezing recruitment and retrenching employees — amid the slump in oil prices, a slowing economy and weaker financials.

“The overall occupancy rate is projected to trend downward slightly, with the impending high completion totalling more than 6.3 million sq ft of space by end-2016 [for KL and beyond] and shrinking demand. This further widens the gap between supply and demand,” says Sarkunan.

“Similarly, rental rates are also expected to decline in 2016 amid a challenging business environment with a high supply pipeline of existing and impending supply and a weak leasing market as firms and business defer expansion plans, freeze hiring and reduce headcount to manage costs.”

To sustain and improve the overall office market, there are some factors to look at.

“The overall state of the current office market will likely improve when there is more certainty in the country in terms of the political and economic conditions. The stabilisation of the local currency as well as of commodity prices, including crude oil, would lead to improved business confidence, and also attract foreign direct investment,” Sarkunan notes.

“Developers of new and proposed office buildings may be well advised to review their plans as there is a high supply pipeline of existing and upcoming buildings in the next two to three years. It is prudent to have a certain level of pre-leasing commitment before construction as net absorption rates fall and vacancy of buildings rises,” he advises. “With heightened competition, owners of older buildings offering lower grade office space may have to refurbish or redevelop to remain competitive.”

According to the monitor, about 6.3 million of office space is slated for completion by 2016, adding more pressure to rental and occupancy levels. 

“It is still a tenant’s market. Building owners are expected to be more flexible in negotiation of tenancy terms to secure quality tenants at reasonable terms and competitive rental rates [that have lock-in tenancies with upward adjustments]. More sub-leasing activities are expected as large space occupiers in the O&G industries and selected business services are looking to downsize or consolidate,” says Sarkunan.

However, he adds that “well-located and good grade office buildings are expected to continue to perform well”.

Stagnant occupancy, flat rental rates

The monitor shows that the overall occupancy rate in 4Q2015 for beyond KL improved the most, rising by 2.7% to 78.6% quarter on quarter. The occupancy rates rose in most areas, such as Subang Jaya (4.2%), Cyberjaya (3.7%) and Petaling Jaya (2.3%).

“The overall occupancy rate improved for the macro Subang Jaya locality due to higher take-up in several office buildings that include PFCC, Tower 1 & Tower 2 in Puchong, and The Pinnacle in Bandar Sunway,” says Sarkunan. “The Cyberjaya office market was fairly active during the review period with selected office buildings such as Wisma Mustapha Kamal, Century Square and Bangunan Emerio welcoming new tenants although several reportedly moved out from Prima 1 and Prima 2.”

However, the occupancy rate in Shah Alam in beyond KL declined 4.8%. “Several tenants moved out of Menara MRCB, which led to a 4.8% dip in the overall occupancy rate of Shah Alam,” Sarkunan says.

Meanwhile, the overall occupancy rate in KL city rose by 0.1% to 82.6% q-o-q. The slight improvement is partially due to the occupancy rate in the central business district (CBD) rising slightly by 1.6% to 88.4%. “This increase is due to the movements in Menara Multi-Purpose and Cap Square Tower,” say Sarkunan. In contrast, the Golden Triangle recorded a decline of 0.1% to 81.5%.

Areas in KL fringe witnessed sporadic results, with overall occupancy rate rising 0.3% to 89.4%, due to higher occupancy in KL Sentral (up 4.3%) and Mid Valley City (MVC)/Bangsar/Pantai (up 1.2%). In contrast, Damansara Heights experienced a decline of 9.2%.

“In Damansara Heights, the completion of Menara Goucoland has yet to achieve significant occupancy,” says Sarkunan.

Rental rates, on the hand, stayed almost stagnant in this quarter.

Grade A rental rates in KL City remained unchanged from the previous quarter, with Golden Triangle Prime A+ at RM11.33 psf, Golden Triangle Grade A at RM7.19 psf and CBD Grade A at RM5.41 psf.

It was the same story for average rental rates in beyond KL, with an overall rental rate of RM4.19 psf. Rental rates in Petaling Jaya (RM4.41 psf), Subang Jaya (RM3.91 psf), Shah Alam (RM3.50 psf) and Cyberjaya (RM4.17 psf) stayed put.

In KL fringe, rental rates (KL Sentral Grade A, RM6.78 psf; Mid Valley City/Bangsar/Pantai Grade A, RM5.90 psf) remained unchanged from the previous quarter.

Damansara Heights Grade A, however, rose by 7.2% from the last quarter, due to the completion of Menara Guocoland. “Tower B of Damansara City commands a higher rental of RM7 psf,” says Sarkunan.

