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Posted: 31 May 2013 05:40 PM PDT

SERENA Yeong of Essel Properties has been an office market specialist for the Klang Valley the last 12 years. She is aware of the hike in office space come 2015/2016.

"We can still make a living when companies migrate from old buildings to new ones. Owners of older buildings will be worried, though," she says.

Landlords of older buildings are already feeling the heat, offering several months of free rent and more car parking bays. It is a tenant's market in the Klang Valley. Property professionals highlighted the situation as far back as two years ago.

Last year, Savills Rahim & Co founder and executive chairman Datuk Abdul Rahim Rahman called for prudence and suggested the imposition of stricter rules when granting development permits to curb overbuilding, which results in congestion, in the Klang Valley. The problem of city congestion has resulted in companies relocating to fringe city locations and suburban area with some form of public transport connectivity. For sectors like banking and oil and gas, this may not be possible.

Property consultancy Jones Lang Wootton drew attention to the office stock in March when senior vice-president and head of research David Jarnell said the supply of office space prime and secondary stock in the Klang Valley had surpassed 100 million sq ft.

He called it "a historic milestone". Saying the situation was "manageable", he nevertheless cautioned this could lead to a consolidation of rental levels for the rest of the year.

In the last quarter of 2012, seven office buildings in the Golden Triangle bordered by Jalan Ampang, Jalan Sultan Ismail and Jalan Raja Chulan, the decentralised area of KL Sentral in Bangsar Pantai, Petaling Jaya and Putrajaya, totalling 2.23 million sq ft, were issued with certificates of completion and compliance. Accumulated office stock rose to 100.694 million sq ft.

Jarnell also compared the Klang Valley with metropolitan areas of Bangkok, Singapoore and Jakarta. Greater Bangkok has the second-highest office stock, totalling 87.85 million sq ft, followed by the Special Capital Region of Jakarta with 65.66 million sq ft. Singapore's office stock is slightly less than Jakarta at 64.01 million sq ft.

Greater Bangkok's population is 8.2 million, Jakarta 10 million and Singapore about 5.1 million. The Klang Valley has a population of about 7.2 milion.

The fact that Bangkok and Jakarta have more people but 12 million sq ft and 34 million sq ft office space less respectively is something to think about. Singapore also has about a third of office space less. Has the Klang Valley over-built?

Don't call it glut

Six out of eight property professionals are reluctant to use the word "glut" as it is "far too simplistic".

"The issue is not whether there is a glut or not; the issue is there are increasingly more prime office space entering the market and this is affecting the rental market," says Elvin Fernandez, managing director of Khong & Jaafar group of companies.

He says in order for a free market to work, it is best to make known the facts regarding the office market to the various stakeholders and the public.

"Only then can the market correct itself," he says.

How did the Klang Valley get into this situation?

Jones Lang Wootton attributes the strong supply growth to steady and sustainable economic growth, a vastly growing services sector and integrated mixed use developments, and improvement in the public transport system when the light rail transit (LRT) came into service in the mid- to late-1990s.

Office stock has grown at an average of 3.62 million sq ft per annum since 1998, Jarnell says. The average annual take-up rate is 1.5 million to 2 million sq ft, another consultant says.

Simply put, as new buildings enter the market, tenants moved from the old to the new, leaving the former vacant.

Greater Kuala Lumpur or the Klang Valley's office market is not a homogenous one. It is a tapestry comprising different sizes, locations, green versus prime grade A stock, and older buildings. The prime office market has splintered into different sub-segments - the normal grade A, grade A plus and super prime category. Certified green buildings may fall into any of these.

The lack of focus on redevelopment some quarters call it regeneration may have lent itself to today's massive office market. Instead of leaving pockets of green here and there, the easier route and the more profitable one for both developers and the local authorities seems to be building new offices.

That does not mean regeneration or refurbishment have not been carried out successfully. The Intermark is a result of redevelopment of what was then the Empire Tower, City Square, Crown Princess and Plaza Ampang in 2007 by an Australian-based fund MGPA. Another successful refurbishment is Menara Standard Chartered, previously Shahzan Insas Tower by Government Investment Corp (GIC) of Singapore.

Says DTZ Nawawi Tie Leung executive director Brian Koh: "Most of the buildings coming up today are Grade A which means that most of them are in Kuala Lumpur. But the oversupply situation is an issue that affects the office space market across the board.

