The occupancy level in Kuala Lumpur city is expected to continue to come under pressure, while the office market in KL fringe remains resilient as there are active leasing activities. Meanwhile, the rental rates of office buildings in Selangor are expected to hold steady, moving forward.

“With rents and occupancy rates softening, investors are generally quite cautious about investing in the office sector and this has been reflected in the lower sales volume in 2018,” says James Paul Buckley, executive director of Capital Markets at Knight Frank Malaysia. “Moving forward, asking prices are likely to fall as owners become more realistic and we will see a pick-up in sales volume this year,” he adds.

With office supply remaining elevated, the landlords of dated buildings, particularly in KL city, may be exploring opportunities to repurpose their existing assets to improve recurring income and investment returns, says the real estate consultancy’s executive director of corporate services Teh Young Khean in presenting The Edge/Knight Frank Kuala Lumpur and Selangor Office Monitor 1Q2019.

“Developers and owners of under-construction projects who are concerned about the current oversupply situation are also looking at alternative usage. For example, 17 office floors in the upcoming Latitud8 project in Jalan Ampang will be converted into SoHo units,” says Teh. The proposed conversion is pending approval from the authorities.

The current supply of office space in KL and Selangor is 103,449,234 sq ft, with another 18,860,095 sq ft under construction.

More landlords are also seen to partner co-working/serviced office providers to attract new end-users/occupiers as they offer flexibility in terms of tenancy arrangement and sizes of occupied space. These arrangements appeal to the growing millennial workforce such as start-ups, expatriates and young professionals.

“Owners of dated buildings need to have medium to long-term plans in place as it will be increasingly difficult for their buildings to compete with newer supply in terms of specification, quality of space, supporting amenities and such,” says Teh.

“They will need to put in high capital expenditure to refurbish or repurpose their buildings to maintain existing tenants and attract new occupiers in this highly competitive office market.”

Meanwhile, Malaysia remains open to the Belt and Road Initiative and investments from China. There also appears to be a push for more Chinese investments in different countries, including Malaysia.

“The resumption of mega projects, such as the East Coast Rail Link and Bandar Malaysia township, will certainly lead to more market activities among Chinese companies in the Malaysian market. Hence, it is likely that an increasing number of Chinese firms will open new offices in Malaysia,” says Teh.

Slight improvement

Overall, the KL fringe office market saw a better performance in 1Q2019 with an improved average rental rate and overall occupancy rate, compared to KL city and Selangor.

In KL city, the average rental rates of Prime A+ offices in the new CBD recorded an increase of 0.6% quarter on quarter to RM12.01 psf, while Grade A offices saw a 1.6% decline to RM6.72 psf. Grade A offices in the old CBD rose 0.2% to RM5.47 psf.

The average rental rates at several locations in KL fringe recorded q-o-q increases: KL Sentral (4% to RM7.03 psf); Taman Tun Dr Ismail (TTDI)/Mont’Kiara/Dutamas (1.3% to RM5.37 psf); Mid Valley City (MVC)/KL Eco City (KLEC) (0.8% to RM6.10 psf); and Bangsar South/Kerinchi (2.4% to RM5.47 psf).

However, rental rates in Pantai/Bangsar dipped 1% q-o-q to RM5.81 psf and remained unchanged in Damansara Heights at RM5.59 psf.

Over in Selangor, the average rental rates in Petaling Jaya and Subang Jaya improved to RM4.50 psf and RM4.37 psf respectively. However, the average rental rate in Shah Alam declined slightly to RM3.41 psf, and remained stable in Cyberjaya at RM4.11 psf.

The average occupancy rate in the new CBD in KL city dipped 1.5% to 77% q-o-q while in the old CBD, it increased 0.4% to 76.3%. This gives KL City an overall average occupancy rate of 76.9%, down 1.2% q-o-q.

The overall average occupancy rate in KL fringe rose 2% from last quarter to 84.6%. TTDI/Mont’Kiara/Dutamas and Bangsar South/Kerinchi led the pack with a q-o-q increase at 4.8% to 83.9% and 84.8% respectively. Knight Frank notes that there was strong take-up for Menara Ken @ TTDI.

MVC/KLEC benefitted from the strong take-up of Mercu 2 @ KLEC and Mercu 3 (DBKL tower), which contributed to a 2.8% jump to 64.9%, while KL Sentral saw a q-o-q increase of 1.4% to 96.6%. Pantai/Bangsar recorded the only decline, albeit marginal, of 0.4% to average at 80%.

In the period under review, the overall occupancy rate for Petaling Jaya improved marginally from 80.3% to 80.8%. Subang Jaya showed a similar trend, moving up to 80.8% from 80.1% q-o-q.

The overall occupancy for Shah Alam improved significantly, from 81.1% in 4Q2018 to 91.2% in 1Q2019, due to better take-ups in Wisma Sunwaymas and Menara MRCB. In Cyberjaya, the overall occupancy rate rose from 75.3% to 76% q-o-q.

“The improved absorption of office space in newly completed buildings, such as Mercu 2 and Mercu 3 @ KLEC, Menara Southpoint at Mid Valley City and Menara Etiqa at Bangsar, was supported by easy accessibility and good connectivity in these locations as well as the availability of quality work space at competitive rentals,” says Teh.

“Meanwhile, SMEs are beginning to embrace the flexibility and cost efficiency provided by co-working operators, evident by the stronger take-up of such space. For example, Malaysia’s largest snack company, Mamee Double Decker (M) Sdn Bhd ,is moving from its Kuala Lumpur office to luxury co-working space Colony @ Mutiara Damansara in Petaling Jaya.”