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Saturday, July 23, 2011

Soft office market outlook

PROPERTY consultants say the short-term outlook for the office market in the Klang Valley is soft, with supply outstripping demand, while the local retail sector continues to offer good prospects.

A recent “Property Market Outlook” report for the second half of 2011 by consultancy CH Williams Talhar & Wong Sdn Bhd (WTW) says the office sector in the Klang Valley remains a tenant's market with a large amount of space available for leasing.

Gan: ‘The commercial property cycle has peaked.’

The WTW report points out that landlords of newly-completed buildings continue to offer two to three months as rent-free periods to attract tenants.

Recently constructed or refurbished office buildings are securing new leasings at a much slower rate while there are also office buildings along Jalan Tun Razak which have remained largely untenanted more than two years since their completion in 2008 and 2009.

“In the first half of this year, purpose-built office space in KLCA (Kuala Lumpur Central Area) accounted for 40.1 million sq ft. About 5.975 million sq ft will be completed by the end of 2014, out of which, about four million sq ft in nine buildings will be located in the Golden Triangle,” says the WTW report.

WTW managing director Foo Gee Jen adds that while there were no new developments completed in the first quarter of this year, over three million sq ft of new office space will come online by the end of 2011.

Foo says the average occupancy in the Golden Triangle registered slightly below 90% in the first half, compared to 91%-93% in the last two years.

Average rental and net yield of prime office space in KLCA registered at about RM6.50 per sq ft and 6.5% respectively as in the first half.

HwangDBS Investment Management Bhd head of equities Gan Eng Peng concurred, saying that the supply of commercial properties is increasing more than demand.

Gan adds that rental yields are falling, while vacancy rates and debt costs are rising.

“Coupled with tighter regulations to curb speculation, the commercial property cycle has peaked. Drive around the usual Klang Valley hot spots such as KLCC, Solaris Dutamas, Solaris Mon't Kiara, Bangsar, Kota Damansara and Damansara Perdana you can see many unoccupied units,” says Gan.

According to Gan, given the current sky-high prices, it is wiser to wait till the dust settles before investing in properties, especially business units.

“This is due to the large supply and murky economic outlook as a result of a mixed set of data from United States economic growth, emerging markets' inflationary concerns and Europe's sovereign debt fiasco.”

KL Sentral office space

Although he points out that rental rates for KL Sentral office space has been quite stable, with prices increasing by only 4% to 5% compared with a year ago, property prices in the Klang Valley have gone up so high now that yields are in the low single digits.

“For instance, if you are lucky, you can get a 758 sq ft office space in Solaris Dutamas that is yielding around 4.5% to 5% per annum after deducting maintenance fees.”

In the KL City Centre, new supply of commercial properties coming on stream in the near future include One @ Bukit Ceylon (a hotel suite by UOA Development Bhd), Binjai 8 (a service suite development by UOA Development due to be completed in January 2013 and priced around RM710 per sq ft), Summer Suites (an office block by Sunrise Bhd, priced at about RM700 per sq ft) and Sunway Velocity (an integrated residential and commercial development by Sunway City Bhd, at RM800 to RM900 per sq ft).

In the KL Sentral area, there is Q Sentral (a grade A office tower comprising strata offices, developed by MRCB Land and priced at around RM1,200 per sq ft).

SP Setia Bhd is also building its KL Eco City mixed development in the Bangsar area.

Meanwhile, in the Kota Damansara vicinity, there is Surian Tower (an office tower development project by the Boustead Group) and Sunsuria Avenue developed by the Sunsuria Group which are available for leasing.

Upcoming projects in the Kota Damansara vicinity include Sunway Nexis (an integrated commercial development by Sunway City Bhd, due to be completed in 2014 and priced at RM700-RM800 per sq ft) and The Cascades (a mixed development by Mitraland Group, due to be completed in 2014 and priced at RM650 per sq ft).

Meanwhile, a recent report by Knight Frank Research says the Kuala Lumpur office market remained soft in the first half, with both rental and occupancy rates trending downwards due to the entry of newly completed office buildings in 2010 and early 2011.

“The average monthly rental for office space in KL City was RM5.18 per sq ft (2H2010: RM5.22 per sq ft) while the KL City fringes recorded an average rental of RM4.30 per sq ft (2H2010: RM4.28 per sq ft). Prime Grade A offices in KL City and KL City fringe locations, on the other hand commanded higher average monthly rentals between RM6.50 per sq ft and RM11.50 per sq ft.”

The Knight Frank Research report says the office market is expected to remain competitive given the abundance of incoming office supply scheduled for 2011.

“Tenant-favoured market sentiment will continue to prevail and rental levels in general, may remain flat or decline slightly while the office take-up rate in existing buildings is expected to remain modest in the year ahead,” says the report.

Klang Valley retail market

According to the WTW report, the retail sector continues to be resilient and vibrant with high occupancy levels in all the popular and established shopping malls.

The report cited as an example, Viva Home, a retail centre along Jalan Loke Yew that was opened recently, which recorded a good take-up rate.

“As at 1H2011, there were 120 retail centre developments in the Klang Valley totalling 40.45 million sq ft. Currently, there is virtually no significant new future retail space supply in the KLCA. Occupancy levels and rentals are expected to be maintained in 2H2011 as retail spending is expected to grow about 6% this year,” says the WTW report.

Meanwhile, Knight Frank Research points out that the Malaysia Retailers Association has projected a lower growth rate of 6% in the retail industry for 2011 (2010: 8.4%) due to a continuous rise in the cost of living together with moderating growth in the world economy.

The Knight Frank Research report says in 1H2011, rental rates for retail centres generally remained firm due to earlier existing leases locked in.

“Selected prime specialty lots in KL City command monthly rentals in excess of RM100 per sq ft.”

It should be noted that with eight new shopping centres expected to be opened before the end of this year, the supply of retail space in the Klang Valley is expected to increase by 7% to about 42.9 million sq ft in 2H2011.

By The Star

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