asian cities report kuala lumpur office 1h...
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1H 2014Asian Cities Report | Kuala Lumpur Office
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Asian Cities ReportKuala Lumpur Office 1H 2014
Savills World Research Malaysia
savills.com.hk/research
1H 2014Asian Cities Report | Kuala Lumpur Office
02
Source: Property Market Report, Savills Rahim & Co Research
GRAPH 2
Existing office stock and occupancy rates, 2006–2013
74%
75%
76%
77%
78%
79%
80%
81%
82%
83%
84%
0
10
20
30
40
50
60
70
80
90
2006 2007 2008 2009 2010 2011 2012 2013
sq ft
(mill
ion)
Golden Triangle Central Business DistrictWithin City Centre SuburbanOverall occupancy rate (RHS)
Source: Bank Negara Malaysia, Savills Rahim & Co Research
GRAPH 1
Malaysia GDP growth, Q1/2006–Q4/2013
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Q1/
2006
Q3/
2006
Q1/
2007
Q3/
2007
Q1/
2008
Q3/
2008
Q1/
2009
Q3/
2009
Q1/
2010
Q3/
2010
Q1/
2011
Q3/
2011
Q1/
2012
Q3/
2012
Q1/
2013
Q3/
2013
Source: Savills Rahim & Co Research
GRAPH 3
Average office rents by location, 2006–2013
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2006
2007
2008
2009
2010
2011
2012
2013
RM
per
sq
ft p
er m
ont
h
Golden Triangle KL Sentral Mid Valley City Damansara Heights
Malaysian economyThe Malaysian economy increased at a steady rate of 4.4% in the second quarter of 2013 compared with 4.1% in Q1/2013. In line with forecasts, GDP reached 5.0% in Q3/2013 and 5.1% in the fourth quarter.
However, with the global economy affected by the weak US dollar and the euro crisis, which caused fluctuations in international trades, including the performance of supplies and services, the country’s overall GDP for 2013 contracted by 0.9% to stand at 4.7% by year’s end, compared with 5.6% in 2012.
Due to global influences on Malaysia’s GDP and domestic performance from 2010 to 2013, Bank Negara Malaysia revised its GDP projection down to 4.5% to 5.0% for the full year of 2013, lower than the previous target of 5% to 6% and the average annual growth rate of 6.1% achieved in the past three years. The economy was constrained largely by exports, which had an estimated increase of 1% for the entire year. Slowing fixed investments, especially by the government, further affected the nation’s GDP.
As imports increased steadily to fulfil growing domestic demand and exports lost steam, the country’s current account surplus suffered. In 2012, the surplus as a share of GDP fell to 6.1%, the lowest in 15 years. With the trade situation not improving significantly in 2013, the surplus shrank further to 4.7% in 2013.
Adding to the burden of Malaysia’s import bill is the country’s weakening currency. Following the US Federal Reserve’s announcement that it would taper the quantitative easing programme, currencies in emerging markets, including Malaysia’s, have been adversely affected. The Malaysian ringgit depreciated by nearly 6% in the first half of 2013. However, the near-term outlook for Malaysia suggests a pick-up in growth in the second half of the 2014, as
external demand bottoms out along with increased confidence in the recovery of advanced economies.
Office market conditions at a glanceOverview of Kuala Lumpur’s current office conditions:
Demand remains steady for well located, good-quality office buildings.
Average rents rose slightly, mainly due to high rents in recent completions.
The investment market remains inactive.
The average vacancy rate declined from 21.4% in Q3/2013 to 20.8% in Q4/2013 due to positive net absorption of 876,000 sq ft. Notable take-up included the relocations of Lend Lease Malaysia from Etiqa Twins to Menara Binjai; DCNS Group from UOA Centre to Menara Binjai; and Fortinet Malaysia from Menara Keck Seng to Menara Standard Chartered. Generally, demand for office space remained stable for well located, good-quality and dual compliant (green certified and MSC CyberCentre status) office buildings.
Total existing stock increased to 82.6 million sq ft in Q4/2013 compared with 82.1 million sq ft in Q3/2013 due to the completion of several office buildings.
