KL office sector challenging

The commercial sector outlook is expected to be challenging with supply exceeding demand, property consultants and analysts say.

Property services group CB Richard Ellis (M) Sdn Bhd's second quarter research report says the Kuala Lumpur office sector will continue to be challenging in the coming quarters.

The amount of new supply over the course of the next five years is expected to increase the city centre's current supply by a quarter, adding further pressure to this segment of the property market.

“Rentals are not likely to see significant iincrease in the near term due to a series of upcoming completions (which will add to the supply). However, on the demand side, we are seeing a high level of absorption as a result of upgrading or expansion, particularly in the oil and gas sector,” it says. The report says this will, to some extent, stabilise a potentially weakening market.

Moreover, it says the Government's initiatives to further lift Kuala Lumpur's position as a global city and its aim under the Economic Transformation Programme to attract 100 multinational companies to set up their regional headquarters in the city by 2020 would ease some of this pressures.

During second quarter 2011, it says only one office building was completed.

Located on Jalan Perak in the KL Golden Triangle, Menara Bank Islam offers a total of 355,000 sq ft of net lettable area.

“Average gross asking rents for existing Grade A space are still flat, with the majority of existing buildings in the RM6 to RM7 per sq ft range. A few city centre buildings, such as Vista Tower, Menara Dion and Menara IMC, have gross asking rents of RM8 per sq ft or higher, while Petronas Twin Tower 2 and Menara Maxis are in the RM10 per sq ft range and above,” CBRE says.

Given the quantity of office supply projected to complete during the next two years, it is unlikely the majority of landlords will have any significant leverage to raise rents.

The total supply of office space in the Klang Valley stood at 80.9 million sq ft as of the second quarter, up from 80 million sq ft in the first quarter.

“Rentals have generally remained static in second quarter with average gross asking rents for selected prime buildings in the Kuala Lumpur City Centre (KLCC) at RM7.18 per sq ft,” it says.

The market is aware of the supply-side risk and expects a large quantum of new office supply to come online over the course of the next few quarters, which may further pressure office rentals to trend downwards.

The KLCC office market expects to see an additional supply of 2.35 million sq ft and 1.9 million sq ft in the second half this year and 2012 respectively. This location will also face competition from suburban areas where about 1.7 million sq ft of office space is due to be completed within the next six months.

“Concerns remain about the impending supply, but the first impact of this should not be felt until later this year or early 2012 when buildings such as Menara 3 Petronas, Menara Binjai and Menara Worldwide are completed,” it says.

Consultancy CH Williams Talhar & Wong Sdn Bhd (WTW), in its Property Market Outlook report for the second half of this year, says the Klang Valley office sector remains a tenant's market with a large amount of space available for leasing.

The WTW report points out that landlords of newly-completed buildings continue to offer two to three months free rental to attract tenants.

“Recently constructed or refurbished office buildings are securing new leasings at a much slower rate. There are also office buildings along Jalan Tun Razak which have remained largely untenanted for more than two years since their completion in 2008 and 2009,” it says.

In the first half of this year, purpose-built office space in KLCA (Kuala Lumpur Central Area) accounted for 40.1 million sq ft. About 6 million sq ft will be completed by the end of 2014. Of this, about 4 million sq ft in nine buildings will be located in the golden triangle.

WTW managing director Foo Gee Jen is reported to have said that while there were no new developments completed in the first quarter of this year, over 3 million sq ft of new office space will come online by the end of this year.

Foo says the average occupancy in the golden triangle registered slightly below 90% in the first half, compared to 91%-93% in the last two years.

Average rental and net yield of prime office space in KLCA registered at about RM6.50 per sq ft and 6.5% respectively as in the first half.

HwangDBS Investment Management Bhd head of equities Gan Eng Peng says rental yields are falling, while vacancy rates and debt costs are rising. Coupled with tighter regulations to curb speculation, the commercial property cycle has peaked (for the time being). “Drive around the usual Klang Valley hot spots such as KLCC, Solaris Dutamas, Solaris Mon't Kiara, Bangsar, Kota Damansara and Damansara Perdana and you can see many unoccupied units,” he says.

He adds that given the current skyhigh prices, it is wiser to wait till the dust settles before investing in properties, especially business units.

“This is due to the large supply and murky economic outlook as a result of a mixed set of data from the US economic growth, emerging markets' inflationary concerns and Europe's sovereign debt fiasco,” Gan says.

The Knight Frank Research report says the office market is expected to remain competitive given the abundance of incoming office supply scheduled for 2011.

It says tenant-favoured market sentiment will continue to prevail and rental levels in general, may remain flat or decline slightly while the office take-up rate in existing buildings is expected to remain modest in the year ahead.

By The Star