Office space oversupply by 2014

KUALA LUMPUR (Nov 1): The mega projects to build more skyscrapers in Kuala Lumpur city centre that are in the pipeline will result in an oversupply of office space in the Klang Valley by 2014, said CB Richard Ellis (M) Sdn Bhd executive chairman Christopher Boyd.

"We are looking at a picture where supply [of office space] is going to likely outstrip demand," he said at a luncheon talk hosted by MIDF Amanah Investment Bank Bhd on Monday.

"This year alone, new supply was over four million sq ft which is already in excess of demand even in a good year," said Boyd, pointing out that demand for new office space averaged two million to three million sq ft net in the Klang Valley.

"Next year, we are looking at six million sq ft [in new office space]. It [supply] will fall in 2013 — but in 2014, we're looking at 10 million sq ft," he said.

The numbers are based on buildings that are already under construction or at advanced stages of planning, he said.

Boyd noted that the current office vacancy rates stood at 13%, which is not an alarming number. But he anticipates the figure to rise as more supply comes on stream.

"Generally, office rents have remained steady and a good building will lease for RM7 to RM7.50 per sq ft.

"Buildings like KLCC Tower 3 with 800,000 sq ft [of office space] is due to complete early next year and has led very well with rents of around RM11 psf," he said.

On the sale of office space, Boyd said the market remains healthy as of now.

"If you were to sell a modern building now, you'd probably sell it for a yield of 6% to 7% net, which on average translates into RM800 to RM900 psf," he said.

Higher prices are being achieved in the market, he said, citing examples of KL Sentral and S P Setia Bhd's Eco City, which have fetched over RM1,100 psf.

Sales of office space are also quite healthy with transactions valued at RM1 billion to RM2 billion a year.

"Buyers these days are mostly local institutions and real estate investment trusts. But before 2008, an extraordinary amount of opportunistic overseas funds were looking to buy into KL office property. They have evaporated since the financial crisis [2008].

"For now, it remains a seller's market as demand exceeds supply of office space for sale," Boyd said.

On premium condominiums, he observed that landlords are getting lower rental rates in prime areas such as KL City Centre (KLCC) and Mont'Kiara due to ample supply.

"The rental market is tough. If you're looking to rent a condominium in KLCC or Mont'Kiara, it is a highly competitive market. In some cases, rents have almost halved in the last two years thanks to the individual landlords," said Boyd.

Competition has driven condominium rental rates down but affordability of housing has not improved.

On the price trend of residential properties, Boyd said he expected the current upward momentum to slow down, but he does not foresee a crash on prices.

"Price increases were quite usual at 12% last year," he said, noting that the market is playing catch-up after almost 10 years of stagnant or slow price growth.

He attributed some of the price increase to the slowdown in development since 2008 which stemmed from a surge in building material costs.

According to Boyd, the supply of residential properties had been steady at about 60,000 units per annum till about 2008 and has since fallen to slightly over 20,000 units in recent years.

"We've seen tremendous growth in the residential market in the past 18 months. It can never maintain that kind of growth.

"We've probably reached the peak. It will continue to increase next year but nothing like the rate we've seen this year. We'll see the market begin to ease; more supply will come in offering more choices to buyers and new developments will be priced less aggressively," he added.

Boyd downplayed speculative behaviour in the market. "The market is not particularly speculative yet," he said.

He said it is very difficult to measure speculation in the property market and he did not have any figures.

"One telltale sign is properties being flipped; sold within two to three years of being bought," he said, "But such numbers are almost impossible to track. Banks may have some of the figures but they won't disclose them."

Boyd also dismissed the possibility of a house pricing bubble.

"We don't think there is a bubble. I don't see prices falling off. The recipe for a bursting bubble requires four to five years of strong price growth, the cost of end-financing to shoot up, the availability of finance to rise suddenly and mass redundancies in the market," he said, adding that he could not see any of these happening.

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