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Saturday, August 11, 2012

A question of demand and supply

What the Tun Razak Exchange could look like.

A BIG pipeline of commercial properties in and around the city centre itching to be launched over the next decade or so is stoking concerns by the day – will there be sufficient demand for all these buildings?

1Malaysia Development Bhd, the master developer of the massive RM26bil Tun Razak Exchange development is fully aware of such concerns.

Close to half of the TRX real estate project will comprise office buildings. The project comes along at a time when many other mammoth commercial projects such as the re-development of 926ha Rubber Research Institute (RRI) Malaysia land in Sungai Buloh and Permodalan Nasional Bhd’s proposed 100-storey Menara Warisan Merdeka are poised to take off.

Naturally, the question of oversupply is posed to the government agency.

“The easy answer to such concerns is... that our interest is aligned towards making sure that there is not going to be an oversupply,” says 1MDB chief executive officer Datuk Shahrol Halmi.

“As a government agency, 1MDB is cognisant of the impression that... look, we are the Government, a 800-pound gorilla, therefore we can squeeze people (private developers) out,” he says, referring to the fact that the agency is spearheading such a big project in one of the city centre’s prime areas.

“But I ask you... is it the Government’s job to go and regulate the area of square footage that is available in the market – is that a good idea?

Is it then fair to say if there is better quality that is available on a certain side then that would be our chosen place?” he asks.

“The reality is that it is not the Government’s interest to destroy the economy of the city,” Shahrol says.

How then do we address concerns of oversupply?

“Via market researches, do studies on commercial property demand, moving forward – let market economics dictate,” he says.

Cause for Concern?

As it is now, there is already an oversupply of commercial properties in and around the city centre, according to Henry Butcher Malaysia director Lim Eng Chong.

And the figures seem to back that premise up.

International property consultant VPC director and chartered surveyor James Wong says the take-up rate for office buildings which are being built and will be completed this year stands at below 50%.

“This is for commercial properties in and around the city, but the same scenario exists further away from KL, such as in Cyberjaya; there is already an oversupply situation,” Wong says.

However, the market will tend to correct itself in time to come, he adds.

David Jarnell, senior vice-president and head of research at Malaysia’s Jones Lang Wootton writes in a recent report that this year alone, the prime office market in the city centre is expected to increase by 2.04 million sq ft with the delivery of several prime office buildings.

“The average occupancy rate in KL city centre declined from 84.9% in the fourth quarter 2011 to 81.3% in first quarter this year as the newly completed offices did not yet register any physical occupation,” he writes in his report from which an extract was published in StarBizWeek in June.

Jarnell further notes in his report that in the first quarter this year, the average net rental reduced marginally as many landlords were still maintaining the same rental rates.

Despite all of this, Henry Butcher’s Lim points out there is a saving grace.

The fact that the Government is pushing for so many economic projects as part of its larger plan to drive the country towards higher productivity and income will help attract foreign direct investments (FDIs) and congregate talents and innovators in the country.

This will inevitably produce demand for not only commercial properties but also other property types.

“The financial and economic reforms, if carried out properly, will get the intended results,” Lim says.

“The TRX project is exciting, but more than real-estate, the entire economic reform idea is a progressive one – if it is realised well, it will gel well with mega projects such as the TRX,” Lim says.

VPC’s Wong points out that in order to create effective demand for commercial properties, the country needs FDIs which will bring in the multinational corporations.

In this regard, mega projects like the TRX are needed, but with a twist.

“We need the FDIs to come but before that we need mega developments like the TRX, but with mega developments come the risk of depleting demand,” Wong says.

By The Star

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