Commercial property still a good buy

Due to the tight supply and continued foreign interest in purchasing, on an en bloc basis, purpose-built Grade A office buildings in Kuala Lumpur in the past year, the commercial property segment of the market will remain a good bet in the short term.

Besides foreigners, real estate investment trusts (REITs) and property funds have also been on the hunt for commercial properties. The Macquarie Global Property Advisors' acquisition of the City Square Centre for RM680mil from Asia Pacific Land Bhd announced in mid-2006 and completed last year among one of the first.

The quarterly market reports of a number of property consultancies have also noted the continued interest among foreigners, in particular Middle Easterners and Singaporeans, in downtown Kuala Lumpur's commercial property development projects or in older Grade A office buildings.

Equity analysts are also bullish on the outlook for the property market, although they base it on broader fundamentals rather than just the commercial property segment.

In a market strategy report for the current quarter, Aseambankers Malaysia Bhd said the property sector “is expected to outperform” driven by strong earnings growth, firm domestic demand and single-digit price-to-earnings valuations after languishing for much of the second half of 2007.

“We particularly like companies and REITs with exposure to commercial property development in Kuala Lumpur, as rising foreign demand via en bloc sales will further boost capital values,” it said. It said that among foreign institutional purchasers, Kuwait Finance House (M) Bhd stood out with its acquisition of Glomac Tower from Glomac Bhd and the east wing of The Icon, Jalan Tun Razak, and The Icon, Mont'Kiara, from Mah Sing Group Bhd.

Interest in Malaysian commercial property is not limited to Middle Easterners only. Across the causeway, Singaporeans are participating in Malaysia's commercial property boom via property funds such as Injaz AsiaEquity Property Fund 1 and Quill Capita REIT, which was listed early last year.

Abu Dhabi merchant bank Injaz Mena Investment Co PSC and Asia Equity Partners Pte Ltd, a Singaporean fund manager, jointly launched the Injaz property fund in mid-2006. The fund acquired the Kenanga International building along Jalan Sultan Ismail from K & N Kenanga Holdings Bhd for RM165mil in late 2006 under a sale-and-leaseback agreement.

Quill Capita, which was jointly sponsored by the Quill group of companies, a Malaysian developer, and Singapore's CapitaLand Ltd, has so far acquired a total of RM549mil worth of properties as of end-2007, with a number of properties still to be injected into the REIT.

Foreign institutions such as Kuwait Finance House and CapitaLand are also partnering local developers to develop properties. CapitaLand is no stranger to the Malaysian property development scene, having partnered developers here for both residential and commercial property development. It also owns a stake in Menara Citibank near the Petronas Twin Towers.

Recently, it was announced that Malaysian Resources Corp Bhd, together with Quill Sentral Sdn Bhd and Kuwait Finance House, had entered into a joint venture to acquire a 1.85-acre site for RM133mil from Kuala Lumpur Sentral Sdn Bhd to build office towers in the KL Sentral area.

By The Star