The Greater Kuala Lumpur office market is expected to remain weak for at least another two years, according to Savills Malaysia. THE fundamentals of the Greater Kuala Lumpur (KL) office market, which is already in a fairly weak and challenging state, is expected to remain so for at least another two years, according to Savills Malaysia. In its Kuala Lumpur Offices Second Half 2020 Report recently, Savills Malaysia said that the office market, which has been hit by oversupply issues and the effects of the Covid-19 pandemic, is expected to remain challenging over the medium term. “The obvious impact derived from the pandemic is perhaps the acceleration of remote working trends and fast-tracked digital adoption in workspaces. As most companies have been forced to adapt their workforce’s remote working ability and juggle with physical distancing rules, it is anticipated that the office footprint is unlikely to change in the short to medium term. “Back in the pre-pandemic period, the fundamentals of the Greater KL office market were already subdued. This is not anticipated to change before 2023, in light of the impending supply between now and then.” Savills Malaysia says that the office stock in Greater KL expanded to 132.9 million square feet in the third quarter of 2020, while the cumulative supply in KL (a subset of the Greater KL market) totalled 89.2 million sq ft during the period under review. “This is marked by the completion of four medium-scale office buildings (with a net lettable area of below 300,000 sq ft), totaling approximately 0.86 million sq ft, of which only one, Menara Hap Seng 3, is within Kuala Lumpur. “The others, namely, Sumurwang Tower, Menara Star 2 and Beta Office Suites at Pacific Star Commercial Hub in Petaling Jaya, are all in Selangor (another subset of the Greater KL market).” By 2023, Savills Malaysia expects the Greater KL office market to expand by another 10% (or 14.1 million sq ft), with 80% of the new supply (11.4 million sq ft) located in Kuala Lumpur. “The bulk of this supply in Greater KL is expected to be completed within the next 12 months (KL: 4.7 million sq ft, Outer KL: 1.9 million sq ft). About 0.7 million sq ft (65%) of incoming space in the Tun Razak Exchange has been pre-committed by owner-occupiers such as HSBC Bank and Affin Bank.” It adds that leasing activity has been subdued not just due to uncertainty in economic conditions, but also what the future of the office may look like post-Covid-19. “These factors have led to many companies putting their near-term expansion plans on hold. Companies are preserving cash flow, with the bulk of ongoing leasing activity being driven by absolute necessity or downsizing, namely, the potential for savings.” Savills Malaysia says the Greater KL Grade A office vacancy rate during the third quarter of 2020 stood at 25.9%, an increase from the 25% recorded in the fourth quarter of 2019. “Grade A office vacancy in Kuala Lumpur improved marginally to 24.9% in the third quarter of 2020 compared with 25.2% in the previous corresponding period, attributable to the newly-completed Menara Hap Seng 3 which is 40% occupied by Tokio Marine General Insurance, as well as the relocation of Accenture and expansion of Agoda at The Exchange 106. “Aside from the completion of new buildings, the overall increase in the vacancy rate in the Greater KL market is attributable to the difficulty in arranging viewings and fit-out works due to government-imposed movement restrictions for more than half the year.” As flexible work arrangements gained traction this year, Savills Malaysia says corporations have taken a step back to reassess their space requirements in the short-to-medium term. Meanwhile, Deloitte in its 2021 Commercial Real Estate (CRE) Outlook report points out that the pandemic has made cost management and redefining the value proposition of CRE properties top priorities for the operations function. “With much lower demand for leased space, CRE companies face rising pressure to contain costs. Globally, 40% of respondents expect a decline in rental growth and 59% anticipate an increase in vacancy rates over the next 12 months. Interestingly, only 37% of the Asia-Pacific respondents expect a decline in rents, but 74% anticipate a significant increase in vacancy levels.” Savills Malaysia says that while sentiment is weak, the lack of concluded transactions across the market makes it difficult to quantify rental movements. “As such, average gross asking rents in Greater KL remain at RM5.60 per sq ft per month while offices in KL stand at RM5.80 per sq ft. In the Grade A office market, average gross asking rents for selected prime buildings in KL experienced only a marginal decline of 1%, from RM7.60 to RM7.50 per sq ft per month in the third quarter of 2020.” Deloitte adds that the pandemic is also creating longer-term, evolving shifts in tenant and end-user preferences, which will likely influence leasing demand. “Because of this, CRE companies will need to reassess the value proposition of properties.”
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