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Office rents, occupancy rates expected to hold firm

THE Klang Valley office market is expected to be stable in the short to medium term, particularly for well-located, good grade and dual-compliant (MSC-status and green-certified) office space. Overall, rental and occupancy rates are expected to hold firm.

"However, with the impending high supply of space in the city centre and city fringe, it is inevitable that there will be mounting pressure on occupancy and rental rates, as the gap between supply and demands widens," says Sarkunan Subramaniam, managing director of Knight Frank Malaysia, when presenting The Edge/Knight Frank Kuala Lumpur Office Monitor for 2Q2013.

Office space in the city centre and city fringe will see an increase of about 21%, or more than 14 million sq ft by end-2016. The cumulative supply in the city centre has remained unchanged at 48.3 million sq ft since 4Q2012. Two buildings were completed in the city fringe during the period in review, bringing the cumulative supply to about 19.6 million sq ft.

The completions were Menara D'Damansara in Jalan Damansara — with 253,000 sq ft, and Menara Shell in KL Sentral — with 528,400 sq ft. Menara D'Damansara is part of an ongoing development in Glomac Damansara.

Sarkunan cautions that developers which continue to announce new projects, with office space as an integral component, should monitor the market closely and review their proposals periodically, as well as engage in pre-leasing activities before commencing construction.

Sarkunan notes that the concerted efforts by InvestKL are expected to help cushion the high level of supply coming onstream in the medium term.

InvestKL is a government initiative that aims to attract multinational companies to set up their regional hubs in Kuala Lumpur. So far, in collaboration with partners such as the Malaysia Investment Development Authority and Multimedia Development Corp, it has brought in 17 MNCs.

A resilient market

Despite the challenging office environment, owing to a supply-demand mismatch, the office market continued to be resilient.

"While there was mixed performance in occupancy, rental rates remained competitive. Owners continued to work on retaining existing tenants and attracting new ones, while offering quality property management services to their tenants," says Sarkunan.

The overall occupancy rate in the city centre was stable, registering a 0.1% increase q-o-q to 81.6%, while the city fringe saw a 2.8% dip, bringing the rate down to 81.1%. The dip was attributed to the completion of Menara D'Damansara.

Sarkunan notes that Menara D'Damansara has yet to achieve a significant occupancy rate and has an asking rent of RM6 psf onwards.

The average occupancy rate in the Golden Triangle (GT) rose 0.5% q-o-q to 79.7%, and central business district (CBD) dropped 1.6% to 82.6%.

In the city fringe, the completion of Menara D'Damansara pushed the occupancy rate in Damansara Heights (DH) down 10.5% to 78.1% q-o-q.

In KL Sentral (KLS), the occupancy rate climbed 1.5% to 66.1% despite the completion of Menara Shell, as it has secured a high tenancy commitment from Shell. Mid Valley City (MVC)/Bangsar/Pantai saw a 1.2% increase from last quarter to 89.2%.

The overall rental rate in the city centre was unchanged at RM5.97 psf, from the previous quarter. In the city fringe, the overall rental rate rose 0.9% to RM5.52 psf. This was due to higher rental rates in new buildings such as Menara Shell.

In the city centre, GT saw a marginal dip of 0.3% q-o-q to RM6.27 psf, while in the CBD, it remained unchanged at RM4.76 psf. Rental rates in DH and MVC/Bangsar/Pantai stayed at RM4.44 psf and RM5.54 psf respectively, while in KLS, it rose 0.4% to RM7.03 psf.

Sarkunan says there were several notable movements of tenants, mainly in the city centre. Meanwhile, major leasing enquiries continued to come from international and multinational firms in sectors, such as oil and gas, business services and consultancy, telecommunications and financial services.

"The investment market was fairly active, with several notable deals of decentralised office space in locations such as Bangsar South, Petaling Jaya and Putrajaya," says Sarkunan.

Among them was the sale of Block H at Oasis Square (NLA: 191,399 sq ft) in Ara Damansara for RM650 psf; Menara PMI in Jalan Changkat Ceylon (NLA: 104,011 sq ft) for RM577 psf; and Block 1, Tower 7, Avenue 3 at The Horizon in Bangsar South (NLA: 71,552 sq ft) for RM894 psf.

Notable announcements

KLCC (Holdings) Sdn Bhd and Qatari Diar Asia Pacific Ltd will jointly develop the fourth phase of the KLCC master plan, which will be a mixed-use commercial development. It has an estimated gross development value (GDV) of more than RM5 billion, and will be Qatari's first investment in a property development in Malaysia.

The four-acre development will have more than 3.8 million sq ft in gross floor area and will include a luxury hotel, a 64-storey office tower, a six-storey retail podium and basement car park. It is expected to be completed by end-2017. The hotel component will be operated by Raffles Hotels & Resorts.

