KL Office Sector Continues To Shine

Source : The Business Times, March 27, 2008

WITH Kuala Lumpur office rentals still hovering at 1995 prices, it's little wonder that the Malaysian capital remains one of the cheapest places in Asia to base an office.

It costs employers just US$3,120 annually to establish a workstation per employee, according to a DTZ survey on global costs. That's five times less than in Singapore where it costs US$16,220, and nearly nine times less in Hong Kong where US$27,540 is needed.

While inflation has taken its toll on just about everything else, there has hardly been any change in Kuala Lumpur's prime rental values for more than a decade.

In 1995, new office space amounted to 2.7 million square feet. Given that it was the go-go years of the 1990s, the take-up rate was strong at 2.58 million sq ft. Data compiled by real estate consultants Williams Talhar & Wong (WTW) shows almost full occupancy as the vacancy rate then was a mere 2.38 per cent. The average rent was RM5.60 (S$2.45) per sq ft.

The strong economy prompted a heady rush of development and in 1997 an additional six million sq ft of office space was added. A total of 13 office buildings were completed that year, including Kuala Lumpur's iconic twin towers. Because the take-up rate was 2.8 million sq ft, or less than half the supply, the vacancy rate shot up to 12 per cent.

When the Asian financial crisis hit in 1998, rents dropped sharply as many multinational companies shuttered their offices while some local set-ups scaled down by moving to cheaper shop lots. Rentals in Kuala Lumpur fell to RM4.30 psf, declining the year after to RM3.90 psf.

By 1999, the take-up rate had contracted significantly; consequently, the vacancy rate rose to over 17 per cent, prompting the Kuala Lumpur City Council to impose a building freeze which was only lifted a few years later.

That helped ease oversupply problems and rentals rebounded in 2000. Over the next seven years, rents gradually inched up, breaching RM5 psf in 2007 - with premium buildings fetching as much as RM7.80 psf.

Currently, the Kuala Lumpur Central Area (KLCA) has an estimated 37.24 million sq ft of office space, some 16.48 million sq ft of it in the Golden Triangle.

An additional 3.45 million sq ft of investment grade office space was added last year, with another 3.78 million sq ft to be completed this year, according to statistics compiled by WTW. Over the next three years, Kuala Lumpur can expect another 9.69 million sq ft to come onstream.

WTW managing director Goh Tian Sui does not consider the coming supply as too much - at least in the coming year. The additional supply last year was well absorbed, with the vacancy rate in the KLCA hovering under 11 per cent, and below 8 per cent in the Golden Triangle. With rentals rising and take-up rates still strong, demand continues to be healthy. More liberal policies have also been a boost.

Mr Goh said the commercial sector is becoming increasingly important because of the demand for Real Estate Investment Trusts (Reits), as well as for existing Reits to continue to expand their portfolios.

The growth of Reits continues to have a positive impact on the industry. In a recent poll of CEOs by WTW, 72 per cent said the expansion of Reits was expected to impact the industry this year while 65 per cent said it would impact price movement. Only 21 per cent believe the commercial sector has peaked.

Over the three years from 2005 to 2007, Reits accounted for 35 per cent of the RM6.07 billion in major office transactions. Locals made up 37 per cent and foreigners the remaining 28 per cent. There are now some 13 Reits in Malaysia with a market capitalisation of RM4 billion to RM5 billion.

Last year, foreign buyers made up 44 per cent of total major office transactions valued at RM2.33 billion. That's a far higher percentage than in 2006, when they accounted for 17 per cent of total transactions worth RM2.75 billion.

Interest in Malaysian real estate assets is high given its relative cheapness. The expected strengthening of the ringgit is another pull factor for foreigners.

The two major office transactions so far this year have been foreign. German-based Union Investment Real Estate AG bought en bloc an uncompleted 41-storey office tower in the city from Bandar Raya Development for slightly more than RM439 million. The other was by Kuwait Finance House, one of the most aggressive foreign players in the Kuala Lumpur property market. It agreed to buy half of the yet to be built 45-storey Menara YNH from YNH Property for RM920 million, setting a new benchmark of RM1,230 psf. The deal with Kuwait Finance comes on the heels of aborted talks between YNH and CapitaLand, after the latter baulked at the RM1,000 psf asked for by the Perak-based developer.

'Investors are still actively looking to buy into Malaysian assets,' Mr Goh said, but with so much capital chasing so few assets, yields are expected to dip from about 6 per cent net at present - still decent by most standards. But even at current returns, building owners are holding out for more.

An example is YNH. So confident is its founder and chairman Yu Kuan Chon of the allure of his development - considered prime owing to its location in the Golden Triangle - that he believes he can dispose of the remaining parts of Menara YNH to two other foreign buyers he is in talks with - but for some 20 per cent more.

Demand will continue to be fuelled by booming commodity prices and a strong services sector. 'People have to put their money somewhere,' Mr Goh observed, adding that in the smaller towns, incomes have doubled owing to the windfall from rising commodity prices.

Zerin Properties chief executive Previndran Singhe agrees. Malaysia's economy grew 6.3 per cent last year and he believes new businesses - particularly those in financial services, oil and gas, and oil palm-based firms - will be looking to come in.

Also, Malaysia is one of the few countries in Asia that allows foreigners to acquire freehold land, and its property laws are transparent, he said. 'Moreover, we don't have a peaking problem. Malaysian real estate is more sustainable - it doesn't drop much and increases are more incremental on a year-to-year basis.'

In light of the stunning inroads made by the Opposition coalition at the recent general elections, which handed it control of five out of 13 states including the industrialised states of Selangor and Penang plus the national capital of Kuala Lumpur, Mr Singhe believes more equitable policies 'will drive more investments into the country'.