KL building boom may struggle to find takers

 

By Lee Wei Lian and Yow Hong Chieh

August 13, 2010

Upcoming projects and increasing traffic congestion will deal a double blow to Kuala Lumpur’s Golden Triangle area. — Reuters pic

KUALA LUMPUR, Aug 13 — Nearly 15 million sq ft of new office space is in the pipeline in the greater Kuala Lumpur area between now and 2014, and could result in fierce competition to find tenants to fill it up.

This includes about five million sq ft in the city’s Golden Triangle central business district (CBD) and office rental rates are already feeling the pressure. The bulk of the new office space is expected to be completed in 2012 as developers bank on the oil and gas along with the financial services sectors to drive demand.

Decentralisation has also hollowed out the CBD with many multi-nationals moving to areas like Damansara Heights, Mid Valley and KL Sentral, lessening the city centre’s appeal as a financial and corporate hub.

One developer of a completed office tower near KLCC said he was worried about the looming oversupply and a “herd mentality” among developers.

“Who is going to fill up all this new office space?” he said to The Malaysian Insider.  “The developers rushing to develop new office towers are all having a herd mentality.”

A Mah Sing Group leasing and marketing executive said that competition was particularly stiff along Jalan Tun Razak, where the group’s newly completed Icon development has to compete with rivals G-Tower, Integra and The Intermark, which offer a total net lettable area (NLA) of about 2.2 million sq ft.

“The market is now very competitive so we have to work very hard,” the executive said, adding that only 30 per cent of Icon was currently occupied.

He was confident, however, that Mah Sing will be able to achieve an occupancy rate of 70 to 80 per cent for Icon’s more than 500,000 sq ft NLA by the end of this year.

A report by property consultancy DTZ

Research shows that office rents continued to drop marginally over the second quarter due to the anticipated incoming supply, which has led to a tenants’ market with the ability to negotiate cheaper rates upon renewal as well as when signing new leases.

Brian Koh, executive director of DTZ Research, said that there are concerns pending supply would put downward pressure on rental yields.

“Growth in demand may lag substantially behind supply,” he said.

DTZ Research figures show that average prime office rents fell from RM6.02 per sq ft per month in the first quarter of this year 2010 to RM6.00 per sq ft per month in the second quarter.

The report forecasted further downward pressure on office rents due to significant levels of new supply over the next few years as intense competition is anticipated amongst new office buildings to secure tenants.

The stakes are high as the revitalisation of Greater Kuala Lumpur has been identified as one of 12 National Key Economic Areas (NKEA) under the Najib administration’s ambitious 10th Malaysia Plan (10MP).

Elvin Fernandez, managing director of property valuer Khong & Jaafar, said the commercial property market will benefit from better fundamentals should the New Economic Model (NEM) and 10MP succeed, despite the 88 million sq ft of office space already available.

“All optimism is hinged on the new Malaysia,” he cautioned.

Fernandez said it was important for rentals to increase from current levels but added that there had to be demand for sizeable spaces of 10,000 sq ft or more for that to happen.

“This must come from expanding local companies and the establishment of new companies, preferably foreign companies attracted by Malaysia’s new openness,” he said.

“We hope this will happen soon and in a substantial way,” said Fernandez.

The city, however, has to compete with mini CBDs like Damansara Heights and KL Sentral that have cropped up outside the city as the lack of a comprehensive master plan for developing a world-class central business district and traffic congestion helped drive the decentralisation of Kuala Lumpur.

Upcoming mega-projects under the 10MP such as the 85-acre KL Financial District, the redevelopment of the 3,300-acre Rubber Research Institute Land in Sungai Buloh and the 400-acre redevelopment of the Sungai Besi Airport is also expected to impact the KL property sector.

OSK Research said in a recent report that the 10MP projects could threaten the prospects of commercial properties in the Golden Triangle and, in the long run, the larger part of the Klang Valley if the developments are rushed and traffic congestion worsens.

Not all analysts are negative on the incoming supply however.

RAM Rating Services acknowledged that the owners of new buildings may also find it a challenge to fill up their buildings if they have not already pre-let the space but the incoming supply is not expected to have a significant adverse impact on the office sector in KL.

“Historically, annual occupied office space in KL has been largely on an increasing trend,” said RAM.