KL Office rental market monitor Qtr 2, 2012

City&Country: The Edge/Knight Frank Klang Valley office monitor (2Q2012)

By Jacqui Chan of The Edge Malaysia Sunday, 09 September 2012 00:00

KL office rental rates to hold firm

The Kuala Lumpur office rental market is expected to remain stable despite the substantial impending supply in the next three years.

“Overall rental rates are expected to hold firm in the short to medium term with well-located good grade office buildings continuing to enjoy good occupancies,” says Sarkunan Subramaniam, executive director of Knight Frank Malaysia, when presenting The Edge/Knight Frank Klang Valley Office Monitor for 2Q2012.

He expects the greatest level of downward pressure on occupancy and rental levels resulting from the impending supply to be largely felt by secondary office buildings equipped with inferior specifications.

“With most of the upcoming office buildings having green credentials in line with existing demand for green office space, this will put further pressure on developers and owners to take proactive measures to remain competitive in the market,” says Sarkunan.

In an effort to entice new tenants and to maintain occupancy levels, some landlords are willing to offer added services such as providing free shuttle bus services to the nearest light rail transit (LRT) stations.

However, says Sarkunan, while the office market remains favourable for tenants, demand for good grade office space is expected to pick up in the short to medium term with concerted efforts by InvestKL to attract multinational companies and foreign participation in the ongoing mass rapid transit (MRT)-related works.

InvestKL is a government entity under the purview of the Ministry of International Trade and Industry and the Ministry of Federal Territories and Urban Wellbeing. It is entry point project No 1 under the Greater Kuala Lumpur/Klang Valley National Key Economic Area.

MRT Corp Bhd, the owner of the Klang Valley My Rapid Transit project, has awarded 33 contracts worth RM15.5 billion for the Sungai Buloh–Kajang line. Another 31 contracts will be awarded by year-end.

With the commencement of construction works on the MRT system, the MRT-related companies are taking up large office spaces. An example is MMC Corp Bhd, which has taken up about 60,000 sq ft of office space in Southgate in Sungai Besi.

While the MRT line and the extension of the LRT lines are good news for many, building owners in the city centre in particular might not be thrilled.

“The development of the MRT and LRT lines is expected to accelerate the decentralisation of office space as accessibility and connectivity between the city centre and these fringe locations will be greatly enhanced. This augurs well for office developments in upcoming locations but buildings in the city centre may face further pressure as competition intensifies,” says Sarkunan.

Quarterly performance The quarter saw the completion of only one office building — Menara Felda in Jalan Stonor — with an approximate net lettable area of 559,000 sq ft. This brings the total cumulative supply of office space in the city centre to 47 million sq ft while that of the city fringe stands at 17.5 million sq ft. An additional 1.5 million sq ft of space will come on-stream by 2H2012 in the city centre while about 600,000 sq ft will be available in the city fringe by end-2012.

During the quarter under review, offices in both the city centre and city fringe saw improvements in the overall average occupancy with corresponding increases in the overall average rental rate.

The overall average rental rate of the city centre registered an increase of 1.1% q-o-q to RM5.68 psf while that of the Golden Triangle (GT) and the central business district (CBD) increased 1.2% and 0.9% to to RM6 psf and RM4.48 psf respectively.

In the city fringe, the overall average rental rate was up 2.1% q-o-q to RM5.34 psf. KL Sentral (KLS) recorded the highest overall average rental rate increase of 7.7% from the previous quarter at RM7 psf while offices in Mid Valley City (MVC)/Bangsar/Pantai saw a marginal increase of 0.2%. The average rental rate in Damansara Heights (DH) remained unchanged.

Sarkunan attributes the substantial rise in rental rates in KLS to the entry of Green Building Index and Singapore Building Construction Authority Green Mark-certified Platinum Sentral, which recorded an average rental of RM8.50 psf. The building is also nearly fully occupied.

The average occupancy rate in the city centre rose 1.4% q-o-q to 81.6% with the GT recording 2.1% growth to 82% and the CDB declining 1.6% to 80%.

The overall average occupancy rate increased 8.1% q-o-q to 80% with DH’s average occupancy rate staying the same and that of KLS rising 0.5% q-o-q to hit 96.5%. MVC/Bangsar/Pantai, however, saw a whopping 15.2% increase in its average occupancy rate from the last quarter. This was due to The Horizon Phase 2 in Bangsar South, which saw major improvements in occupancy during the quarter.

“Well-located good grade office space continues to see average rental holding steady with Prime A+ office space in GT recording an average rent of RM9.52 psf and Prime A office space in KLS recording an average rent of RM7.75 psf,” says Sarkunan.

The oil and gas, IT and financial sectors remain the dominant sectors in the commercial leasing market. Oil and gas-related companies are continuing their expansion plans with both local and foreign firms setting up their operation centres, notes Sarkunan.

Notable developments Crowne Plaza Mutiara Hotel and Kompleks Antarabangsa in Jalan Sultan Ismail will be demolished to pave the way for a RM6 billion mixed-use development project, Tradewinds Corp Bhd (TCB) has confirmed. The 2.8ha plot will comprise grade A+ offices, serviced apartments and retail space. The project, which will reportedly be named Tradewinds Centre, is scheduled for completion in seven years.

The Malaysian Rubber Board (MRB) has awarded the RM1.4 billion development on 2.2ha in Jalan Ampang, Kuala Lumpur, to Crest Builder Holdings Bhd and its 49% joint-venture (JV) partner, Detik Utuh Sdn Bhd. Known as Lot 76, the plot is located opposite the Great Eastern Mall. The development will comprise one office block, two SoFo (small office, flexi office) blocks and an apartment block atop a retail mall and will be developed over seven years.

Crest Builder Holdings Sdn Bhd via its 51%-owned subsidiary, Landasan Bayu Sdn Bhd, will embark on a mixed-use property development on a 4.76-acre tract located at the intersection of Jalan Ampang and Jalan Jelatek in Kuala Lumpur. The mixed-use development has an estimated gross development value (GDV) of RM1.33 billion.

Work will start on the mostly vacant Pantai Plaza in August in stages. Located along the Federal Highway, the plaza, renamed Bangsar Trade Centre, will have a wholesale centre for the F&B and hospitality industry. The RM850 million project will also have offices, a convention and exhibition centre and a hotel.

Island Circle Development (M) Sdn Bhd will develop a mixed-use development named Pacific Star in Section 13, Petaling Jaya. It will be a JV with contractor JAKS Sdn Bhd with a GDV of RM900 million. Glomac Bhd may soon ink an en bloc deal with an investor looking to buy its proposed integrated commercial complex with an estimated GDV of RM300 million. It comprises a high-rise office tower, an office suite and a mall on 1.45ha in Kelana Jaya.

Axis REIT’s trustee will be acquiring Wisma Academy and the Annex in Petaling Jaya for RM85 million from Academy Resources Sdn Bhd. Wisma Academy is a six-storey office/warehouse building while the Annex is a 2-storey showroom. Upon completion of the acquisitions, Axis-REIT will have a portfolio of 32 properties and manage assets worth over RM1.5 billion.

DKLS Industries Bhd will acquire the 14-storey Tower 8, Avenue 5, office building from Nasib Unggul Sdn Bhd for RM93.8 million or RM938 psf over the lettable area. The building is part of The Horizon Phase 2 in Bangsar South, which was completed in 2011. It has a gross floor area and lettable area of approximately 132,000 sq ft and 100,000 sq ft respectively.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 923, Aug 13-19, 2012

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