'Quite Sizeable' Office Market

22 August 2015

Business News, The Star - Despite a rapidly growing supply and intensifying competition amid a tenant's market where opportunities to shop around are plenty, good offices in central locations, especially within Greater Kuala Lumpur (KL), will continue to do well.

According to Savills Malaysia Executive Chairman Chris Boyd, the office market within Greater KL is already "quite sizeable".

"The office market is expected to reach 100 million sq ft this year. That's bigger than Singapore and on par with Bangkok and Manila," he tells StarBizWeek.

Greater KL refers to an area covered by 10 municipalities surrounding Kuala Lumpur, each governed by local authorities, namely Kuala Lumpur City Hall, Perbandaran Putrajaya, Shah Alam City Council, Petaling Jaya City Council, Klang Municipal Council, Kajang Municipal Council, Subang Jaya Municipal Council, Selayang Municipal Council, Ampang Jaya Municipal Council and Sepang Municipal Council.

Boyd says the office market in Greater KL currently stands at around 97.7 million sq ft. "That puts occupancy rates at around 85%. Vacancy rates are at 15%."

However, Boyd says the office market in Malaysia has a cyclical trend. 

"There will be short periods of undersupply, followed by long periods of oversupply. The last undersupply period was back in 2008, during the global financial crisis."

Boyd points out that demand for office space in KL is traditionally driven by the oil and gas (O&G) and banking/finance sectors.

But with oil prices going down, O&G players will be cautious about expanding or relocating this year.

"Because of this, many O&G firms have put their expansion plans on hold. Moving, costs a lot of money. So right now, many are just waiting and making use of their existing space."

According to Boyd, with at least 17 million sq ft scheduled to be completed by end-2017 in Greater KL, occupancy rates are set to deteriorate in 2015 and beyond, and could be less than 80% overall in two to three years.

Despite the strong supply growth in city centre area since 2009, landlords of new, better quality buildings have remained steadfast and, for the most part, held rents firm or raised them only slightly.

"Landlords don't like to reduce rents because then they have to hold it through two or three renewal terms. They would rather hold the rents and maybe offer rent-free periods."

Boyd says it is common for landlords to offer rent-free periods for up to three months.

He adds that older, less highly-specified buildings are likely to struggle even more as landlords look to retain tenants.

"There is demand for good quality suburban space. In the past, it was normal to build low-specified buildings in sub-urban areas."

"But today, that doesn't work anymore. That would be a mistake. Today, you need to build high-specified buildings if you want to attract good tenants."

Early this year, global agents Savills acquired a substantial shareholding in local property consultancy firm, CB Richard Ellis (CBRE) Malaysia. The firm started trading under the Savills brand from March 1.

According to Savills Malaysia's latest Asian Cities report, office space within Greater KL stood at 96.6 million sq ft as at last year - a 2.9% increase from 2013.

Three office buildings were completed in KL during the second half of 2014, namely Menara Hap Seng 2, Menara MBMR and Sunway Velocity V Office.

These three buildings represent about 720,000 sq ft of additional office space. In total, about 2.9 million sq ft of office space was completed in Greater KL in 2014, which is less significant than in 2013, which saw a completion of 5.1 million sq ft, with a substantial portion of that new supply located in KL Sentral.

Gross passing rents did not see any significant increase between the first and second halves of 2014, averaging RM7.79 per sq ft per month against Rm7.76 per sq ft six months earlier.

The overall vacancy rate in Greater KL stood at 13.1% as at the second half of 2014, which is an improvement compared with the first half of 2014 (14.2%), thanks to a moderate number of completion recorded which gave the occupancy rate the opportunity to improve.

 
 

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