Top grade office space faces growing pressure


  • Property
  • Saturday, 11 Jan 2020

More supply: The recently-completed Exchange 106 (left) at the TRX is adding to the supply with its 2.65 million sq ft of premium office space. — Bloomberg

WITH Permodalan Nasional Bhd (PNB)’s Merdeka 118 tower nearing completion, there is a growing concern that this may add to the existing glut of office space in the Klang Valley.

PNB group chairman Tan Sri Zeti Aziz had assured that there is no cause for concern in securing tenants for Merdeka 118, given its grade A office building status, which carves out a niche segment.

She noted that there are few grade A office buildings in Malaysia and most of them have high occupancy rates.

The grade A office buildings are namely the Petronas Twin Tower with an occupancy rate of 100%, Menara 3 (100%), The Intermark (85%), KYM Tower @ Mutiara Damansara (81%), Menara Prudential (85%) and Axiata Tower (72%).

Property consultancy MacReal International Sdn Bhd founder Michael Kong tells StarBizWeek that the rental rates for grade A office buildings in KL city and KL fringe are RM7 to RM11 per sq ft (psf), and RM6 to RM8.50 psf, respectively.

Meanwhile, the rental rates of office buildings that are of a lower grade in KL city and KL fringe are RM6 to RM7 psf, and RM5 to RM6 psf, respectively.

“The market value for grade A office spaces or buildings is slightly higher than those of a lower grade because of the superb facilities.

“The buildings have high quality finishes, modern systems coupled with exceptional accessibility, ” says Kong, who is also the president of the Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector.

Interestingly, there is no well-defined specification for grade A or class A office buildings in Malaysia.

According to the Building Owners and Managers Association International, office spaces are categorised into three classes: A, B and C.

Generally, grade A buildings (interchangeably used as premium A+ or prime A+) are classified as highly-prestigious buildings which compete for premier office users at rental rates that are above average in a particular area.

The office buildings have top-notch infrastructure and large spaces in the city centre.

The professionally-managed buildings also attract quality tenants as well as command premium rental rates.

Kong opines that the office market is expected to be tenant-led in the short to medium term.

He adds that most of the demand for office space is heavily dependent on the oil and gas industry as well as the financial services sector.

The two sectors account for 60% of the demand for grade A office space in the city centre.

“There will be growing pressure on the overall occupancy and rental levels with newly-completed buildings having no significant committed tenants.

“With more supply coming onstream, the outlook remains cloudy, ” he says.

Note that the recently-completed Exchange 106 at the Tun Razak Exchange (TRX) is adding to the supply with its 2.65 million sq ft of premium office space.

In the Real Estate Highlights Second Half of 2019 report, Knight Frank Malaysia says that while Exchange 106 has an estimated 20% pre-committed occupancy, there is further pressure exerted on the prime A+ office segment in the upcoming financial district of TRX.

This is due to the heightened competition for the limited pool of large corporations and multinational companies (MNCs).

“On a positive note, there are investment incentives announced in Budget 2020 to encourage more inbound investment from Fortune 500 companies and ‘global unicorns’ in the high technology, manufacturing, creative and new economic sectors over the next five years.

“There are also concerted efforts by InvestKL to attract more MNCs to invest in the country. This will have a multiplier effect on the country’s economy and real estate market due to the creation of more job opportunities.

“Newly-completed buildings in mega developments such as the TRX and other mature economic clusters which offer competitive rentals, will appeal to this category of occupiers, ” says Knight Frank Malaysia.

Another trend in the office property market is the relocation of companies from older office buildings to newer ones.

Kong notes that tenants are savvy about the space they occupy, and understand the financial and productivity benefits of a higher quality space.

“As such, more landlords and building owners are exploring opportunities to repurpose or refurbish their assets to seek higher investment returns, ” he says.

Ultimately, office buildings that are able to achieve high-occupancy rates are those that can offer differentiating features, accessibility, secure and reasonably-priced parking space, as well as attractive leasing packages.

Additionally, there is an increasing demand for environment-friendly office buildings as tenants can benefit from tax incentives and feature the building as part of their corporate social responsibility.

Multimedia Super Corridor buildings continue to be attractive to tenants given the technology and digital infrastructure such as high-speed Internet, which is a requirement for technology support in operations.

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