AT a glance, the Klang Valley office market, which is in a state of oversupply and still facing repercussions from the pandemic, does not seem to have a lot going for it.
But this has not stopped landlords from trying to get creative to maximise the value of their assets.
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Savills Malaysia Sdn Bhd group managing director Datuk Paul Khong (pic) says many landlords, during difficult market conditions or during an oversupply situation, are willing to give good discounts to secure anchor tenants that can take up a larger space or even a longer-term lease.
“It is a trade-off between existing big vacancies against rental rates and attractive lease terms. An empty building still has its own holding and operation costs to the landlord.
“These are commercial decisions that the landlords will take in retaining reasonable yields for their buildings,” he tells StarBizWeek.
While predicting a challenging office market for 2022, Khong says leasing activities have been improving since the fourth quarter of 2021.
“Undoubtedly, tenants’ incentives are key to success in the current challenging market,” he says.
CBRE|WTW in its 2022 Market Outlook Report says the Klang Valley office sector is a tenants’ market, with landlords focusing on tenant retention via cost-cutting, asset enhancement and leasing strategies.
“Buildings are incorporating wellness, health and safety measures using technology. Leasing activities are mainly rent renewals. Companies are benefitting from the current market to secure more favourable leasing terms.
“Landlords are enhancing building specs and offering more flexible leasing arrangements to drive or retain the occupancy.”
CBRE|WTW says asking rents have been weakening amongst newly completed buildings, while older buildings have tried to maintain their current rental rates.
“This may be due to existing oversupply concerns as vacant office spaces were observed for long continuous periods. Some tenants are also relocating to a lower-grade office building as part of a cost-saving strategy.”
Rental rates
According to Knight Frank Research, the average rental rate of office space in the Kuala Lumpur City (KL City) area retreated to RM6.79 per sq ft per month in the second half of 2021 (compared with RM6.87 in the first half), as the prolonged pandemic continued to impact the economy and businesses.
“In addition to the growing supply-demand mismatch in the office market, the resurgence of Covid-19 cases further weakens leasing activity as more corporations and companies review or postpone their real estate decisions to strike a balance between driving growth while maintaining operational and cost-efficiency.”
Rahim & Co International Sdn Bhd real estate agency chief executive officer Siva Shanker says the more competitive pricing is seeing more tenants upgrading to newer buildings.
Similar to KL City, Knight Frank Research says the average office rent within the KL fringe area in the second half of 2021 was also lower at RM5.60 per sq ft per month (compared with RM5.69 per sq ft during the first half of the year).
“While in Selangor, it declined marginally to RM4.10 per sq ft per month during the period under review (from RM4.15 per sq ft per month in the first half).”
During the review period, Knight Frank Research says asking rents of Prime A+ and Grade A office space within the KL City area ranged from RM5 per sq ft to RM12 per sq ft per month, depending on location.
Within the new central business district (CBD), rentals ranged between RM7 per sq ft and RM12 per sq ft per month, while in the old CBD, it ranged from RM5 per sq ft to RM6.50 per sq ft per month.
“While in the KL fringe area, it ranged from RM6.20 per sq ft to RM8.50 per sq ft per month. In Selangor, similar grade office space commands competitive monthly rentals ranging from RM4.50 per sq ft to RM7.50 per sq ft,” says Knight Frank Research.
Rahim & Co International Sdn Bhd real estate agency chief executive officer Siva Shanker says the more competitive pricing is seeing more tenants upgrading to newer buildings.
“Many companies will use this downturn to move to better quality buildings or addresses because they get cheaper rates and better savings.
“In the past, buildings that were likely too expensive to rent are now more accessible. The prices have dropped because of the oversupply.”
In light of this, Siva says many owners of older buildings will start to suffer.
“Some landlords would have taken the effort to regularly upgrade or refurbish their buildings to keep it fresh and up to date.
“Others, however, would have just let it get completely rundown.”
In light of the softer office market, Khong says many old buildings are being put up for sale.
“They have to remain relevant in competition with the newer stock in view of a ‘flight to quality’ by existing tenants. Many landlords have to decide how to improve and refurbish, repurpose or redevelop their old buildings.
“These old buildings will continue to attract potential buyers, especially in good and established locations where land values are high, should they offer a decent rental yield or they are priced well for refurbishment or brownfield redevelopment.”
Last week, CBRE|WTW placed an advertisement in StarBiz for the sale of Menara Telekom or Menara TM in Lembah Pantai for an undisclosed amount.
It said the building was for sale by expression of interest, with the closing date for the first stage of the sale being on March 18.
The 55-storey building currently serves as the headquarters of Telekom Malaysia Bhd (TM), which is under a sale-and-leaseback agreement with Menara ABS, a special-purpose vehicle.
“In the case of Menara Telekom, it is an iconic office building with a good current occupancy rate and TM as its main anchor tenant,” says Khong.
“However, TM’s tenancy lease is reported to lapse in the first quarter of 2023. The landlord may want to sweeten the deal to secure a good price,” he adds.
PPC International managing director Datuk Siders Sittampalam notes that Menara Telekom is occupied on a leaseback, which carries an element of risk if its tenants decide to uproot suddenly.
“It will be tough to replace such a huge vacant space. This is especially with the oversupply situation now and post-Covid-19, there is a higher demand for hybrid workspace, meaning demand for smaller office space will be greater.”
Separately, Sittampalam says rental rates of prime office space, such as that within the Tun Razak Exchange, still continues to remain steady.
