Excess office space raises concern

IN the wake of declining crude oil prices and cautious sentiment among the oil & gas (O&G) and financial players, the vast upcoming supply of office developments over the next three years has become a concern.

Savills Malaysia executive chairman Chris Boyd says some 8 million sq ft of office space is expected to be completed within the Klang Valley this year.

“The office market is over 100 million sq ft and typically the absorption rate is between two to three million sq ft,” he tells StarBizWeek, adding that occupancy rates stood at around 80% currently.

Boyd expects some 2 million sq ft of office space to enter the market next year, with another 8 million expected in 2018.

He however emphasises that Malaysia has “good quality buildings” now, which would make for a good, conducive working environment for potential investors.

“Compared with other countries where rents are high and volatile, it’s a welcoming environment for business in Malaysia,” he says.

According to Savills World Research on the Kuala Lumpur office market for the first half of 2016, demand for offices is traditionally driven by the O&G and finance sectors which typically require extensive office space located in the central or strategic areas of KL City.

“The market absorption in KL (excluding Selangor) was much less active in 2015, compared with the past three years. Only 1.12 million sq ft of Grade A offices was taken up in 2015, about 50% of the average annual absorption recorded from 2012 to 2014.

“Low global oil prices, along with the sluggish financial markets, in particular the banking industry, has triggered a revision or consolidation of office space requirements for the affected tenants as part of their cost-cutting measures,” it says.

Boyd: ‘Malaysia has good quality buildings which would make for good conducive working environment for potential investors.’ 

RAM Ratings in a report earlier this year said it had retained a negative outlook on the office sector in the Klang Valley, due mainly to lethargic economic conditions, as well as subdued consumer and business sentiment.

“This is compounded by the caution weighing on the finance and O&G sectors – traditionally key take-out sources for office space in the Klang Valley. With the finance and O&G sectors affected by the decelerating economy and the plunge in crude oil prices, both sectors have been trimming their workforces and, consequently, their office space requirements,” RAM says.

RAM expects occupancy rates of the office sector to fall two percentage points this year.

Boyd says rental rates will likely remain stagnant this year.

“We don’t expect any upward movement. If there is any, it will most likely involve consolidation and upgrading rather than expansion.

Over the last 10 years, Savills Research says the average asking rents for selected office buildings in Greater Kuala Lumpur had increased at a gradual pace, with the exception of a substantial rise in 2008, when vacancy rates were at their lowest for the decade.

“A noteworthy observation of the Greater Kuala Lumpur office market reveals an apparent lack of pronounced cycles and volatility which seem are evident in the more developed office markets regionally, such as Singapore, Hong Kong and Tokyo.

“Even developing markets such as Manila and Ho Chi Minh City have shown greater volatility over the past 10 years.”

Instead, Savills Research says the rent cycle formation of Greater KL’s office market shows an approximate stepped plateau shape, with lengthy periods of very gradual growth (compounded annual growth rate of 3.4% over 10 years from 2005 to 2015).

“As such, office tenants and investors are typically not able to take advantage of the benefits which can come from correctly ‘predicting’ office cycles.”

Greater KL refers to an area covered by 10 municipalities surrounding Kuala Lumpur, each governed by local authorities, namely Kuala Lumpur City Hall, Perbadanan Putrajaya, Shah Alam City Council, Petaling Jaya City Council, Klang Municipal Council, Kajang Municipal Council, Subang Jaya Municipal Council, Selayang Municipal Council, Ampang Jaya Municipal Council and Sepang Municipal Council.

According to Savills Research, the vast number of office completions in 2015 pushed up the overall vacancy rate in Greater KL to 17%, the highest seen in the past 15 years.

“This was primarily impelled by the slower take-up of new office space completed in KL City.

“Moreover, the supply growth in KL suburbs has also benefited tenants with far more choices than in the past, with most companies which may now choose to locate their shared services, back office or secondary space to the outskirts of the city centre.”

According to the National Property Information Centre (Napic) from the Finance Ministry’s Valuation and Property Services Department, It says the office sub-sector saw a slight downturn in the overall occupancy rate at 83.7%, down from 84.9% in 2014.

Although the annual take-up rate was positive at 262,202 sq m in 2015, it was lower than 867,979 sq m that was recorded in the previous year.

Occupancy rates for government buildings was at 98.7%, which helped to cushion the moderate performance of private office buildings at 78.5%.

Private buildings supplied nearly 75.0% of existing space and 70.0% of occupied space nationally.

“State performance was commendable with 14 states having secured more than 80% occupancy. Perlis obtained full occupancy and eight other states obtained more than 90% occupancy,” says Napic.

It says the state office sub-sector was mostly dominated by government office buildings.

“The new office supply was on an uptrend. There were 27 new completions offering a total space of 520,718 sq m, an increase of 17.3% against 2014 (443,792 sq m).”

It adds that there were 16 buildings that commenced construction (481,642 sq m) last year, more than double the space recorded in 2014 (183,395 sq m).

“Seven of these starts were in Kuala Lumpur. New planned supply, on the other hand, recorded eight buildings against 13 last year but did not run far in terms of space. Six of these newly approved building plans are in the capital city.”

As at end-2015, Napic says there were 20.13 million sq m of existing office space from 2,434 buildings.

“There were another 62 buildings (1.67 million sq m) in incoming supply and 17 buildings (0.41million sq m) in planned supply. Kuala Lumpur dominated all three supply categories.”