Overview – Outlook 2015 & Hot Picks

Kuala Lumpur commercial office market remained stable with resilient occupancy and rental rates despite completion of a number of office buildings in 2014 which adds further to existing excess supply. The continuous strong growth of Malaysia’s economy coupled with strong demand particularly for new green buildings in prime locations from MNCs as well as the excitement caused by on-going MRT and LRT extension projects helped to keep the Kuala Lumpur commercial office market healthy and active with leasing enquiries. The year 2014 also witnessed many new spaces were taken up in new buildings at the expense of older buildings due to the increasing preference for higher quality buildings.

According to NAPIC’s First Half 2014 Property Market Report, the  existing supply of purpose-built office space in Klang Valley as of H1 2014 stands at approximately 138.90 million sqft with an average occupancy at 81.46%, improved slightly from 80.74% recorded in 4Q 2013. KL City accounts for 48.58% of the total supply while 12.07% comes from KL City Fringe. The remaining 39.35% are from WP Putrajaya and Selangor. Occupancy rate for Kuala Lumpur commercial office market lingers around 80% in 2014 which is still very healthy, proving that the market has not reached a glut situation although there is a bit of oversupply. Overall, the office market moved along positive trend with improved occupancy rates by sustaining good take up rates particularly the Kuala Lumpur commercial office market which recorded the highest take-up during the first half of 2014 at approximately 2 million square feet.

A number of office buildings saw completion in 2014 while completion of some buildings was deferred to 2015. The completed buildings include Menara Hap Seng 2 (NLA: 320,000 sqft) at Jalan P Ramlee, Bank Rakyat Twin Towers (NLA: 962,582 sqft) at Jalan Travers, Menara MBMR (strata units) at Jalan Syed Putra, Menara TH@Platinum Park (NLA: 360,000 sqft), The Cascades @ Kota Damansara (GFA: 240,000 sqft), Menara Dialog at Mutiara Damansara, and The Pinnacle @ Bandar Sunway (NLA: 580,000 sqft).

More completions in 2015 are expected with substantial amount of supply pipelined to enter the office market coupled with the deferred projects in 2014 that were pushed forward for completion in 2015, a noticeable trend among private developers with impending office projects to defer their developments until the market improves and they have the resources to hold on to the asset until there are better conditions. Notable office buildings that are due for completion during 2015 are IB Tower (NLA: 408,000 sqft) at Jalan Binjai, Menara Bangkok Bank at Berjaya Central Park (NLA: 464,000), Menara Centara at Jalan Tuanku Abdul Rahman, Ken TTDI (NLA: 330,000 sqft) at Taman Tun Dr Ismail, Wisma Luxor (NLA: 135,582 sqft) at Kota Damansara, The Ascent @ Paradigm and The Vertical (Phase 1) at Bangsar South which will house 420 office units ranging from 735 to 13,664 sq ft.
This year, the Kuala Lumpur commercial office market is expected to be competitive due to the incoming supply and sliding crude oil prices which will affect the oil and gas industry to some extent. The office segment will continue to be a tenant’s market with tenants capitalising on the present and forecasted state of market on leasing terms. Landlords will be proactive by offering more incentives such as longer rent free periods, more flexible air conditioning and car park allocation to retain existing tenants and attract new tenants. There will be increasing preferences for office developments within integrated developments for next generation of employees and office buildings within prime location with good connectivity, high accessibility to LRTs or MRTs as well as dual qualifications. More old office buildings in prime location will undergo gentrification, either into boutique or budget hotels or service apartments due to growing trend of ‘flight to quality’ by tenants who prefer office buildings with exclusive design concepts that incorporate green building technology.

