Office rents in Greater Kuala Lumpur dip 1.1% in Q4 2020

The KLC submarket recorded the steepest decline of -1.4%.

Weaker demand and shrinking pool of tenants continued to exert downward pressure on occupancy rates. According to JLL, tenants across various industries, for example oil & gas, recruitment firms, automotive, aviation, travel & tourism, etc. were continuing to right-size their office footprints. The current work-outside-office arrangements among most occupiers continued to dampen demand for office space.

Tenants were continuously offered incentives such as rent-free periods, refitting incentives, flexible tenancy terms and flexible space usage. There were plenty of fitted-out units available at negotiable rents, reducing the capex for prospective tenants. Despite the soft market environment, buildings in strategic locations with great connectivity and close to neighborhoods were still holding up.

Weak absorption and new completions further increase vacancy

Menara MyIPO in PJ Sentral and Menara TCM at Jalan Tun Razak obtained CCC during the quarter. MyIPO will be occupying around 70% of Menara MyIPO, its new headquarters. Both the buildings were MSC cybercentres and GBI accredited. Menara TCM is additionally designed for LEEDS Gold Accreditations.

The overall vacancy rate in Greater Kuala Lumpur increased by 0.3 ppts as the supply-demand mismatch continued to widen. Vacancy in KL City (KLC) increased by 0.8 ppts due to the completion of Menara TCM and soft take-up. The KL Fringe submarket remained stable. The Decentralised (DC) submarket recorded an improvement in occupancy, supported by owner occupied space in Menara MyIPO at PJ Sentral.

KLC rents undergo more correction but Fringe holding firm

Overall net effective rents in Greater Kuala Lumpur fell by -1.1% q-o-q. KLC submarket recorded the steepest decline of -1.4%. Net effective rents in KL Fringe fell by -0.8% q-o-q, while the DC submarket remained stable with a change of 0.1% q-o-q. Landlords were providing more rental incentives to retain their tenants, as opposed to leaving their office space unoccupied.

UOA REIT acquired UOA Corporate Tower in Bangsar South from Distinctive Acre. This related party transaction between UOA subsidiaries was transacted at MYR 955 per sq ft, below its valuation price at MYR 980 per sq ft. Meanwhile, JD Hospitality acquired Menara MIDF in Jalan Raja Chulan from PNB at MYR 875 per sq ft. The property is reportedly to be repurposed to a hotel.

Outlook: Economy set to rebound and improve market sentiment

Recovery of the office market depends greatly on the economy and the influx of new investment. The economic consensus across the board predicts Malaysia’s growth to range from 5.2% to 7.5% in 2021. However, FDI in the service sector fell sharply, with a drop of -90.9% y-o-y, to only MYR 2.17 billion between 1Q-3Q20, which could lower office space take-up from multinationals in the near term.

More fitted-out units will be available in the market, offering more choices to tenants at lower costs. E-Commerce, logistics and tech sectors are expected to perform well. The Malaysia Investment Development Authority is proactively seeking more MNCs to relocate their operations to Malaysia, by promoting its competitive edge with some of the lowest rents and capital values in the region.