"It is a concern to landlords and those in the property profession given that occupancy is likely to go downward because of oversupply. Landlords will have to give more competitive terms to tenants which will affect their bottomline.

"It also affects the banking and finance sector because banks are funding the development and construction of these properties. That means the banking sector will have to be more cautious and there may need to be restraints on funding," Koh says.

Size and locality are not the only defining qualities of office buildings which come with varying degrees of "greenness" and technological features known as MSC (multimedia super corridor) status.

The range of offices available is as diverse as its rental per sq ft. Office space rental is priced as low as 87 sen per sq ft in Kampung Baru to RM12 per sq ft at the Petronas Twin Towers in the Kuala Lumpur City Centre (KLCC), according to property websites. There is a huge middle segment priced between RM4 and RM6 per sq ft available in prime locations like Damansara Heights, Mid Valley, Petaling Jaya and in the Ampang area.

It is this diversity that makes it difficult to tar the sector with one stroke that a glut exists.

A property website estimated that office rental rates have dropped by between 20% and 25%. Buildings in the category of G Tower, a green building, used to be RM8-RM8.50 per sq ft initially. A property consultant says buildings in the same category may be rented out at RM6.50-RM7 per sq ft effectively with rent-free incentive for a few months.

Regeneration Vs new projects

Savills Rahim & Co James Goh says there are three issues excess space, old buildings that do not meet international standards and rental pressure. The general office yield today is 6%. Some put it at between 6.5% and 7% net for average grade A buildings.

"Landlords need to bite the bullet and upgrade or risk becoming obsolete," he says. "Landlords have to accept the new market reality. Those who adapt quickly will fill up their buildings faster," says Goh.

The Petronas Twin Towers are fully occupied, Menara Maxis is about 90% occupied but some KL downtown offices priced at above RM7 per sq ft are half filled.

Says Serena Yeong of Essel Properties: "There are many downtown buildings that are struggling. There is a lot of migration to outside KL city." This accounts for the 80%-90% occupancy enjoyed in Bangsar South, Petaling Jaya and Subang Jaya.

The average occupancy level today in the Klang Valley is about 75%. Anything below that should set off warning bells.

If the various mega projects announced by the Government were to go ahead, the amount of space is expected to swell further. Among which are the Tun Razak Exchange, KL Metropolis area near the Matrade Centre, the former Pudu prison redevelopment and Bandar Malaysia in Sg Besi. KL Sentral, a government-initiated project, is almost complete.

How much is enough?

In a nation striving for developed nation status and building liveable cities, how much is enough?

There is no straight-forward answer, because unlike Britain, where the London mayor's office regulates developments, in the Klang Valley, approval is given by the local authorites based on compliance with by-laws, and not according to demand and supply and market feasibility studies.

"So lenders have to be the regulators' because they are funding the projects. In the past, Bank Negara insists applications for project financing come with market and feasibility studies but this has changed. There is no property regulatory body to oversee developments based on demand and supply, how much space is needed and over what period of time," says a property consultant who declined to be named.

This may be one of the reasons contributing to the Klang Valley's burgeoning developments far exceeding neighbouring cities like Singapore, Jakarta and Bangkok.

Property consultant Henry Butcher chief operating officer Tang Chee Meng says: "This is an area of concern as the potential increase in supply of office space from these mega projects is significant and will lead to an oversupply situation, unless the Government can attract overseas companies to take up the additional space.

"At the current projected pace of economic growth, it is unlikely the normal organic growth in demand for office space can take up the additional space being created by these mega projects."

It is part of the Government's plans to attract 100 of the world's largest multinationals from the Fortune 500 or Forbes Global 2000 to invest in Greater KL by 2020.

As important as developments that meet international standards may be, it takes more than bricks and mortar to attract investments and people to Kuala Lumpur. There are factors such as the city's liveability and infrastructure, which includes both public transport and utility needs, security, green and open space, air quality, to name a few.

Location branding

There are certain sectors of the economy that need the branding that a city location offers. Sectors such as financial services (banks, insurance, fund management) and oil and gas may need to remain in the city.

Professional services such as accounting, architectural, engineering, valuation and real estate may prefer to decentralise to take advantage of lower rents or better transportation links and less traffic congestion.

Accenture and international law firm Wong & Partners, which is part of Baker & McKenzie International, are today in the Mid Valley Mega Mall area while British Telecoms has expanded to KL Sentral, says YY Lau of YY Property Solutions Sdn Bhd.

