Competition for tenants expected to intensify


The decentralised office market on the fringes of Kuala Lumpur city has seen tremendous growth in the past few years, with office space supply growing 89.5% from 2005 to 2010, compared with 12.8% growth in the city centre over the same period.

Total office space supply in the city fringes, including Damansara Heights, KL Sentral and Mid Valley City, currently stands at 15.28 million sq ft, with another 6.02 million sq ft under construction.

In view of this, The Edge/Knight Frank Klang Valley Office Monitor has included the rents and occupancy rates of offices in KL Sentral (KLS), Mid Valley City (MVC) and Bangsar/Pantai in the monitor. The monitor is now made up of two indices — for the city centre and for the city fringes.

“Previously, we only tracked Damansara Heights (DH) offices but today, the decentralised office market is much more than just DH. Over the last three to fours years, we have also seen the emergence of areas such as Bangsar South and the ever-expanding Mid Valley City (MVC) and KL Sentral (KLS) office markets. The decentralised office market has grown beyond DH, and has become a significant force,” says Knight Frank Malaysia executive director  Sarkunan Subramaniam when presenting The Edge/Knight Frank Klang Valley Office Monitor for 3Q2011.

The KLS/MVC/Bangsar/Pantai area has Jalan Jelutong (Taman SA) to the north, Jalan Damansara to the east, Jalan Bangsar and Jalan Lingkaran Syed Putra to the southeast, New Pantai Expressway to the south, Jalan Angkasa and Jalan Kerinchi to the southwest and the Sprint Highway to the west.

In KL city centre, which consists of the Golden Triangle (GT) and the central business district (CBD), office space supply currently stands at 44.87 million sq ft, with another 5.31 million sq ft under construction. About 4.08 million sq ft of space is expected to be completed by end-2012.

In the overall market, an estimated 2.8 million sq ft of new space is scheduled to come onstream by end-2011, including Menara Petronas 3 (Lot C KLCC), Crest on Jalan Sultan Ismail, Persada Putra, Menara Worldwide, Bangsar South The Horizon Phase 2, Lot E KL Sentral Park and Dua Sentral Corporate Office Tower (formerly known as D’Tiara).

“We expect the competition for tenants to intensify. This may lead to more favourable and competitive leasing terms upon renewal and new signings, thus putting further pressure on rental and occupancy rates,” says Sarkunan.

However, he notes that enquiries and leasing activities for well-located, quality and good grade office space with Multimedia Super Corridor (MSC) status and green features remain encouraging, due mainly to the limited supply of such prime space.

“At least 20% to 30% of the enquiries we receive insist on an MSC-status building. A good number of them are from overseas and one of the reasons for this is the tax incentive,” says Sarkunan.
As for the interest in green offerings, most enquiries are not for certified green buildings, but for buildings with green features, although Sarkunan believes certified green buildings will be the next wave as companies become more environmentally conscious and the green concept becomes part of their corporate social responsibility practices.

“Green certification is a plus point but not much of a deal breaker. Still, it does give the building an edge. About 10% to 20% of our enquiries are for green features,” says Sarkunan, adding that it is likely more older buildings will be upgraded and refurbished in order to stay competitive.

“We are already seeing this trend. It’s not a matter of increasing rents but to stay competitive and, in some cases, to survive,” he says.

Sarkunan cites Menara Citibank in Jalan Ampang as an example of a building trying to compete by upgrading to the level of newer buildings. Upgrading works have started and are expected to be completed by 2013.

Measures that landlords can take to retain tenants include keeping abreast of the latest trends where tenants are concerned, establishing and maintaining good rapport with them and hiring a professional property management team, Sarkunan adds.

“In today’s market, you need to be proactive. Listen to your tenants and be flexible with reasonable requests, especially when it comes to leasing agreements. One of the worse things a landlord can do is to adopt a ‘take it or leave it’ attitude during leasing negotiations,” he says.

Sarkunan suggests hiring a public relation executive to deal solely with the tenants on matters not related to leasing agreements. “You need that PR face, someone who listens and build relationships with tenants. It’s no more just about the building; it’s about the people too.”

On a larger scale, InvestKL, a government entity under the purview of the Ministry of International Trade and Industry, and the Ministry of Federal Territories and Urban Wellbeing, has an ambitious target to attract 100 multinational companies by 2020. The Kuala Lumpur High Speed Rail (HSR) project is expected to appeal to companies looking to operate in Iskandar Malaysia or Kuala Lumpur.

Sarkunan believes these government initiatives have the potential to help cushion the high amount of office supply coming onstream and translate that into improved absorption rates for the office sector.

Performance
Overall prime office rents in KL city and the city fringes were unchanged from the previous quarter, while occupancy rates in GT and Mid Valley saw a marginal increase.

