Rents in Kuala Lumpur's office sector continue to face downward pressure this year with more new supply coming on-stream the next three years.
The great news, however, is foreign investors have begun to pour in, albeit on a small scale, thanks to the Malaysian government's market liberalisation initiatives made last year.
For the most part of 2009, the city's office market was in the doldrums as the Malaysian economy entered into recession in the first half of last year, resulting in falling demand for office space as corporate consolidation and downsizing became the norm.
According to Savills Rahim & Co, most of the eight existing Grade 'A' office buildings in the Golden Triangle area experienced slightly higher vacancy rates in the second half of 2009.
This has exerted downward pressure on the city's office rentals and occupancy rates, prompting the Malaysian government to further liberalise the financial and service sectors last year.
At the height of the economic crisis, Savills said rentals in some office buildings plunged by as much as 30 percent.
CBRE's data, however, gave a more conservative estimate.
It shows that prime office rentals in Kuala Lumpur's Golden Triangle area peaked at the end of the fourth quarter of 2008 and softened moderately thereafter by about 15 percent as at the end of the fourth quarter of 2009.
According to CBRE, the asking rents for Grade 'A' office spaces took a dive from RM7.10 in the fourth quarter of 2008 to RM7 in the first quarter of 2009.
However, the full effect of the global economic downturn was only fully felt in the second quarter of 2009 when asking office rentals plunged further to RM6.80.
Rents finally achieved some stability at RM7 in the subsequent two quarters.
CBRE said this was because the market downcycle had approached its end and leasing activity gradually began to pick up in the fourth quarter.
Office rents in different areas affected differently
On a macro level, however, the different office areas in Kuala Lumpur were affected differently by the economic downturn.
According to Savills, the average rentals for prime office areas in Kuala Lumpur declined the most while those in the suburbs remained unchanged or even show price increases.
For instance, the average rents in both the KL Sentral and the Golden Triangle area peaked at RM6 per sq ft in the second half of 2008 before falling to RM5.50 per sq ft in the second half of 2009.
In the same period, average rents in the Mid Valley City area dropped from RM5.50 per sq ft to RM5 per sq ft while those in Damansara Heights remained unchanged at RM4.50 per sq ft.
Only the Petaling Jaya area witnessed an increase from about RM3.30 per sq ft to RM3.50 per sq ft.
Office capital values falling
The falling rental values has resulted in a fall in capital values that has brought about some aborted investment deals in the second half of last year
According to Savills. Mah Sing Group lost a buyer for their 380, 000 sq ft office building The Icon @ Mont Kiara worth RM285.4 million and now has plans to build small residential serviced suites.
YNH Property also lost a buyer for their 1.2 million sq ft office building, Menara YNH, worth RM920 million.
Mah Sing Group has however, managed to secure a new buyer for the East Wing of The Icon at Jalan Tun Razak.
The new sale price is approximately 4.5 per cent off the original price agreed in 2007 and comes with a rental guarantee for 3 years, which was not part of the original deal.
Leasing activity returning
While the first half of 2009 was a difficult time for Kuala Lumpur's office sector, the second half began to witness leasing activity returning.
Savills said new licenses were granted to heavyweight financial institutions like ICBC Bank from China and Goldman Sachs.
Just recently in December 2009, Permodalan Nasional Bhd (PNB) completed the purchase of the 370, 000 sq ft office building at Kenanga International for an estimated RM250 million
As we speak, Savills is in the midst of brokering a commercial deal for a multimedia super corridor (MSC) status company in Kuala Lumpur.
New supply exerts downward pressure on rentals
Despite signs of increasing leasing activity in the office sector, Kuala Lumpur's rents still faces downward pressure as more new supply are expected to arrive in the next three years.
The most notable new Grade 'A' office space in terms of location, size and quality coming on-stream this year is Cap Square Tower.
The building will offer 600, 000 sq ft of premium quality office space with an energy efficiency of nearly 80 per cent.
Analysts, however, say the new supply will spell good news for Kuala Lumpur in the long run.
"The combination of modern infrastructure, quality facilities and comparatively cheap rentals makes Kuala Lumpur a highly attractive location for any prospective multinational considering a move. Kuala Lumpur offers a consistent cost advantage which is not a flash in the pan, as growth in the supply of new buildings serves to smooth any potential fluctuations in rental levels," says CBRE Malaysia's executive chairman, Chris Boyd.
CBRE expects continued broad-based demand across a wide range of sectors including Islamic finance, the oil and gas industry, agribusiness and commodities.
Savills said more could be done by the Malaysian government to attract foreign investments.
"The Malaysian government could do more to get foreign investors to come in as much of the work is being spear headed by the private sector such as the real estate industry," says Christopher Hahn, manager for Savills Rahim & Co's overseas business development.
Alternative office spaces
Also adding to the new supply is YTL Land's d6 boutique office space located in Sentul East that is expected to be ready by 2011.
Launched in 2008, d6 comprises 105 units - 12 retail and 14 garden suites.
85 percent of D6 has already been taken up by law, architectural, interior design and IT firms.
"The selling points of d6 is its low-rise concept and the close proximity to public transport such as the Sentul LRT and Sentul Kommuter line," says Jessica Loo, senior manager for sales and marketing at YTL Land & Development Bhd.
Rentals at d6 are half of those in the Golden Triangle area at RM3.50 per sq ft per month.
For those interested to invest, YTL said it is offering rebates between RM120, 000 to RM150, 000 which translates to RM450 to RM500 per sq ft.
About this Author
Khalil Adis is an experienced property writer and is best known for pushing the envelope when he was editor for Property Report Singapore-Malaysia-Indonesia magazine. During his tenure at Property Report from August 2008 to August 2009, he elevated the standard of the magazine by accomplishing the impossible - he snagged exclusive interviews with some of the region's high profile players in the real estate industry such as Singapore's Minister for National Development Mah Bow Tan, YB Datuk Peter Chin, Malaysia's Minister of Energy, Green Technology and Water and Dato' Ahmad Fuad Ismail, Mayor of Kuala Lumpur.
Having built an extensive network of contacts in Singapore, Kuala Lumpur and Indonesia, Khalil is now a highly sought after writer who writes an expert blog for Property Guru as well as monthly columns for Property Guru Times, Property Buyer and Property Report. Khalil's indepth knowledge on the region's property market plus his journalism experience also means he is a highly valued and credible speaker. He has been engaged by marketing agents like OrangeTee and RXI Realty Investment to give high net worth investors in Singapore an update on Kuala Lumpur's property market.
Khalil's good rapport with public relations companies, property consultancy firms and developers mean he continues to be invited to view their projects in Singapore and Kuala Lumpur. Aside from writing for Property Report, Property Guru and Property Buyer, Khalil also does copywriting works. His property clients include Far East Organization and RXI Realty Investment Pte Ltd. Khalil was recently invited to be a judge by Singapore's Institute of Estate Agency (IEA) for its Realtor Awards 2009/2010. Khalil graduated from Monash University with a Bachelor of Arts (Communications).
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