Four office buildings are expected to be completed in 2014. Menara Hap Seng 2, IB Tower, TH Tower at Platinum Park (all in the Golden Triangle) and the ongoing refurbishment of Menara Tun Razak (CBD) will provide a total of 1.5 million sq ft. Higher rents are offered for recently completed high-quality office buildings. However, in general, the rental rates of the majority of office buildings remained stable.
As a result of declining vacancy rates, many landlords maintained their asking rental levels in
1H 2014Asian Cities Report | Kuala Lumpur Office
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GRAPH 5
Total office stock, 2007–2013
Source: Savills Rahim & Co Research
0
5
10
15
20
25
30
0
2
4
6
8
10
12
14
2007 2008 2009 2010 2011 2012 2013
sq ft
(mill
ion)
Total stock (LHS) No. of buildings (RHS)
Q4/2013. However, landlords of buildings with high vacancy rates continued to offer longer rent-free periods to attract prospective tenants.
It was reported that KPJ Healthcare intended to purchase Menara 238 (formerly known as Menara Marinara) along Jalan Tun Razak for RM206 million. This shows there is still demand for offices in the city centre area. The cautious approach by investors, limited short-term rental growth prospects and the limited number of investment-grade office buildings available for sale in the market contributed to the lack of activity.
Overall, average occupancy in KL City rose slightly to 78.5% in Q4/2013 from 75.7% in the preceding quarter, with improved take-up in several buildings which are popular with the oil and gas (O&G) sector and multinational corporations (MNCs). These buildings included MenaraBiniai, Integra Tower, Vista Tower, Menara Citibank and Menara Etiqa Twins.
Office market conditions – looking aheadThe office market is to remain challenging as supply continues to outstrip demand. The average vacancy rate in the city centre is expected to increase marginally in 2014, as a result of new supply. At an aggregated level, following an increase in completions this year, 2014 will also see more activity. This will be reflected in the vacancy rate, which is anticipated to rise before declining as development completions plateau and demand firms, potentially taking vacancy down.
Positive signs are forecast for the Kuala Lumpur office market as demand for good-quality office space is expected to remain stable, driven by tenant relocations from older buildings to newer, better specified office buildings which are good grade dual compliant (MSC CyberCentre status and Malaysia’s Green Building Index) buildings will
continue to be popular with MNCs and tenants in the O&G sector, particularly those located within prime and established/upcoming office locations in KL City and KL City Fringe.
The O&G, banking/financial and services sectors should continue to be the main drivers of office demand.
Despite limited rental growth prospects, average capital values are expected to increase marginally in the short to medium term, underpinned by several factors such as higher land and construction costs. Furthermore, the lack of available stock for sale could result in prospective investors matching potential vendors’ relatively high price expectations.
Furthermore, the impending opening of Nu Sentral shopping mall is expected to improve integration between the various completed components within KL Sentral and add further appeal to the transportation hub as a popular alternative office location, thus leading to improved demand and absorption rates in the medium to long term.
With rapid developments of public transportation links (the LRT extension and MRT lines), accessibility and connectivity between KL City and its fringe locations will be greatly enhanced.
In addition, the availability of good grade office space at competitive rental rates will accelerate the overall decentralisation process.
Owners of old and dated office buildings are proactively seeking to upgrade and enhance their assets in a bid to remain competitive and retain tenants (and to attract new ones) amid a challenging leasing market.
Given the high supply pipeline, several developers have adopted a cautious stance by deferring the construction of their projects, with works to commence only when they have secured pre-leasing commitments from potential anchor tenants.
Source: Savills Rahim & Co Research
GRAPH 4
Cumulative office supply, 2006–2015F
0
10
20
30
40
50
60
70
80
90
2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
sq ft
(mill
ion)
Suburban Golden Triangle Central Business District
Source: Savills Rahim & Co Research
TABLE 1
Significant office leasing transactions, 2013–1H/2014
Office building Tenant Area occupied (sq ft)
Integra Tower Aker Solutions 155,000
Integra Tower Petronas Lubricants 50,000
Menara Tun Ismail Mohd Ali Kuala Lumpur Metropolitan University College 101,600
Quill 7 Google Malaysia 10,000
Quill 7 CLO 20,000
Sunway Tower 2 Worley Parsons Services 10,000
Sunway Tower 2 ACCA Malaysia 10,000
Bangsar South Swift N/A
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