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Saturday, November 12, 2011

Mixed feelings over mixed-development projects

At a glance: The launch of the KL Metropolis provides attendees with a first-hand view of how the mixed-development project is going to take shape.

Concerns rising over the possibility of an oversupply of office and retail space

As a new line of mixed large-scale property developments go on stream to spur economic growth, market observers and those involved in the property sector are cautious. Their main concern: an oversupply of officespace.

Reports and data coming from think tanks suggest there are concerns about the situation, despite some assurances that the Government has already done proper studies and planning.

Among the projects are the KL Metropolis by Naza TTDI Sdn Bhd that will add millions of square feet space of office, retail and residential space, in addition to the ongoing KL Sentral project and the recent launch of the KL International Financial District (KLIFD).

Property consultant Rahim & Co, through an e-mail, tells StarBizWeek that as for the first quarter, occupancy rates of prime offices in Kuala Lumpur and Petaling Jaya range between 60% and 97% and a healthier 75% and 98% respectively.

“We are in the opinion that the oversupply cannot be solely attributed to these mega-projects but also other stand alone purpose-built offices in the city centre,” the statement says.

Excluding the upcoming mega-projects, a total of 6.69 million sq ft of new office space will be completed in Kuala Lumpur by 2015. Based on an average annual take up of 1.8 million sq ft of office space in Kuala Lumpur, Rahim & Co estimates the occupancy rate of prime office building to be between 82% and 85%.

However, with the effort and incentives put forward by the Government, it believes more multi-national companies will be operating in Kuala Lumpur, and will subsequently occupy the available office space.

“We expect rental rates to stabilise in the next few years, especially with the completion of new office buildings by 2015 in Kuala Lumpur. Average rental rates of prime office buildings in Kuala Lumpur is expected to moderate around RM7 per sq ft by 2015 compared with current rates averaging at RM6 per sq ft,” it says.

Rahim & Co adds that due to locational factors, for example, integration with rail network and image branding, the mega-projects will be able to command higher rental rates; potentially 5% to 10% more than the average rate.

To date, it says the total net lettable area of prime office space in Kuala Lumpur stood at 40.88 million sq ft. By the end of 2011 and 2015, an estimated 6.69 million sq ft of new office space will be completed in Kuala Lumpur (excluding KL Metropolis and KLIFD) and most of these projects are currently under construction; contributed largely by stand-alone purpose built office towers and a few form part of a mixed development project. 50% of the new supply will be located in the Golden Triangle Area and are purely driven by private initiatives.

“Meanwhile, KL Metropolis, KLIFD and KL Sentral are Government initiatives, with strong synergies with the private sector, to propel Kuala Lumpur towards world class status. Prime components will be office space supported by retail, serviced apartments, hotels and a convention centre,” it says.

With total gross development value of RM15bil, KL Metropolis covers a total land area of 75.5 acres located near Matrade Jalan Duta. The key development component (apart from ratail, hotels and apartments) is the 1.07 million sq ft convention centre which aims to strengthen Kuala Lumpur as the preferred meeting, incentive, convention and exhibition destination over its regional competitors that include Singapore and Guangzhou.

“KLIFD is another national mega-project located near Imbi area fronting Jalan Tun Razak. This 75 acres integrated mixed development project aims to establish Kuala Lumpur as the regional financial centre.

KL Sentral, on the other hand, is a world class transportation hub valued at RM8bil and has been divided into 14 land parcels, each representing a different function. Some of these lots have been fully developed and are already in use, while others remain under construction or are still waiting for work to commence,” it says.

Upon completion, KL Sentral will comprise Stesen Sentral, corporate office towers and business suites, five-star international hotels, luxury condominiums, a retail mall, services apartments and, an international entertainment and exhibition centre.

The opening of The Hilton and Le Meridien hotels in September and October 2004 respectively has added a new dimension to KL, providing a myriad of prestigious lifestyle amenities at an international level.

By 2015, a total of approximately 6.3 million sq ft of office space will be available within KL Sentral. “In general, we are in the opinion that these mega-projects will act as a development catalyst which will then help to spur growth in the immediate locality. For instance, Brickfields enjoys a spill over effect from KL Sentral,” it says.

