Occupancy rate fell to 70%-80% after Petronas Twin Towers was built
EXACTLY one year after property consultancy Jones Lang Wootton (JLW) drew attention to the Klang Valley office market’s 100 million sq ft milestone, opposing views are brewing whether the numbers are as frightening as made out to be.
Earlier this week, property consultancy CH Williams Talhar & Wong said although the Klang Valley office market might have an oversupply of office space on plan, the situation is controllable.
Said its managing director Foo Gee Jen: “The developers or owners can slow down or pause, which they did last year.”
Occupancy is about 80% currently, he says. Assuming 2014 supply comes in and this space is not filled, occupancy will drop to 78.57%. For 2015, it will be 75.86% and 2016 it will be 73.82% (assuming no take-up of this space). This is not detrimental to the market. “Things go south when occupancies are way below 60%,” he says.
“Moreover, there is a strong trend of newer office buildings being filled up at the expense of older ones, and the older ones are being rejuvenated into boutique hotels,” says Previn.
While there is no reason to pit one view against another, the Klang Valley office situation underscores the differing yardsticks and benchmarks.
JLW, which first highlighted the situation, defines office stock as purpose-built self-contained buildings above five storeys. Federal and state government office complexes solely used by the Government and older buildings where part of the space has been sold on strata are excluded from JLW’s monitored stock.
Before the Petronas Twin Towers was completed, office occupancy hovered above 90%. Occupancy hovered in the strong 70%-80% range in 1998 after its completion. This suggests the office market has not recovered fully, some say.
Does this mean we have to return to the 90% occupancy rate level before building more offices? There is “no magic number”, says Savills Rahim & Co, but constant and careful monitoring is crucial.
What is clear, says Savills Rahim, is that the office market has become increasingly fragmented with different tiers, for example Grade A and B. Opinions differ as to what constitutes a Grade A building.
“For us, new or refurbished buildings completed after 2008 is Grade A. They represent the next generation of office stock,” the statement says.
“Grade A occupancy was high at 90+% back in 2008 as a result of the decade old freeze on new office development imposed by City Hall at that time. As a result, we saw a pent-up demand for world class office space as even back then the majority of Kuala Lumpur stock was becoming obsolete.
“The new buildings completed since then are catering to this pent-up demand. For these new Grade As at least, many of them will move towards full occupancy soon,” the statement says.
The older buildings need to adapt to changing needs or risk falling behind. The key lies in redevelopment and change in land use, the statement says.
An old office building can be replaced by a new boutique hotel like the Wolo Hotel where Wisma KLIH used to be. We are already seeing old buildings such as Angkasa Raya and Kompleks Antarabangsa making way for new integrated multi-component developments, says the statement.
The National Property Information Centre (NAPIC) put the Klang Valley’s office space, excluding shopoffices, at 110.26 million sq ft as at the fourth quarter of 2013, says Khong & Jaafar group of companies managing director Elvin Fernandez.
This is “a sizeable quantity to begin with,” says Elvin. He says Singapore Business Times reported the island state has 63.6 million sq ft recently.
Of this total supply, 77.56 million sq ft is in the Federal Territory and 32.70 million sq ft outside Federal Territory. Total space occupied is 84.21 million sq ft, an occupancy rate of 75.37%, says Elvin.
“This means a sizeable amount is vacant as the net take-up is only about 2 to 3 million sq ft annually at best,” says Elvin.
By contrast, Singapore’s 10-year average net take-up is 1.5 million sq ft and its historical occupancy rate is 92% to 93%, he adds.
“Vacancies exist in mainly older buildings, many of which have still not recovered fully from the oversupply situation we found ourselves in post-Asian Financial Crisis. Anecdotal evidence suggests that even the newer ‘green’ certified buildings with MSC (multimedia super corridor) status have difficulties attracting tenants and rents are slowly slipping down,” says Elvin.
He says longer rent-free periods and landlords absorbing fit-out costs have made their way into the market, a sign of the looming over supply.
“We are also beginning to see contractual rents (as stated in agreements) and effective rents (actual rent received after deducting rent-free period and fit-out costs) widening,” Elvin says.
Pressure on rental
This means new projects will compete for tenants, which in turn will exert pressure on rent. Rental rates at RM7 to RM8 per sq ft for the Grade A office buildings are important to support values of about RM800 to RM900 per sq ft. This is the benchmark all-in replacement cost now based on the net area, says Elvin.
“If rent falls below this level, it means values will slip below replacement cost. This is unhealthy,” he says.
Such a situation happened post-Asian Financial Crisis and the market did not recover until seven to eight years later. To avoid a recurrence, there is a need to assess a project’s viability in a more robust manner and subject it to stricter, more in-depth, independent market and feasibility studies and other financial tests before funding is approved and drawn down.
This will sift through what is needed and what is not, says Elvin.
Savills Rahim says they expect city centre effective rent, where most of the new Grade A supply has already been completed, to consolidate.
“We expect rent to creep up next year as new buildings fill up and pressure eases off generous rental incentives,” Savills Rahim says.
Barring any major unforeseen events, they expect rent and occupancy to move up by 2017 as supply of quality office space tightens again. In the area immediately surrounding the Kuala Lumpur City Centre, the current supply under construction would be completed but demand by oil and gas and financial services sector will only increase with an expanding economy.
The “flight to quality” will mean good times for the Grade A office sector, Savills Rahim says.
As for the government-driven projects, Savills Rahim say joint ventures with private sector ensure they remain market driven.
These projects have a five to 10 year horizon, enough time to meet new challenges and demands of the next cycle. However, it is crucial developers monitor and implement their development according to market fundamentals, says Savills Rahim.
Elvin from Khong & Jaafar focuses on the incoming supply (buildings presently under construction) of 17.93 million sq ft. This excludes “planned” space which will come from the mega projects and for which development orders have not been secured as yet.
“This is a substantial amount of space in the making in the years ahead,” says Elvin.
Previn believes the tipping point will be the Kuala Lumpur-Singapore high-speed rail.
“We will not reach high 90s (occupancy rate) in the short term. In the long term, with all infrastructure including double tracking and City Hall pushing Kuala Lumpur towards a world class city, I do see this happening,” he says.
By The Star Online