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Friday, November 30, 2007

Foreign buyers boost office property

Rising interest in the commercial market has many experts wondering what the next benchmark price for prime office space will be

The recent record-setting RM1,120 psf offer for Glomac Al Batha Sdn Bhd’s Glomac Tower in the KLCC vicinity has set the local property market abuzz, with many in the real estate fraternity caught in a guessing game on the next benchmark price for prime office space.

Glomac Tower

The Icon Jalan Tun Razak

Then, close on the heels of that offer came Mah Sing Group Bhd’s enbloc sales of two Grade A office developments -- the East Wing of The Icon Jalan Tun Razak and The Icon Mont’Kiara to Prompt Symphony Sdn Bhd. The sales, announced three days ago, have valued the East Wing of The Icon at RM237 million and The Icon Mont'Kiara at RM285.4 million.

It is worth noting that Kuwait Finance House Bhd (KFH) featured in the Glomac and Mah Sing
transactions. KFH teamed up with real estate investor Prestige Scale Sdn Bhd to pay RM577 million for Glomac Tower. As for the deals with Mah Sing, KFH formed Prompt Symphony,
a special purpose vehicle with Autron Corp Ltd.

On a per sq foot basis, the East Wing of The Icon Jalan Tun Razak has been priced at a discount to Glomac Tower, but this is to be expected given the different locations of the projects. There is no doubt that the KLCC address commands a significant premium.

It should be noted that Mah Sing’s sale of its two commercial developments to Prompt Symphony does not include parking bays. For the East Wing of The Icon Jalan Tun Razak, Mah Sing has signed a put and call agreement to sell 301 parking bays at RM18.15 million to Prompt Symphony. For The Icon Mont'Kiara, the developer has also inked a similarly worded agreement with Prompt Symphony, valuing the 637 parking bays at RM19.9 million.

The recent enbloc office space deals serve to highlight the increasing interest from foreigners, particularly from the Middle East, in real estate. On the pricing, several consultants contacted said, at RM899 psf, the East Wing of The Icon Jalan Tun Razak is a “good” deal. The 17-storey tower has a nett lettable area (NLA) of 263,435 sq ft.

In comparison, Mah Sing had in July this year, sold the West Wing of The Icon Jalan Tun Razak to Koperasi Permodalan Felda for RM174.4 million or RM715 psf, or, as pointed out by Knight Frank Malaysia executive director Sarkunan Subramaniam, the East Wing sale marks a 20% increase in values.

“Rentals for the office space when completed in two to three years time would have to be able have to fetch a minimum of RM6 psf with the nett yield at 6% for the property to be worth
the purchase,” Sarkunan told Propertyplus.

Can The Icon Jalan Tun Razak command such rentals upon completion? "I believe it is possible. Rents in KL’s Golden Triangle are moving upwards. Current average rentals are at RM6 psf and yields for prime offices are at 6.25%,” Sarkunan said.

He reasoned that Prompt Symphony foresees a compression of yields, which are a reflection of rentals over capital value. Lower yields, Sarkunan continued, are not necessarily a bad sign, but possibly due to good capital appreciation.

The Icon Mont’Kiara
The market has valued Mah Sing’s 27 levels of offices and a retail podium with a combined NLA of 380,510 sq ft at a cool RM285.4 million or RM750 psf. Zerin Properties chief executive officer
Previn Singhe (pix) sees this as a possible benchmark price for the area.

The Icon Mont'Kiara

Zerin Properties chief executive officer - Previn Singhe (pix)

“The closest transaction to this would be One Mont’Kiara’s, which was launched in 2006 for RM550 to RM650 psf. The new prices show the area’s maturity and that Mont’Kiara has become a preferred location for investors,” Previn said, adding that, if values were based on quality alone, Mont’Kiara properties could fetch higher prices than certain KLCC projects.

One Mont'Kiara
Other commercial offerings in the area would be Sunrise Bhd's Solaris@ Dutamas. This mixed-use commercial development first launched its office suites in October 2005, at RM370 psf and the latest launch in April this year was RM460 psf.

YY Property Solutions chief executive officer YY Lau also called the price “attractive”. It shows that Mont’Kiara has graduated from just being a residential enclave to a truly sought after commercial centre, she added.

DTZ Debenham Tie Leung executive director Brian Koh (pix) said that enbloc purchases of commercial buildings usually include the parking bays, hence the West Wing of The Icon Jalan Tun Razak and The Icon Mont'Kiara prices would be higher if they were sold with car parks.

DTZ Debenham Tie Leung executive director Brian Koh (pix)

“If the car parks were included, The Icon Jalan Tun Razak would be priced at RM969 psf, which is pricey for that location. And the fact that the earlier block had been sold, it would mean that the property is stratafied," Koh said.

Koh adds that the high prices paid by foreign investors shows that they either have a bullish view of the market or that they are willing to accept low yields because they are in it for the long haul.

Office Market
Consultants concur that the recent commercial purchases reflect the confidence in the local property market. Previn said foreign investors have shown that they believe the Malaysian real estate industry to be on the upside. “They see that the upside has just begun and that is why they are buying.”

Lau adds that factoring in the rising construction costs, property prices are unlikely to go down. “There will be a lot more supply of office space coming in from not only KL, but less central areas such as Damansara Heights and Petaling Jaya. Although the immediate market for offices in the Klang Valley remains healthy, there could be a possibility of oversupply in the next three to five years if all the proposed projects are approved,” Lau noted.

However, Previn felt that the demand for offices, especially in the KL city centre would be strong as the tightening of rents show that there isn’t enough office space to go around.

By theSun (by Allison Lee)

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