Rising KL office supply draw mixed views, may affect REITs

KUALA LUMPUR:  Office-based Malaysian real estate investment trusts (M-REITs) may see some pressure given the planning of more office space coming onstream in the coming years, according to property players.

However, some REIT managers said this is not a huge cause for concern as it will take a while for new supply to come onstream and that demand for office space should rise over the next few years given the government’s Economic Transformation Plan (ETP).

“The ETP is supposed to create more jobs as we move towards becoming a services-based economy; with the new jobs will come new companies and new offices,” AmFirst REIT CEO Lim Yoon Peng told The Edge Financial Daily.

“There appears to be an overhang in supply at this point, but by the time the new offices are completed in three to four years, there should be stronger demand especially with more foreign financial institutions coming in.”

In Budget 2011, Prime Minister Datuk Seri Najib Razak announced the RM5 billion 100-storey Warisan Merdeka along with the RM26 billion development of the Kuala Lumpur International Financial District (KLIFD).

The Warisan Merdeka project, to be developed by Permodalan Nasional Bhd (PNB), is expected to house the fund manager’s offices, and it has a gross floor area of three million sq ft.

Hall Chadwick Asia chairman Kumar Tharmalingam concurred with Lim. “The first project (as announced during Budget 2011) will only come to fruition in 2015 at the earliest,” he said, adding that despite the new office supply, there was still a shortage of grade-A office space in KL city.

“The new developers will have to create a new market for their space to stop existing tenants from playing musical chairs, moving from one new building to another. I believe a strategy will emerge before the first building is complete.”

Data from the National Property Information Centre (Napic) showed that in 3QFY10, office space in Kuala Lumpur saw an occupancy rate of 80.5% with 58.51 million sq ft of the 72.67 million sq ft taken up.

The data also showed that during the quarter, some 839,377 sq ft of office space was completed. Another 10.41 million sq ft of office space is expected to come onstream, with 8.56 million sq ft being already under construction while construction began on another 1.85 million sq ft.

Research house InsiderAsia estimates that the average annual take-up rate of office space in Kuala Lumpur was 1.72 million sq ft from 1985 to 2009. Based on this calculation, it means that the incoming office supply in 3QFY10 alone is about six years’ worth of average office occupancy.

But that is not the end of it. According to Napic statistics, another 6.21 million sq ft of new office space supply is being planned in Kuala Lumpur. Some of these projects may not take off, but if they do, they are equivalent to another 3.6 years worth of annual take-up.   

According to a quarterly report on the Kuala Lumpur office market by CB Richard Ellis (CBRE) (Malaysia), another 1.7 million sq ft of office space is scheduled to be completed by end-2010, including Hampshire Place Corporate Office Tower and Menara Worldwide in the Golden Triangle, Capital Square Office Tower 2 in the CBD and BRDB Office Tower, BZ-HUB @ One Mont’ Kiata and Menara Ireka @ One Mont’ Kiara.

The real estate advisers estimate another 3.5 million sq ft of office space to be completed in KL in 2011, with an additional 4.9 million sq ft in 2012, and plans for a further 11 million sq ft beyond that. In terms of outlook, CBRE expects supply to accelerate from the second half of this year until 2013.

Contrary to market expectations, the budget did not yield any incentives for the M-REIT sector. It had been earlier speculated that the government could be looking to reduce or remove entirely the 10% withholding tax for REIT investors.

However, Kumar, who is also CEO of Malaysia Property Inc (MPI), said that the removal of the withholding tax could be done at any time.

“REIT managers have to show the authorities that the loss of revenue from the tax can be recovered by other means by the actions of the managers to grow their business,” he said.

Meanwhile, Lim said it was likely that the government may review the withholding tax in the 2012 budget announcement as the present regime was due to expire on Dec 31, 2011.

Among the M-REITs, UOA REIT and Tower REIT are primarily office REITs, while AmFirst REIT, Quill Capita Trust and AmanahRaya REIT see a mix of office, commercial, hotel, industrial and education.

In terms of market capitalisation, the two diversified REITs — AmanahRaya and AmFirst — are the highest at RM515.9 million and RM510.51 million, respectively, followed by Quill Capita at RM397.93 million as at Oct 20, 2010.

Meanwhile, the two office-based M-REITs, namely UOA and Tower, have market capitalisations of RM364 million and RM342.21 million, respectively, as at Oct 20.

In a note, RHB Research said office REITs were struggling to achieve positive rental growth given the unstable economic environment.

“Furthermore, the oversupply of office space in Kuala Lumpur city centre exerts pressure on rentals,” it said in an Oct 20 note on Quill Capita Trust.

“Although the outlook is less exciting compared to retail and industrial REITs, we believe 7% to 8% dividend yield for Quill Capita is still sustainable.”

The brokerage firm had an outperform call on Quill Capita with a fair value of RM1.23 and a 7% target yield for M-REITs.

In terms of areas that would see strong demand for office space going forward, Kumar said KLCC remained at the top of the list, with strong rentals in regional high-population areas in the Klang Valley, such as Puchong, Damansara and Shah Alam as people prefer to work closer to home.

This article appeared in The Edge Financial Daily, October 21, 2010.

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