Rents level off despite tight office supply

Despite the tight office supply situation in the Klang Valley, office rent had showed signs of levelling off in 4Q2008. Rents are expected to be on a downward trend in the later part of this year due to weaker demand for occupancy.

“Basically, there is no expectation for growth in office rent for the coming two years. The increase in rents we see today is the result of rents agreed earlier on,” says Knight Frank Malaysia executive director Sarkunan Subramaniam when presenting The Edge/Knight Frank Malaysia Klang Valley Office Monitor for 4Q2008. Sarkunan predicts that rents in 1Q2009 in the Klang Valley will be stable without much increase as a majority of companies are reassessing their business potential and thus deferring business decisions. Rents are expected to soften by about 10% by the end of the year, due to the uncertain market sentiment and the increasing building supply.

“The asking rents in newly-completed buildings have been revised to more competitive levels to attract tenants as it is taking a longer time to fill up the office space than what was anticipated earlier on,” he adds.

Compared with 3Q2008, the average rents of all three types of buildings — Prime A+, Prime A and secondary — sampled in the Golden Triangle (GT) area remain unchanged at RM9.67, RM6.17 and RM4.68 psf respectively, says Sarkunan.

The central business district (CBD) also experienced the same situation with rents remaining stable at RM4.52 and RM3.65 psf for its Prime A and secondary buildings respectively since the previous quarter. The CBD covers the Jalan Dang Wangi area, part of Jalan Ampang, Jalan Tun Perak, Jalan Petaling, Jalan Kinabalu, Jalan Raja Laut and its fringes.

Sarkunan says the economic uncertainty also adversely affected the confidence level in the corporate sector, including multinational corporations (MNCs), causing the companies to be more cautious in drawing up their expansion plans while at the same time trying their best to cut operational costs.

Without good reasons to expand business operations, Sarkunan says many companies will make use of the minimum lease renewal period of two years to stay put in their existing buildings before creating new demand for office space. “This in turn have a spillover effect, causing a weaker demand for office space in 4Q2008 and 1H2009,” he says.  

Furthermore, Sarkunan adds, the number of companies looking for relocation was fewer in 4Q2008, mainly due to uncertainties in terms of future business potential. “However, there are several MNCs especially those in oil and gas and manufacturing sectors, which are beginning to relocate and undertake consolidation exercises as part of their cost rationalisation. Right now, my advice is for companies to think of relocation to reduce operational costs. For example, by shifting operational branches into one single building instead of several branches operating at different locations in the Klang Valley.”

Companies operating in different countries may also consider centralisation by minimising physical operations through shared services such as payroll processing, human resources and in-house IT.

“In this regard, the shared services market here is still attractive compared to alternatives, such as India or the Phillipines, as our rents are still one of the lowest in the region,” says Sarkunan.

Bleak occupancy in 2009

Based on the sampling for the 4Q2008, the overall occupancy rate stood at an average of 95%. As seen in the previous quarter, the highest growth in average occupancy rate on a q-o-q basis was seen again in the secondary grade buildings in the CBD, from 80% to 91% in 4Q2008.

The average occupancy rates for both the Prime A+ buildings in the GT area and the Prime A buildings in Damansara Heights area stood at a strong 99%. Prime A buildings in the CBD area, improved a marginal 1% q-o-q to 97%.

Sarkunan says the increase of occupancy in CBD’s Grade A offices has been due to lower rents within the CBD. “However, this trend will not stay long as we have seen rents in KLCC starting to stabilise and this will have an effect of narrowing the gap of rents between offices in the CBD and the KLCC areas. Therefore, we foresee that companies may opt for the latter due to the more strategic business location,” he adds.
Of the three main areas surveyed — GT, CBD and Damansara Heights — the general average occupancy rates for CBD and Damansara Heights have increased. However, the average occupancy rate for GT remains the same at 96% as of 3Q2008.

The overall occupancy remains steady with a slight increase from 94% to 95% in 4Q2008. Sarkunan says this marginal increase is probably due to decisions on new office space take-up prior to September 2008.
According to Sarkunan, the supply of office space in 4Q2008 amounted to about 41.1 million sq ft within the GT and CBD areas and 12.3 million sq ft within the KL fringes (such as KL Sentral, Bangsar and Bukit Jalil).

A slight dip in occupancy rate is expected in 2Q2009 with new office space provided by buildings such as Quill 7 at KL Sentral (358,441 sq ft) and The Icon in Jalan Tun Razak, KL (507,265 sq ft).

“We will certainly experience a dip of occupancy of less than 5% by end-2009 when new office supply comes into the market,” says Sarkunan.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 746, March 16-22, 2009.