KUALA LUMPUR: Office rental among super prime buildings in the Klang Valley is expected to come down further with landlords struggling to get the rental rate they want, according to property consultancy Rahim & Co.
The super prime space, with top-notch specifications, involved high construction costs and their owners would, rightly, want a certain yield from their investment.
However, they are unable to get the rent they are seeking because of the flood of office space in the Klang Valley.
They may ask for a certain rental rate – the so-called asking price – but their effective rent is lower after deducting rent-free periods, paying for tenants’ fit-out costs as well as a cut in the rental rate. It is a tenant’s market.
“There is a yield compression – yield is reduced. Some buildings are yielding less than 5%,” said Rahim & Co executive chairman Tan Sri Abdul Rahim Abdul Rahman.
With 12 million sq ft of office space under construction and expected to enter the market in the next couple of years, he said rental would go down further. The Klang Valley has 136 million sq ft of purpose-built office space, equivalent to the net lettable area of office space available in 40 Petronas Twin Towers.
“But (building owners) have financial commitments. They can only afford to bring rental down to a certain level. There will be a plateauing off,” said Rahim at the Rahim & Co Research: Property Market Review 2018/2019 here yesterday.
Rahim, who is also the exclusive joint agent for Permodalan Nasional Bhd’s PNB118, said it was seeking anchors to occupy the space.
PNB118 is a mixed integrated development next to Stadium Merdeka in the city. It comprises retail, office and residential space, a hotel, two stadiums and a park.
The focal point of the 20-acre project is a 118-storey building, which is best visualised as three buildings stacked one above the other. The top 17 floors will be occupied by a hotel comprising 232 rooms.
PNB has many companies and subsidiaries and they are expected to occupy about half of the 83 floors of office space. The rest will be tenanted.
“PNB had negotiated with subsidiaries to occupy the space even before construction started,” he said.
“The issue is with the move, they would be vacating the space they are currently occupying.
“With the 12 million sq ft of space under construction today, I suppose the (overall) office rental (in the Klang Valley) will come down somewhat,” he added.
Rahim was seeking tenants to occupy PNB118 in Malaysia and globally.
“We are talking to potential tenants worldwide,” he said. He expected rental to be in the double-digits.
On retail, Rahim said the Kuala Lumpur City Centre has very good occupancy.
Retail space rental has not come down as dramatically (as office space), but with the oversupply of retail mall space, they may want to consider bringing down rental rates.
The residential segment is expected to further consolidate.
“The consolidation started in 2016 and is expected to go on for the next 24 months,” Rahim & Co research director Sulaiman Saheh said.
The challenge is not just about the sheer number of unsold units, but also their price, location and product specifications.
He said developers with unsold stocks have gone into rent-to-own (RTO) schemes and this has turned unsold unoccupied units to yielding ones.
On whether prices are coming down, Sulaiman said the median house prices are actually dropping. Prices of new properties have also dropped when developers give freebies and rebates.
“When you buy a house and the developer gives you a bicycle or a car, they are effectively dropping prices,” he said.
Separately, CIMB Equities Research expected residential mortgage growth, which is the largest loan segment of the banking industry’s total loans, to slow down further in 2019 due to the cautious view of the market.
The research house said residential mortgage growth fell from 13.3% in 2014 to only 7.6% in 2018.
“We expect residential mortgage growth to ease further to circa 7% in 2019,” it said.
Residential mortgage is the biggest loan segment, comprising 33.4% of the banking industry’s total loans at end-December 2018 and 45% of the industry loan growth (5.6%) in 2018.
“Any drop in residential property prices would be negative for banks, as this would reduce the value of collateral for residential mortgages, possibly leading to higher loan loss provisioning for banks.
“We estimate that an additional 5% provisioning for residential mortgage impaired loans would reduce banks’ forecast financial year 2019 net profit by circa 0.6%.
“In our coverage universe, we expect the impact to be the least severe for Malayan Banking Bhd and Hong Leong Bank Bhd at just 0.3%, and most significant for RHB Bank Bhd and Alliance Bank at 1.8%,” the research report said.