Moving forward, Kuala Lumpur commercial office market is expected to experience good take up rates from foreign firms looking at making Malaysia as a gateway to the Asia Pacific Market driven by the government’s focus on enhancing business regulatory framework, Malaysia’s economic stability and backed by rapid infrastructure developments in the likes of MRT lines, LRT 3 as well as the High Speed Rail (HSR) project between Malaysia and Singapore which will further accelerate transportation access into ASEAN. Election of Malaysia as ASEAN chair in 2015 is poised to benefit Malaysia from significant investment following the commitment of ASEAN leaders to set up an integrated ASEAN Economic Community (AEC) by 2015 and as a result will witness higher influx of professionals into the country which will augur well for the Kuala Lumpur commercial office market.

There were a few significant office leasing transactions in 2014. During the period, Tradewinds Corporation Bhd relocated to Menara Shell in KL Sentral from Wisma Zelan in Bandar Tun Razak by taking up about 30,000 sqft of space on levels 17 and 18 while Fuji Xerox relocated into Menara Binjai, occupying Levels 23, 23A & 25 on floor plates ranging between 12,000 to 13,000 sqft. Another notable office leasing was by Petronas ICT in 3Q of 2014 which took up 28,000 sqft of space on levels 10, 11, 12 and 13 in Tower 8 Avenue 5, The Horizon at Bangsar South.

Several major transactions and sales announcement were recorded in 2014. Four purpose-built office buildings were transacted in 2013 but recorded in 2014 namely Menara PMI  (104,011 sqft; RM60 Mil) in Jalan Raja Chulan, Menara PJD (GFA: 796,355; RM220 Mil) at Jalan Tun Razak, Plaza Sg Mas in Jalan Ipoh and Signature Office A and B, Capsquare in Jalan Munshi Abdullah. Meanwhile, MRCB entered into agreement with Capita Trust Bhd (QCT) to sell its Platinum Sentral (NLA: 420,000 sqft) in KL Sentral for RM750 million. On the other hand, sales announcement during the year include Tower Real Estate Investment Trust (Tower REIT) which announced to sell a 25-year-old building, known as Menara ING, at Jalan Raja Chulan in Kuala Lumpur for RM132.34 million to Goldstone Kuala Lumpur Sdn Bhd and New York-based BlackRock Inc announced intention to sell The Intermark, a RM2.2 billion integrated development at Jalan Tun Razak with total NLA of 2.5 million sq ft, housing the Intermark Mall, Vista Tower, DoubleTree by Hilton hotel and Integra Tower while it was reported that KPJ Healthcare intended to purchase Menara 238 (formerly known as Menara Marinara) along Jalan Tun Razak for RM206 million.

The average rents for the office market remained stable throughout 2014 with evidence of upward movements were recorded in areas with good accessibility and transportation networks. Kuala Lumpur City Centre office rentals were undoubtedly spearheaded by a few selected buildings namely Petronas Tower 2 and Tower 3, Menara Maxis, and Integra Tower which commanded an asking rental between RM10.00 to RM12.00 psf while average rents for other existing Grade A buildings in Kuala Lumpur City Centre ranged between RM7.00 to RM9.00 psf. The CBD area registered rentals of RM6.00 psf for newer buildings whereas the older buildings revolved around RM4.50 to RM5.00 psf.

The Bangsar/Pantai/Mid Valley area has a large disparity in terms of rental rates as there are various options of office towers that differ greatly. For instance, BRDB Tower has an average rental of RM6.80psf, UOA Bangsar Tower A averages RM4.00psf while Tower B has an average rental of RM4.80psf and Bangunan Syed Kechik averages RM4.00psf. Meanwhile, UOA Pantai records an average rental of RM5.00psf and The Gardens Mid Valley averages RM7.00psf.

KL Sentral maintained its rental for the region with average rental for Plaza Sentral at RM6.00psf while rental for other buildings in the area averages around RM8.00psf. Petaling Jaya, on the other hand, recorded an average rental of RM4.00psf for the existing buildings and RM4.50psf for new buildings.

The average rental for decentralised areas such as Damansara Heights ranged from RM4.50 to RM5.00psf while average rental for Grade A buildings in Mutiara Damansara and Damansara Perdana revolves around RM4.50 to RM5.50 psf.

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