KLCC Real Estate Investment Trust (KLCC REIT), the first syariah-compliant stapled REIT in Malaysia, was listed on May 9 with a portfolio of three assets — the Petronas Twin Towers, Menara 3 Petronas and Menara ExxonMobil.

All the assets are fully-occupied, with 15-year leases and an increase of 3% in rent every three years. More assets are expected to be injected into the REIT, including Kompleks Dayabumi and a new building near Mandarin Oriental.

WCT Bhd has been awarded the first package of earthworks and substructure contract for the Tun Razak Exchange (TRX).

The RM169.26 million contract is the first in a series of TRX earthworks and civil engineering jobs to be awarded, and covers site clearance, rock excavation and earthworks, secant pile walls, grouting, piling and other structural and related works.

The first phase of TRX is scheduled for completion in 2017, coinciding with the opening of the mass rapid transit (MRT) line.

1Malaysia Development Bhd (1MDB) has appointed a global team in partnership with local planners, to develop the master plan for Bandar Malaysia. It will be led by acclaimed master planner Broadway Malyan and supported by world-class design and engineering teams, from Arup and Sinclair Knight Merz, in collaboration with local planner Arah Rancang Malaysia.

UDA Holdings is negotiating with several parties to jointly redevelop the 34-year-old BB Plaza. They include the Employees Provident Fund, Kumpulan Wang Persaraan, Permodalan Nasional Bhd and Malaysian Resources Corp Bhd.

BB Plaza will be demolished and an MRT station will be built below the plot. The redevelopment project is estimated to cost between RM700 million and RM800 million.

UDA has identified at least 20 developers to jointly redevelop the Pudu jail site. The integrated project, which has an estimated GDV of RM6 billion, will comprise office towers, serviced residences, commercial lots and a mall. It will take upto 10 years to build.

The receiver and manager of Plaza Rakyat Sdn Bhd, Adamprimus, has called for the submission of proposals from parties with a proven track record in integrated property development and strong financial background, in a bid to revive the project.

Covering over 15.3 acres of prime land, the project was abandoned after the Asian financial crisis of 1997/98. It was envisioned as a RM1.4 billion multi-modal transport terminus, with commercial and residential components.

A third party supplemental agreement has been signed between Impian Ekspresi Sdn Bhd (IESB) and Bukit Damansara Development Sdn Bhd (BDDSB) — a subsidiary of Damansara Assets Sdn Bhd, which is owned by Johor Corp.

IESB is majority-owned by Malton Bhd's Datuk Desmond Lim Siew Choon and his wife Datin Tan Kewi Tong.

Under the agreement, IESB will pay RM500 million cash and allocate two segments of office space — totalling 266,668 sq ft (186,667 sq ft and 80,000 sq ft) in the redeveloped Pusat Bandar Damansara (PBD) land — to BDDSB.

Meanwhile, BDDSB will assign office space measuring 186,667 sq ft to Khuan Choo Property Management Sdn Bhd (KCPM) — a subsidiary of Malton, in return for a 20-storey commercial office building known as V Square (VSQ), located in Petaling Jaya.

The remaining 80,000 sq ft of office space is to be delivered to BDDSB within five years from the date IESB acquires the PBD land.

The VSQ building, valued at RM140 million, has an NLA of about 163,504 sq ft and parking bays for 964 cars. The transaction will see Malton gain a development profit of RM54.6 million from the disposal of the VSQ property, and provides KCPM with an opportunity to invest in the proposed PBD complex.

Sunway Bhd has earmarked a 4.9-acre tract in Jalan Lagoon Timur for three office towers, with an estimated gross development cost of RM1.5 billion.

The tract is located next to the under-construction office tower, The Pinnacle. Sunway plans to transform the stretch along Jalan Lagoon Timur, which includes Menara Sunway, into a "commercial sweet spot".

Selangor Dredging Bhd has unveiled its first commercial office project in Klang Valley — The [email protected] in Petaling Jaya. Featuring 13 units of 4-storey retail offices and a 44-storey office tower with 276 Signature Suites, it has a GDV of RM337 million.

New opening and expansion

Gatehouse Bank, a syariah-compliant wholesale investment bank based in London, has started operating in Malaysia via a representative office in Kuala Lumpur.

The investment bank, whose major shareholders include The Securities House KSCC, specialises in real estate, wealth management, treasury products and syariah advisory activities across international markets.

The construction of NTT Communication Corp's fourth data centre in Malaysia — Cyberjaya 4 Data Center (CBJ4) — started in May.

CBJ4 will feature redundant systems for commercial and uninterruptible power supply, cooling, power generator and power distribution, plus robust systems for fire and flood prevention, in line with leading global standards.

The building is expected to start operations next May.

InvestKL is currently in talks with five MNCs from the US, Europe and Japan, to make Kuala Lumpur their business hub. It aims to secure another 10 MNCs this year.


This story first appeared in The Edge weekly edition of Aug 26-Sept 1, 2013.


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