The overall rents in the city centre remains at RM5.18 psf, with GT and CBD at RM5.56 psf and RM4.02 psf respectively. The data for DH, which used to be included in the overall data for the city centre, now comes under the index for the city fringes.

In the city fringes, overall rents were also unchanged from 2Q at RM5.14 psf, with DH, KLS and MVC/Bangsar/Pantai at RM4.30 psf, RM6.43 psf and RM5.32 psf respectively.

The overall occupancy rates in the city centre rose a marginal 0.5% from the previous quarter, to 83.5%. The increase came from GT with 84.2%, up 0.6%, while CBD rates remained at 82.4%.
The overall occupancy rate in the city fringes rose to 89%, up 1.6% from the previous quarter. DH and KLS stayed at 88.9% and 96% respectively, while MVC/Bangsar/Pantai saw an increase of 3.3% from the previous quarter, registering 88% in 3Q2011.

Notable announcements
In 3Q2011, there were several major office developments. In July, MBM Resources Bhd (MBMR) held a groundbreaking ceremony for its new RM240 million 24-storey Menara MBMR project that will replace the Federal Auto building on Jalan Syed Putra.

Some 70% of Menara MBMR, expected to be completed by 3Q2014, has been sold since its launch in May. It is the only freehold, Green Building Index-certified (GBI) Grade A office building in the vicinity of Mid Valley City. It is also aiming for MSC status and will have a full-fledged service office to cater for automotive-related ICT start-up companies that the MBMR Group plans to nurture. Menara MBMR will offer 135 units, ranging from 1,060 to 3,836 sq ft and equipped with individual air-conditioning systems.

The Employees Provident Fund (EPF) is purportedly the new owner of the 29-storey office building Quill 7 in KL Sentral. Quill 7 (previously known as Tower D, Lot J at KL Sentral) has a total net lettable area (NLA) of 356,759 sq ft and is developed by Quill Realty Sdn Bhd. The building, which enjoys almost full occupancy, commands an average rent of RM7 psf. Its tenants include Axiata Group Bhd and Nokia Siemens Networks Sdn Bhd.

KLCC Property Holdings Bhd (KLCCP) is looking to develop Lot D1, a 0.6ha plot adjacent to the Mandarin Oriental Hotel. This mixed-use development will have a retail component and serviced apartments or retail and office, depending on the prevailing market demand. It is also refurbishing the 26-year-old Menara Dayabumi and expects to complete works by year-end. The refurbishment of the 36-storey office building will be carried out in two stages and will cost RM30 million to RM40 million. KLCCP is also planning the redevelopment of City Point, a six-storey office-cum-retail-podium next to Menara Dayabumi.

Bandar Raya Developments Bhd (BRDB) has handed over CapSquare Tower to Union Investment Real Estate Gmbh (UIRE) of Germany. The Grade A office block has 41 floors and about 600,000 sq ft of NLA. UIRE purchased the tower for RM440 million in January 2008, marking their first foray into the local property market.

In early September, Ambang Sehati Sdn Bhd, the major shareholder of BRDB, offered to purchase a number of the developer’s assets, including Bangsar Shopping Centre (BSC) and Menara BRDB located on Jalan Maarof.

The total preliminary disposal consideration for the portfolio of assets, including CapSquare Centre in Kuala Lumpur City and Permas Jusco Mall in Johor Baru, is about RM914 million. The indicative value for BSC and the 12-storey Menara BRDB (combined NLA of 531,503 sq ft) is RM700 million. However, following subsequent deliberations between the parties, BRDB decided to dispose of its assets in a tender exercise, in which Ambang Sejati will also be invited to participate.

Bangunan Shell Malaysia in Damansara Heights has been put up for sale for an estimated RM140 million. The 25-year-old property comprises a 12-storey tower and a basement car park. It is located adjacent to Wisma Chase Perdana on Changkat Semantan. Its NLA is 212,867 sq ft.
Shell Malaysia occupies the entire building on a leaseback arrangement that expires on Sept 15, 2012, with an option to extend the tenancy on a quarterly basis up to Sept 15 2013. Rental rates in the area are around RM4 to RM4.50 psf inclusive of service charge.

Multi-Purpose Holdings Bhd (MPHB) entered into a sale and purchase agreement with the Malaysian Chinese Association (MCA) on Sept 26 for the proposed disposal of Menara Multi-Purpose office tower and its 414 parking bays in the Capital Square development for RM375 million or about RM693 psf. The 17-year-old building, which has an NLA of 541,424 sq ft, is 99% occupied and commanded a monthly rental income of about RM2.1 million as at July 2011.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 885, Nov 21-27, 2011