New supply likely to hit leasing market

THE commercial leasing market is expected to remain challenging in the short to medium term. This is due to a tenant's market, upcoming completion of office buildings as well as existing supply of such space.

"New supply of office space in the decentralised location of KL Sentral (KLS) may cause a significant drop in occupancy in the short term. The expected completion of a further 2.28 million sq ft of space here by the end of 2013 may hit rental and occupancy rates," says Sarkunan Subramaniam, managing director of Knight Frank Malaysia, in The Edge/Knight Frank Klang ValleyOffice Monitor for 1Q2013.

The recent completion of three office buildings in KLS brings the cumulative supply of such space on the city fringe to about 18.9 million sq ft while the cumulative supply in the city centre is 48.3 million sq ft.

The city fringe will be the only contributor to new supply in 2013 as the completion of Menara Hap Seng 2 in Jalan P Ramlee and Crest Sultan Ismail in Jalan Sultan Ismail has been rescheduled to 2014. Knight Frank estimates an overall 22.6% increase in office supply in the next four years.

"The threat of new completions in the city fringe may be partly mitigated by the pre-leasing commitment of multinational corporations (MNCs) and financial institutions to several of the new buildings, for example Shell to 348 Sentral in KLS," says Sarkunan.

With KLS being one of the stations on the Sungai Buloh-Kajang mass rapid transit (MRT) line and the expected opening of Nu Sentral in 3Q2013, integration between the various completed components of KLS is expected to improve.

"This will make the transport hub even more appealing to large corporations and MNCs as an alternative office location, leading to better demand and absorption rates in the medium to long term," says Sarkunan.

Long-term prospects

In the long term, the proposed high-speed rail (HSR) link between Malaysia and Singapore is expected to create more business activity and help fill office space in Kuala Lumpur. The 350km rail link will cut travel time between the two cities to 90 minutes.

The HSR — which reportedly will pass through Seremban, Melaka, Pagoh, Batu Pahat and Iskandar before ending at the Tuas checkpoint in Johor Baru — will complement the rapid transit system (RTS) link that will connect Johor Baru to Singapore's Thomson line.

RTS is likely to be completed by 2019.

"It will offer a big re-rating catalyst for Malaysian properties, especially the real estate segment in Kuala Lumpur, in the long term. This, coupled with the three lines in the MRT network (SBK, Circle line and Line 3) and the extension of the existing light rail transit lines (Kelana Jaya and Ampang), augurs well for the office market," remarks Sarkunan.

The soon-to-be-announced MRT Circle line is said to have three stations in the Pantai Dalam locality and will link Mid Valley City, Mont'Kiara, Sentul Timur, Ampang and areas near the Matrade building in Jalan Duta.

MRT 3 (the north-south line) is expected to link areas such as Sungai Buloh, Kepong, Selayang and the eastern half of the city centre, including Kampung Baru. It will cover 36km and feature 24 stations built 1.5km apart.

"The development of these public transport links is expected to accelerate the decentralisation of office space as accessibility and connectivity between the city centre and the fringe will be greatly enhanced. While this bodes well for office developments in some locations, it might impact office buildings in the city centre," comments Sarkunan.

Continued improvement

Average occupancy in the city centre rose 3.4% from 4Q2012 to 81.5% overall. In the Golden Triangle, it added 0.8% to reach 79.4% while in the central business district (CBD), it climbed 6.1% to 83.9%. Buildings that saw better occupancy in the CBD are Wisma Budiman in Persiaran Raja Chulan (+70%), Kompleks Dayabumi in Jalan Sultan Hishamuddin (+8%) and Sunway Tower in Jalan Ampang (+6%).

In the city fringe, average occupancy dipped 4.2% from 4Q2012 to 83.4% overall. Damansara Heights saw an increase of 1.3% to 87.3% while in Mid Valley City/Bangsar/Pantai occupancy rose 2.3% to 88%. However, due to the completion of Nu Tower 1 (259,632 sq ft), Nu Tower 2 (498,309 sq ft) and Menara CIMB in Lot A KL Sentral (608,000 sq ft), KLS recorded a decline in occupancy of 32% to 65.1%.

Average rental rates in the city centre stood at RM5.97 psf overall, up 1.2% from 4Q2012. The Golden Triangle registered a 0.9% increase to RM6.28 psf and the CDB 4% to RM4.76 psf.

The city fringe registered a 1.2% increase in its overall average rental rate to RM5.47 psf. In Mid Valley City/Bangsar/Pantai, rents rose 0.2% to RM5.54 psf from the last quarter while rents were unchanged at RM4.44 psf in Damansara Heights. In KLS, rents dipped 3.4% to RM7 psf.