“There is good demand for Grade A office space in Damansara Heights, which is evident from strong occupancy levels at selected decentralised office locations such as KL Sentral, and Mid Valley City,” he adds.

Notable movements and transactions

The quarter witnessed a couple of notable investment sales and transactions. Malaysian Resources Corp Bhd (MRCB) has proposed to sell Menara Shell together with a 5-storey podium and a 4-storey basement car park in Kuala Lumpur Sentral to MRCB-Quill REIT (MQ REIT) for RM640 million for 556,468 sq ft in NLA.

Meanwhile, AmFIRST Real Estate Investment Trust (REIT) is disposing of a 13-storey office building known as AmBank Group Leadership Centre, with 57,801 sq ft of NLA, in Lorong P Ramlee for RM36 million. The freehold building comprises a 10-storey office block, a penthouse and 3-level car park.

Meanwhile, QBE Insurance Malaysia has opened a new office at Menara Hap Seng 2, KL City, increasing its branch network in Malaysia to a total of 15 across eight states.

In another development, Procurri Corp Pte Ltd, a global independent distributor of data centre equipment and multi-vendor maintenance provider, relocated to a new office in Petaling Jaya. The new 12,000 sq ft office in Infinite Centre will cater for the company’s growth and future expansion plans. 

FBS Market Inc, a Belize-registered forex broker that focuses on clients in Asia, has announced the opening of its 12th international representative office in Petaling Jaya.

Notable announcements

In KL City, Naza Group launched the 50-storey Naza Tower within the RM4 billion Platinum Park development in November. The Grade A, GBI-accredited office building with more than 500,000 sq ft of NLA, won the “Best Office Architecture” award at the International Property Awards, Asia-Pacific in 2012.

Econpile Holdings Bhd has acquired a contract valued at RM120.5 million for piling and related works for the Menara Felcra mixed development project. Located in Jalan Sultan Yahya Petra in Kuala Lumpur, the integrated development will house Felcra’s new headquarters (35-storey office tower), a 43-storey residential tower (480 units of serviced apartments) and a six-storey commercial and retail block.

Marble and granite products trader Stone Master Corp Bhd has entered into a heads of agreement (HoA) to acquire YNL Properties Sdn Bhd (YNL Prop) — the owner of a 305.6 sq m piece of land with an 11½-storey office building in Jalan Raja Chulan — for RM15 million. The primary objective of the proposed acquisition is to house Stone Master’s existing corporate and head offices, and/or showrooms.

There were two notable announcements for KL fringe. Guocoland is finalising agreements with tenants for its Office Tower B, a 19-storey office building with 240,000 sq ft NLA within the Damansara City integrated development. To date, it has reportedly secured 70% occupancy, including two tenants that are multinational corporations. Rental rates for Menara Guocoland (Office Tower B) are in the region of RM7 psf per month.

Also in KL fringe, two blocks of corporate office towers within the KL Gateway mixed-use project by Suez Capital Sdn Bhd will have 212 units and 246 units respectively. The GBI-certified towers come with comprehensive facilities such as a reception lobby, executive lounge and fully equipped meeting rooms. To date, about 95% of the residential and office units in KL Gateway have been sold, and targeted to be completed in 2016.

For beyond KL (Selangor), the 23-storey Top Glove Tower on a 0.8ha parcel in Setia Alam, Shah Alam, has officially opened. The Grade A, GBI-certified gold office and retail building, adheres to internationally recognised Conquas and Qlassic standards. With 640,000 sq ft of space, the corporate tower houses a Nova Fitness gym, the Hao Xiang Chi Seafood Restaurant, a Natural Health Farm outlet, a Bespoke Tailor’s shop and a clinic. Other amenities include conference rooms, a ballroom, cafeteria and auditorium and a 768-bay car park.

Apart from Top Glove Tower, the first office tower to be developed in Bukit Jelutong, Shah Alam, has been revealed. Block A of Radia Offices comprises 159 units of stratified offices with flexible built-up areas ranging from 825 to 2,001 sq ft, with an average selling price of RM770 psf. The office block, which is expected to be ready by 2018, forms part of the Radia integrated development — a 50:50 joint venture (JV) with a GDV of about RM1.6 billion between Sime Darby Property Bhd and UEM Sunrise Bhd.

MRCB is jointly developing the first parcel of land in the Kwasa Damansara project in Sungai Buloh. The group has signed a management contract for Kwasa Utama — a 29.82-acre commercial development comprising eight office towers, a hotel, an auditorium and a common facility block.

 

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This article first appeared in City & Country, a pullout of The Edge Malaysia Weekly, on March 14, 2016. Subscribe here for your personal copy.

 

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