HLIB Research said the prolonged mismatch between supply and demand had led to persistently high vacancy rates of 20% to 30% and stagnant rental growth.
KUALA LUMPUR: After more than a decade of oversupply and subdued demand, the Klang Valley office market may finally be turning a corner, according to Hong Leong Investment Bank Research (HLIB Research).
In a recent sector note, the research house said the prolonged mismatch between supply and demand, exacerbated by large completions during the pandemic, had led to persistently high vacancy rates of 20% to 30% and stagnant rental growth.
However, the imbalance is now beginning to ease.
“We believe that the Klang Valley office market has likely hit an inflection point and is poised for sustained recovery ahead,” HLIB Research said.
The research house identified several structural tailwinds supporting its view.
First, it noted anecdotal evidence of improved take-up rates in newer, higher-quality office developments, suggesting that the prolonged supply glut is starting to clear. Second, it said Malaysia’s pivot towards a high-value, high-tech and high-growth economy – in line with national frameworks – is fuelling demand for office-based operations.
“New drivers of growth such as semiconductors, digital services, green technology, electric vehicles (EVs) and artificial intelligence (AI) are increasingly reliant on knowledge, innovation and service-based functions, which typically require office-based environments for research and development, engineering, design and management,” it noted.
Third, HLIB Research said foreign direct investment (FDI) that initially focused on manufacturing was now expanding into regional headquarters and support offices.
The research house said since US-China trade tensions emerged in 2018, Malaysia has benefited from supply chain shifts, attracting manufacturers building a presence.
HLIB Research noted that recent investments from global tech giants like Microsoft, Google, Amazon Web Services, Oracle and ByteDance, which often begin with data centres, are typically the first step up to anchoring their long-term presence in a new market.
It cited the example of ByteDance, which has become an anchor tenant at Sunway V Tower in Kuala Lumpur, housing functions such as customer service, administration, human resources and payroll, and business development.
HLIB Research said investor confidence is also gradually being restored by clearer national agendas and political stability following the last general election in 2022.
“Amid this renewed policy clarity and stability, Malaysia is regaining its appeal as a cost-competitive alternative to regional peers, particularly for shared services, regional operations and investments in the digital economy,” it said.
The research house expects the recovery to first take hold in Selangor and the fringe areas of Kuala Lumpur, where the supply overhang is less severe, before gradually extending into central Kuala Lumpur.
Within this cycle, it believes the strong performers will be newer Grade A offices, certified green buildings with energy-saving features, offices integrated with public transport and retail amenities, and those managed by experienced property teams.
As top picks for exposure to the office market, it named IGB Commercial Real Estate Investment Trust
(REIT), with 3.5 million sq ft of net lettable area in the Klang Valley; IOI Properties Group Bhd, with 2.26 million sq ft in Putrajaya and Puchong; and Sunway Bhd together with Sunway-REIT, which have a combined 2.37 million sq ft in the Klang Valley.
