Property: New supply will impact the market

Office space take-ups and rentals in downtown Kuala Lumpur are expected to slide in 1H 2010 but improvement in the oil and gas sector growth may cushion the downward slide, says Sarkunan Subramaniam, executive director of Knight Frank Malaysia.

An estimated 1,874,000 sq ft of new office space is expected to come on stream in 2010, and this will impact the market in the short to medium term, he says.

“Generally, when there is new supply, tenants have more choice and will be more selective and take a longer time to commit, resulting in low rental growth and low leasing activities,” explains Sarkunan when presenting The Edge/Knight Frank Klang Valley Office Monitor for 4Q 2009.

The new office buildings will give some of the older ones a run for their money, as they will have to upgrade to compete, adds Sarkunan.

Due to the competition between existing and new office supply, landlords are taking measures to maintain occupancy rates and entice new tenants with better leasing terms. Besides more competitive rents, they may offer also longer rent-free periods (of up to six months) and better general fit-outs such as carpets and blinds.

Among the new buildings are The Icon, Vista Tower and G Tower, all located along Jalan Tun Razak in Kuala Lumpur.  Knight Frank estimates rental rates for the new buildings  at RM6 psf to RM6.50 psf but notes that there could be further downward pressure.

Despite the measures taken by landlords, Sarkunan does not foresee that companies that relocated outside the city centre will move back.

“The decentralisation trend is a macro trend and will not change due to cheaper rents in the city. Besides, some of the newer buildings in the suburbs and on the fringes of KL are very attractive in rent,” says Sarkunan.

Landlords facing the current downward trend in occupancy and rental rates may however see the market pick up in 2Q due to new business activities such as Petronas’ new oil and gas contracts and the granting of new banking licences to foreign banks such as the Industrial and Commercial Bank of China Ltd.

“There may also be a pick-up in economic activities due to the anticipated liberalisation measures that the government is undertaking,” adds Sarkunan.

However, he cautions that the pick-up could be tempered by external factors, such as global economic conditions like the recent Dubai debt debacle. On the domestic front, potential political unrest, interest rate hikes and inflation could affect the momentum. 

For the quarter under review, the rents sampled either dipped marginally or remained unchanged. On average, rents retreated by 0.6% to RM5.08psf from 3Q 2009, while overall occupancy declined to 93% from 94% in 3Q.

In the Golden Triangle (GT), the average rental rate is RM5.86 psf, a marginal decline of 0.1% from 3Q, while in the Central Business District (CBD), average rents declined by 1% to RM3.93 psf.

On the fringe of the city centre, the average rental rates for Damansara Heights (DH) stands unchanged at RM4.30 psf.

Occupancy for GT and DH, meanwhile, remained unchanged from the previous quarter, standing at 94% and 93% respectively. However, the CDB experienced a decline of 2% from 3Q, registering 95% occupancy.

On the investment front, 4Q 2009 saw two major transactions taking place; the acquisition of Kenanga International Building in Jalan Sultan Ismail by Permodalan Nasional Bhd (PNB) and Mah Sing Group Bhd’s The Icon East Wing by TS Law Realty Sdn Bhd along Jalan Tun Razak.

Kenanga International Building, with a net lettable area of 367,511 sq ft, was sold for RM250 million (RM680 psf) on Dec 17, 2009, while The Icon East Wing with a net lettable area of 278,128 sq ft was sold for M226.5 million (RM814 psf) on Dec 29, 2009. According to Sarkunan, the office market has seen a correction in values since the beginning of 4Q and yields have since increased. “There is a growing interest in the office market as investment interest slowly returns,” he says.

With the government heading the push towards greener buildings and increasing social awareness, the demand for green buildings is likely to grow.

“In today’s market, green buildings are important in order to attract multinational companies and large corporations,” says Sarkunan.

Emkay Group has announced that the group is developing a 5-storey green building in Cyberjaya. The building, with a net lettable area of 323,000 sq ft, will be the first building in Malaysia to be accredited the internationally recognised Leadership in Energy and Environment Design (LEED) Gold certification.

The RM120 million building is scheduled for completion in 2011 and will be leased to Shell Shared Service Centre.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 791, Feb 1-7, 2010.

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