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Saturday, August 28, 2010

An upside in the office market

A drop in the capital value of office buildings from their previous highs is attracting higher interest among investors looking for potential value upside and good rental income streams, say property consultants.

According to CB Richard Ellis Sdn Bhd executive chairman Christopher Boyd, the value of office buildings has fallen by an average 10% to 15% from their absolute highs around mid-2008 and this offered potential for capital upside.

“It is more a seller’s market right now as there is not enough investible buildings around to meet demand. Given the lower entry cost, demand is getting stronger especially for office buildings that are well managed and located, have high occupancy and offer good yields,” Boyd tells StarBizWeek.

If the rising demand continues and the country’s economic recovery is sustained, he expects further upside in the office market.

“I believe with the right planning, the office market can be easily well balanced in terms of supply and demand,” he adds.

Office transactions between March and June included the sale of two office buildings by UOA Holdings to UOA REIT. Wisma UOA Damansara II, which has net lettable area (NLA) of 297,000 sq ft was sold for RM211mil, and Menara UOA Bangsar (Parcel B), with NLA of 312,000 sq ft was sold for RM289mil.

During the quarter, Menara Olympia was sold for RM200mil while Wisma Time was transacted at RM78mil. The latest sale involved that of Menara Pan Global which exchanged hands at RM160mil last month.

“The outlook for en-bloc sale of office buildings will still be good as investors are looking to lock in at the current lower asking prices,” says Boyd.

Even so, in its latest Kuala Lumpur office property market report, CB Richard Ellis said another 1.7 million sq ft of office space are scheduled to be completed in Kuala Lumpur by end-2010.

These include Hampshire Place Corporate Office Tower and Menara Worldwide, Capital Square Office Tower 2, BRDB Office Tower, BZ-HUB @ One Mont’ Kiara and Menara Ireka @ One Mont’ Kiara.

With supply projected to increase at an accelerated rate from the second half of this year, office rents are not expected to show any significant increases over the coming months.

The situation is expected to prevail until 2013.

“We estimate another 3.5 million sq ft of office space will be completed in Kuala Lumpur next year and 4.9 million sq ft will come on-stream in 2012. There are also numerous projects in the planning stages, accounting for at least 11 million sq ft. Whether or not a large portion of these projects go ahead as planned will have a profound effect on the city’s office market from 2012 onwards,” it said in the report.

Meanwhile, KGV-Lambert Smith Hampton Sdn Bhd director Anthony Chua says most of the recent office transactions were for second grade buildings that were quite old and located in less prime locations.

With proper upgrading and refurbishment, the buildings will be able to command quite good rental rates for the new owners.

“Although the office market is generally still quite soft in terms of occupancy and rental, it is a good time for investors to shop around for some opportunistic buys to position themselves for a market upswing in the future,” says Chua.

In addition, owners of office buildings who are looking to cash out may be willing to consider selling at more reasonable prices.

Knight Frank Malaysia executive director Sarkunan Subramaniam points out that there are a number of secondary buildings up for sale at between RM350 and RM600 psf.

Meanwhile, Grade A office buildings have price tags ranging between RM800 and RM1,200 psf.

“There is always demand for good office buildings – if the price is right and where there are opportunities to upgrade for value enhancement. Such transactions have become more palatable after the asking prices dropped from their previous highs,” he elaborates.

City Valuers & Consultants Sdn Bhd general manager CY Lim concurs that well-tenanted buildings are still in the radar screen of potential buyers, especially for their rental streams: “The cash flow from office buildings is dependent on the occupancy and rental rates. Of course one also has to consider the capital value of the property and whether it has potential for appreciation.”

By The Star

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