"With the exception of Menara CIMB in Lot A KLS, to which CIMB Group is highly committed, Nu Tower 1 and Nu Tower 2 in Lot G in KLS are currently being offered for lease at an average asking rental rate of RM6.50 to RM7.50 psf," observes Sarkunan.

Notable announcements in 1Q2013

KLCC Property Holdings Bhd, via wholly owned Kompleks Dayabumi Sdn Bhd, is refurbishing the 35-storey Menara Dayabumi at a cost of RM50 million to RM70 million. Its annexed 6-storey retail podium City Point will make way for a high-rise office-cum-residential tower. The total cost of the upgrading works, which started last year, is RM900 million. Upon completion, the company is expected to raise the rental rate by more than 50%.

Magna Prima Bhd will be developing a RM1.8 billion luxury development on the 1.05ha site of the existing Lai Meng Primary School and Lai Meng Kindergarten in Jalan Ampang. The proposed development will comprise a tower of Grade-A green office space and a second tower housing serviced apartments, a five-star hotel and offices. The project will be Magna Prima's single largest development to date and will be launched next year after the completion of the new Lai Meng school in Bukit Jalil in 3Q2013.

Meanwhile, UDA Holdings Bhd is in the process of submitting the master plan for Bukit Bintang City Centre (the former Pudu Jail) to Kuala Lumpur City Hall. The redevelopment project will include a hotel, offices, condominiums and commercial lots.

Private equity real estate investment advisory MGPA launched the 40-storey Integra Tower in Jalan Tun Razak on March 20. Integra Tower is part of the RM2.2 billion integrated development The Intermark, and is the last component to be completed. Integra Tower, with a net lettable area of 777,000 sq ft, has a tenancy commitment of 12%. The asking rent for Integra Tower is RM11 psf.

WCT Bhd has accepted a letter of award from Putrajaya Holdings Sdn Bhd worth RM315 million to construct and complete commercial office buildings and external works in Precinct 2 of Putrajaya.

Fraser & Neave Holdings Bhd has said it is in the process of applying for necessary approvals for its mixed-use development on its former manufacturing facility land in Section 13, Petaling Jaya. The project has an estimated gross development value (GDV) of RM1.65 billion and is a joint venture with FCL Centrepoint Pte Ltd. Targeted for launch between June and September, it will comprise residential, retail and office components and a hotel.

TRC Synergy Bhd has partnered with Syarikat Prasarana Negara Bhd to turn a 49,776 sq m site in Subang into a mixed-use development with a GDV of RM687.5 million. Located near two of the Kelana Jaya LRT line extension, the proposed development will comprise offices, hotel, apartments, retail, SoHos and LRT user car parks.

Conlay Group of Companies is planning to launch [email protected] Jaya — a 3.25-acre commercial development with an estimated GDV of RM300 million. The development, which will comprise 162 SoHo suites, 263 serviced apartments, one 17-storey office tower and 21 retail units, is expected to be launched in 2Q2013.

New opening and expansion

Bangsar South welcomed two new MNC tenants in 1Q2013 — global financial messaging provider Swift and British Telecoms. Swift's new facility will offer services such as IT development, qualification testing, support, business operations, accounting and finance analysis and transactional functions while BT's Malaysian office will operate as its headquarters for Asia-Pacific. The latter is expected to hire about 600 to 800 high-knowledge workers over the next two years.

InvestKL, a specialist investment agency set up by the government in 2011 to attract 100 MNCs to invest in Greater Kuala Lumpur by 2012, has brought in 17 MNCs. Among them are Schlumberger, Vale, IBM, Worley Parsons, Aecom and Toshiba. Another MNC is US-based Darden Restaurants Inc, which will develop the world's first lobster aquaculture park in Sabah with a value of RM2 billion.

Talks are ongoing with five more MNCs to set up their business hubs in Kuala Lumpur.

Investment sales

Pelaburan Hartanah Bhd (PHB) has proposed to acquire the 20-storey Tower 3, Avenue 7 in Bangsar South from UOA Development Bhd. With the acquisition of its ninth completed property, the total value of PHB's completed assets is RM1.8 billion.

Value Add Sdn Bhd has proposed to acquire the freehold East Wing of The Icon @ Tun Razak for RM226 million from TS Law Realty Sdn Bhd. This building has a gross built-up of 278,182 sq ft and an occupancy rate of 98%.

This story first appeared in The Edge weekly edition of Jun3-9, 2013.

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