“Menara 106 is still maintaining theirs at RM9. HSBC Malaysia is even higher, while for Menara Prudential it is around RM8.”
At most, Sittampalam says landlords with buildings in prime locations may offer extended renovation periods to entice potential tenants.
“In the case of an extended renovation period, let’s say it’s for three months. So the annual rent will only reflect the remaining nine months, so the price may be a little lower.
“Alternatively, these landlords may offer special goodies like free furnishing. But generally, they will not reduce rents because it will bring down the image of the buildings in the area.”
Incoming supply
According to Knight Frank Research in its Real Estate Highlights for the second half of 2021, the cumulative supply of office space in Klang Valley stood at around 112.6 million sq ft during the period under review, following the completions of Plaza Conlay@Conlay 301 and Imazium@Uptown in Selangor.
It adds that there are nine office buildings scheduled for completion by the first half of 2022, with five located in KL City and two each within the KL fringe area and Selangor.
“Upcoming completions in KL City are Menara Affin, PNB 1194, The Stride@Bukit Bintang City Centre (BBCC), Merdeka 118 Tower and UOB Tower 2.
“While in the KL fringe area, the upcoming buildings are The MET Corporate Towers and Aspire Tower.
“The impending completions in Selangor are Empire City Block J and Block G. Collectively, these completions will add around 5.2 million sq ft of space to Klang Valley’s existing cumulative office stock.”
Amid growing challenges in the office market, Knight Frank Research says the overall occupancy rate of purpose-built office space in the KL City area dipped further to record at 65.5% during the second half of 2021.
Similarly, the occupational demand in Selangor was also under pressure at 74.2%, compared with 75.8% in the first half of last year.
“Meanwhile, the overall occupancy rate within the KL fringe area remained resilient during the review period at 86.1%, compared with 85.9% in the first half of 2021.”
Evolving trends
CBRE|WTW in its report says the increased awareness in environmental and social governance has certainly pushed more office tenants to express their interest in green buildings.
“Energy efficiency and health and wellness are the main considerations for better ventilation,” it says.
Setting new benchmarks in sustainability, Knight Frank Research says the Merdeka 118 tower will be the first building in the country to earn platinum rating with international sustainability certification.
“The tower includes 1.7 million sq ft of net lettable area of premium Grade A rentable office space, while the top 17 floors will house the first and only Park Hyatt Hotel in Malaysia.”
Knight Frank Research notes that the Merdeka 118 tower, which is 85% completed, is on track for completion by this year.
“Due to the various movement restrictions last year, the construction of the iconic tower was delayed by more than six months from its initial target of end-2021,” it says.
As of 2021, Khong says the existing supply of Green Building Index (GBI) certified office buildings stood at 24.3 mil sq in Greater Klang Valley, which is equivalent to about 42% of total Grade A buildings.
“Further, the average occupancy rate for the GBI-certified buildings is currently at about 75% and is performing better, whilst the non-GBI-certified buildings are at close to 70%,” he says.
With the onset of the pandemic, CBRE|WTW says the movement control order in June last year prolonged companies’ work-from-home (WFH) arrangements and delayed the return to offices.
“A few multinational corporations announced permanent WFH plans or withdrew their return-to-office plans.
“At the same time, some companies have started welcoming their staff to the office, implementing additional wellness tools to enhance office safety and health.”
Depending on the nature of work, CBRE|WTW says most organisations are likely to adopt a hybrid working mode.
“As collaborative arrangements become the main driver to improve work performance, there is a rising trend of work areas for mentoring, learning, and training.
“Some offices have upgraded, incorporating interactive areas for their staff and reorganising their workspace allocation.”
Another notable trend is the conversion of office buildings into hotels as an alternative way to maximise asset value.
The most recent example was when Hap Seng Consolidated Bhd purchased Wisma KFC along Jalan Sultan Ismail in December last year, with plans to convert the building into a hotel.
Siva points out that this is not something new.
“This has been going on for quite some time already, where many old buildings in the city were converted into either high end or budget hotels.”
In 2006, the 13-storey Wisma Peladang in Jalan Bukit Bintang underwent a complete retrofit and became the Piccolo Hotel.
Other conversions over the years include Wisma KLH into Wolo Hotel, Magnum Plaza into Sky Express Hotel (formerly Flamingo Hotel) and Sentosa Hospital into Tune Hotel.
Siva says turning old buildings that were struggling to get tenants into a hotel was a good business decision for many.
“However, the Covid-19 pandemic has had a disastrous impact on the hotel sector.
“Still, Covid is not going to last forever and I do expect things to pick up again, eventually.”
Commenting on Wisma KFC, Siders says now is a good time to refurbish the building.
“It’s a good time to begin construction then be up and running when the market improves,” he says.
Khong meanwhile notes that the Hap Seng Group has been actively expanding its property investment portfolio in Malaysia in the past two decades.
“With its latest acquisition of Wisma KFC, they will now own the entire stretch at the Jalan Sultan Ismail and Jalan P Ramlee quadrant, adding to its strong presence in the KL Golden Triangle and with the Mercedes Benz showroom @ Hap Seng Star sited prominently here.
When repurposing older buildings, especially those within the city centre, Khong says owners need to consider various crucial factors.
“This includes the economic value of the building (pre- and post-refurbishment); changing of market conditions, replacement costs, land value (redevelopment) and any changes in the allowable plot ratio.
“Hence, building owners will need to undertake a feasibility study carefully on the available options to their older buildings. Conversion of use also may not guarantee better yields to the landlord. It really depends on the viability of the business model in place and the respective sector selected.”