Head hunters Korn/Ferry International and Michael Page International may be in the city because of their clientele. Data centres may want to be in Cyberjaya because of the MSC status, although that is now possible outside Cyberjaya, says Lau.

"When a company chooses a location, factors under consideration includes branding, perception, budget and talent retention. Sg Buloh will not be an address for a multinational company, but it could be the back office for a bank," she says.

Consultants polled say the emphasis on development changed more than a decade ago with the entry of the government versus entrepreneur-style private sector. Among them being Malaysian Resources Corp Bhd (MRCB) for KL Sentral, 1Malaysia Development Bhd (1MDB) for the Tun Razak Exchange, Sime Darby group, Permodalan Nasional Bhd (PNB) and S P Setia Bhd. The ones leaning towards commercial developments would be MRCB, 1MDB and PNB.

Says Koh of DTZ Nawawi Tie Leung: "(It goes back to) risk management by the respective stakeholders. Unlike Singapore, where the government releases land as and when needed to control the property market, we don't have that sort of mechanism. So the banking sector has to come in because they are the ones financing the projects."

How the problem came about

Posted: 31 May 2013 05:30 PM PDT

THE flood of office space in Greater Kuala Lumpur today is a result of policies and responses by both the public and private sector before the 2008 global financial crisis.

Khong & Jaafar group of companies managing director Elvin Fernandez says it is necessary to look back in history to understand the current office market. The second thing to note is capital value of office space is driven by rents.

Elvin says the Klang Valley office market was peaking before 2008. Prime rents for new buildings were shooting up from an earlier base of RM6 per sq ft to between RM8 and RM9 per sq ft in 2008. When rentals began to head towards the RM10 per sq ft a month level, the capital value of the office space began to move up. It is rent which drives capital value.

"It was during this time, when capital values began to shoot above RM1,000 per sq ft and we saw a lot of transactions," says Elvin, who is also an adjunct professor at Universiti Malaya's Faculty of Built Environment.

As a rough rule of thumb, if the rental is RM6 per sq ft, the capital value would move roughly in tandem at RM600 per sq ft.

"So if the value of RM6 per sq ft was going towards RM10 per sq ft, the capital value would move towards the RM1,000 per sq ft level. But instead of even hovering at the RM1,000 per sq ft level, capital value went past it," Elvin says.

While at times capital values do run ahead of fundamental factors like rents and there were many transactions like that this at once indicates froth in the market, says Elvin.

The global crisis did not affect Malaysia that much but it did affect the office and condominium markets in Kuala Lumpur, he says. Rents fell. The question is: If the Malaysian economy was not much affected, why were the office and condominium markets affected? The answer: Both these markets had over-extended themselves, he says.

"Weaknesses had built into the market and the affected markets shook as a result of the external events," he says.

Since then, the markets have come down and rents for both the office and condominium sectors are no longer aggressive.

The market is no longer dreaming of RM10 per sq ft for average prime office market rents, but there exists today in the city, very prime office space by virtue of their location or the facilities/amenities or what property professionals call prime plus and are in places around the Petronas Twin Towers.

"Rents for average prime have fallen to between RM7 and RM8 per sq ft. Hence the capital value, at one time past the RM1,000 per sq ft mark, is also retreating," says Elvin.

Nonetheless, there are developers who are selling strata office space at RM1,000 per sq ft. But these are minor distractions and the focus should remain on the wider office sub-segment. What is fundamental today is that the Klang Valley office market is on a more realistic level, driven by rent of RM7 to RM8 per sq ft, and capital value of between RM700 and RM800 per sq ft for average prime office space with exceptionally well located or green buildings commanding higher prices.

The next question is, why has the capital value remain at this RM700 and RM800 per sq ft level?

This, says Elvin, is the replacement cost. It will cost that much to replace new buildings. The cost of replacement (or cost of construction) is also a driver in the market. It benchmarks the bottom line. But there is a caveat and it is this during times of severe stress, the capital value can go below cost of replacement. This was seen in Japan and in Kuala Luimpur itself post the 1997/98 Asian financial crisis. It is demand and supply which dictates the capital value, and not just cost of replacement. The policies of the day are also important drivers.

In the case of the Klang Valley, between 2010 and the present, something important has taken place.

Transformation

Between 2010 and today, a new euphoria has entered the overall property market.