Over the last eight years, the profile of Brickfields has slowly morphed and there has been hardly any new land in Brickfields for further development over the last several years. Property prices there have shot up after KL Sentral opened in 2001 and have been going up steadily over the years. A 4-storey shoplot, with good frontage and in good condition, that was sold for RM1.7mil in 2002 can now command around RM2.8mil. The rent of a ground-floor space can go up to RM10,000 a month while the upper floors can command RM1,500 to RM2,000 a month.

“We believe KLIFD will eventually change the landscape of its surroundings. The prime challenge will be to establish the anchor tenant of the office tower. For instance, the establishment of Petronas in KLCC has raised the demand for office space surrounding KLCC which is mainly generated by oil and gas related companies. Similarly, KLIFD will need to identify the anchor tenant that will help to augur growth in its surrounding areas. In general, with more office space, more office population will be attracted. With higher influx of professionals, both local and international, demand for other components such as serviced apartments and retail will increase accordingly,” says the property consultant.

Connectivity to a rail network is also pertinent in ensuring the success of these mega-projects. It is learnt that KL Sentral and KLIFD will be connected to the proposed MRT line.

“This transit-oriented development will eventually create a new development corridor along the rail line similar to the Rossyln-Ballston Corridor in Arlington, Virginia served by Washington Metro Line and Burnaby, Vancouver served by Sky Train line. Upon completion of KLIFD, the surrounding areas which are currently occupied primarily by old retail businesses and offices will be transformed into a more modern, vibrant and liveable area,” says Rahim & Co.

Meanwhile, the development of KL Metropolis will help to disperse the concentration of office space to the outskirts of the Kuala Lumpur city centre.

Generally, it will be similar to Mid Valley City as being a self contained integrated commercial centre outside the city centre. While Mid Valley City is acting as the southern Kuala Lumpur commercial hub serving areas such as Bangsar, Seputeh, and Petaling Jaya, KL Metropolis will function as the northern Kuala Lumpur commercial hub with prime coverage areas including Mont Kiara, Damansara Heights and Sentul. The availability of a major convention centre will position the locality as an international trade and exhibition district in Kuala Lumpur.

“Notwithstanding the fact that these mega-projects will bring a positive impact to the nation's economy, we still need to be cautiously optimistic on its success. As these projects are highly dependent on private investments, both local and international, the uncertainty in the global economy may pose investment worries,” it says.

In addition, there has been a trend developing. Companies are shifting their operations outside the city centredue to bad traffic and higher operating costs in the city. Companies are also drawn to the larger and modern office space on offer in buildings outside the city area .Petaling Jaya is currently the focal point of new supply of office space and has gradually seen a higher influx of multi-national companies.

Property consultancy CB Richard Ellis (M) Sdn Bhd says the Klang Valley will face an oversupply of office and retail space within the next two to three years while capital values for residential units would see some increases in 2012, but at slower rates compared with the past 18 months.

Its executive chairman Christopher Boyd, in a recent briefing, says that while 2011 is a strong year in terms of demand for office space in the Klang Valley, rental values might succumb to the oversupply within the next 18 months.

The total office space supply in the Klang Valley stands at 80.8 million sq ft at the end of the first half of 2011 (compared with 80 million sq ft at the end of 2010).

However, Boyd says it is estimated that an additional 25 million sq ft of office space will come on stream in the Klang Valley by 2015 (excluding mega projects such as the Naza group's KL Metropolis development and the KLIFD).

He says that vacancy rates in Kuala Lumpur are under 13% and though this is not an alarming number, the vacancy rates are expected to increase in tandem with supply.

A report by CB Richard Ellis notes that prime gross asking rentals were flat at RM7 per sq ft with only a handful of buildings above this level.

Since rising steadily from 2002 to 2008, rentals at top city centre buildings have remained mostly flat for the past two years.

Boyd says recent average transaction prices of Grade A office space generally ranges between RM800 and RM900 per sq ft. However, there are higher prices than these being achieved in the market like the RM1,100 per sq ft or more in KL Sentral and SP Setia Bhd's KL Eco City.

By The Star

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