PETALING JAYA: Saving Tun Razak Exchange (TRX) will need more than capital injection from the Government as property consultants feel the oversupply of office property will need to be addressed.
Rentals at TRX would also need to be brought down to a more attractive level as Kuala Lumpur’s multi-year showcase property will need to attract both local and foreign companies.
This will also bring about a more level playing field as Grade A office spaceaverage between RM7 and RM8 per sq ft (psf), in some cases going down to RM6.50 psf after free rental periods and fit-outs.
Super grade A offices in the KLCC area average about RM13 psf. Property consultants say while the government has been objective when it agreed to inject more funds to complete Kuala Lumpur’s international financial centre, it must take concrete steps to address the oversupply, property consultants said.
The Klang Valley has office space totalling some 120 million sq ft. According to TRX website, there will be 26 buildings with a gross floor area of 21 million sq ft inclusive of commercial and residential space in the 70-acre development.
They are of the view that although TRX has a gestation period of between 10 to 15, or even 20 years, about four office buildings, a mall and a couple of serviced apartment blocks are being completed during this phase one period.
The Klang Valley has an over supply of virtually every segment of the property market -- office, retail and high-rise residential units.
Exchange 106 alone will add 2.8 million sq ft net lettable area with typical floor space of 35,000 sq ft, according to previous reports.
Last Thursday, Finance Minister Lim Guan Eng said RM2.8bil would be provided to master developer TRX City Sdn Bhd (TRXC) on a staggered basis until 2024 to complete TRX.
The announcement brought relief to TRX investors. They were concerned about TRX going down the same path as the shelved high speed rail (HSR) project or the to-be-reviewed East Coast Rail Link.
Lim said it was a better to inject RM2.8bil than to pay RM3.51bil in compensation claims. The Government had already sunk in RM3.7bil, bringing government funds in TRX to total RM6.5bil.
VPC Alliance Malaysia managing director James Wong said all the parties, private and government, put work in a “concerted” effort to fill the space there. “Intensive international marketing road shows will be required to sell TRX as an international financial destination and Kuala Lumpur as one of the world’s most liveable cities,” Wong said.
Wong said the government had “no choice” but to put in the RM2.8bil. “It was a chicken and egg situation. That was the only way the Government can recover their ‘investments’, but the over supply office situation is worrying,” he said. Although the proponents of TRX said most of the buildings in phase one are owner-occupied, there is little consolation in that, Khong & Jaafar managing director Elvin Fernandez said.
According to the master developer, most of the buildings in phase one, with the exception of Mulia’s Exchange 106, will be owner-occupied. Therefore, Mulia’s asking rental of RM17 psf should not be used as a TRX benchmark, TRX City Sdn Bhd, the master developer said. Exchange 106’s effective rent is about RM15 psf after taking into consideration the tax breaks. The fact that other buildings are owner-occupied does not disguise the fact that the rent in TRX may be too high considering that Grade A offices outside TRX is rented out at only RM7 to 8 psf.
“Even if the other buildings are owner-occupied, there is an opportunity cost for the occupier. So it is a poor excuse to say that since it is owner-occupied, it is all right.
“Most likely, the market rent will be inconsistent with the building cost on a per square foot, net lettable area basis.
He said although the Government has to go ahead with TRX to avoid a mega-sized abandoned eyesore, there must be a level playing field for the office market, whether the space is to be found inside or outside of TRX.
Offices within TRX have all sorts of tax breaks, which effectively lowers rental while those outside do not have these privileges. Despite that, rental rate is too high.
“Rent is a function of the profitability of the business. There is a ceiling rent that businesses will pay at any given time, for a given location, in any given city. A rent above the ceiling constitutes ‘a pain barrier’ for businesses,” he said. CBRE-WTW managing director Foo Gee Jen said it is important to “put aside the controversial and scandal surrounding 1MDB and the issue of over supply of the commercial property” and just push ahead. The Government has shown its resolve, he said.
KLCC and KL Sentral were “game changers to Kuala Lumpur’s business dynamics” and TRX will be too, Foo said.
His company was engaged by 1MDB to be TRX’s real estate advisor and valuer during the project’s earlier days.
He said completing TRX will move KL to be closer to competing with financial centres such as Singapore, Hong Kong and Tokyo.
TRXC, formerly 1MDB Real Estate Sdn Bhd, was the property arm and subsidiary of 1Malaysia Development Bhd (1MDB).
It was transferred to MoF in March, 2017 as part of a restructuring process in order to cut links with 1MDB.
By giving that RM2.8bil, Foo said the new government is giving more than just its financial backing to TRX. The new government is “objective” in its “assessment of the future direction of country’s economy,” he said.
“This project will accelerate the move to upscale our financial services. We need a Grade A+ building and infrastructure to be competitive,” said Foo.