"The Economic Transformation Programme (ETP), and its focus on property and transportation, has created a new emphasis to turn Kuala Lumpur into a more liveable international city. It is a policy that hinges on nearly every segment of the property market," says Elvin.

As of September last year, the Klang Valley office market has total vacancies amounting to about 23 million sq ft while the annual net absorption rate will not exceed 2 million sq ft. This vacant space covers all buildings, both old and new, but excludes government buildings.

Demand is also shifting. "There may be less hope for the old ones unless they are refurbished or redeveloped," he says.

From that perspective, the vacancies will probably be in the older buildings. The onus is for owners of older buildings to decide if they want to invest in redevelopment, says Elvin.

Fresh ideas and policies are needed to look into what can be done as companies migrate to newer, grander buildings.

He says there is an approved total incoming supply of about 18 million sq ft and a planned supply of about 2 million sq ft as at March this year. This total of 20 million sq ft is a huge figure, and may not include all the big ticket projects announced but not detailed out or given development orders as yet. It is imperative, therefore, he says that decision-makers and lenders understand the market.

"The long and the short of it is, don't be aggressive in building. But to suggest that the local authorities step in is not a good idea as they may not have the expertise to navigate a good balance. It would be better to impose the burden on banks as they are the lenders of these projects, and to insist they play a more effective role through the mechanism of requiring detailed market and feasibility studies before financing approvals through loans or other means," he says.

The cost of congestion

Posted: 31 May 2013 05:30 PM PDT

WHEN Marylene had her first baby, she continued working. When she had her second baby, she decided to quit the working world. Marylene's office is in Petaling Jaya and her home is in Bukit Antarabangsa, Kuala Lumpur.

"I love my job. But the traffic congestion was getting unbearable," she says.

Marylene took a few months off work. Armed with a degree in economics and with her banking experience, she decided to seek work based on two criteria distance from home and working hours.

She found an 8am to 4pm research job about 10 minutes' drive from home.

In her search for new office space for her clients, YY Lau of YY Property Solutions says she is coming across more women turning away from the career they are trained for, or giving up work altogether, because they are unable to juggle work commitments and home life.

It is under this scenario that building owners are considering adding a child care centre within their premises.

"2012 was a dragon year which naturally saw a baby boom. Working mothers are having a hard time getting help to look after their babies. Hence, the trend today among building owners is to have a child-care centre within their premises which they outsource to an operator," says Lau, adding that 1 First Avenue in Bandar Utama has one. Jaya33 in Section 13, and Pinnacle in Sunway are planning to have this facility. These office buildings are located in Petaling Jaya.

She says the main concern among companies today is traffic congestion. There used to be a time when this was an issue confined to Kuala Lumpur but it has since spread to other parts of the Klang Valley.

Where construction of the mass rapid transit (MRT) has started, lanes are being squeezed, exacerbating the situation. The Sungai Buloh-Kajang line, the first MRT line, is scheduled for completion by June 2017.

"Between now and completion of the MRT line, it may be necessary for companies to consider flexi-hours, staggered working hours or working from home," says YY.

It is against this backdrop that companies are leaving the city to relocate in fringe and decentralised areas. "The decentralised areas appear to be doing better than the central business district (CBD) area. Fringe areas like KL Sentral is a workable solution. British Petroleum moved from KLCC area to KL Sentral," she adds.

Lau divides the office market into four broad categories CBD, KL fringe, decentralised areas and Cyberjaya/Putrajaya. Decentralised areas include Petaling Jaya, Shah Alam and Klang while KL fringe areas include locations like KL Sentral, Mid Valley and Gardens, Damansara Heights and Bangsar South.

Average rates for decentralised and fringe areas are between RM4.50 and RM5.50 per sq ft while grade A buildings in the city average between RM7 and RM9 per sq ft.

Lau says the move to decentralised areas started with IBM and KPMG several years ago. The most recent one was global consultancy group Accenture, which moved from KLCC to the Mid Valley locality. Wong & Partners, which is part of Baker & McKinsey international law firm, is in KL Sentral while British Telecom has expanded operations in Bangsar South.

Lau says these movements indicate the appeal of non-city locations which are close to transport links. Both Mid Valley and Bangsar South have link bridges connecting rail transportation. KL Sentral is an interchange station.

"The mindset has changed," Lau says.

Kredit: www.thestar.com.my

Jumaat, 31 Mei 2013

The Star Online: Business

The Star Online: Business

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