KL prime property market quarterly snapshot shows progress

Despite increasing economic uncertainties, Kuala Lumpur's prime property markets continued to perform well as 2011's momentum carried into 2012, albeit at a slower rate.

Condominium

In the first quarter of this year, the high-end condominium stock increased to 21,214 units with the completion of 285 units in a Bangsar located project. The freehold development, designed for “young and aspiring urbanites,” has six types of unit layout with built-up areas ranging from 671 sq ft to 1,610 sq ft all of which have been sold.

The number of high-end launches slowed as developers focused on the more saleable mid-price range market. One high-end development, located in Ampang, was launched in the first quarter. With good demand from both owner occupiers and investors and early pre-launch marketing by the developer, the freehold development, comprising 500 units, has been almost fully sold. Activity in the high-end condominium market is, however, expected to slow this year, in line with more caution in the market. More developers are expected to adopt a wait and see attitude and many are expected to promote and market their products to gauge demand before officially launching them.

Demand in both the sale and leasing markets has been stronger for smaller units and we anticipate this trend will continue this year with developers building smaller more affordable' units, which cover a larger purchaser catchment. We also expect to see more developers delivering SOHOs (small office home office), SOVOs (small office versatile office) and SOFOs (small office flexible office) in the short term.

Generally, market prices and rental values remained stable and rental rates were steady and average net yields were in the range of 3.5% to 5%. We anticipate that market prices will consolidate this year and rentals will continue to face downwards pressure despite the relatively strong holding power of many investors.

Office

Following the completion of two buildings, located in the city's Golden Triangle, the total existing supply of prime office space in Kuala Lumpur city increased by 1.1 million sq ft. The city centre's prime office market is expected to increase by 2.04 million sq ft this year with the delivery of four prime office buildings.

The average occupancy rate in KL city centre declined from 84.9% in the fourth quarter 2011 to 81.3% in first quarter this year as the newly completed offices were yet to register any physical occupation. However, one of the two was reported to be fully pre-committed. The office market in the city centre registered a net absorption of just below 190,000 sq ft and notable leasing activity was recorded within numerous prime buildings in the Golden Triangle.

In the first quarter this year, the average net rental reduced marginally as many landlords are still maintaining the same rental rates. Some, however, are now willing to offer attractive incentives such as longer rent free periods to attract prospective tenants.

With limited stock available in the market and steady demand from Malaysian investors, the investment market was relatively quiet and no major transactions were concluded.

We believe that if all buildings are delivered on time, the oversupply scenario will become more serious and with steady local demand, but slowing foreign demand, the occupancy rate in the city centre will decline. The lower occupancy rate will result in some landlords reducing their rental rate expectations in a tenant favourable market. Generally, market prices are expected to remain stable but assets with high occupancy rates and superior specifications within prime locations could register some capital appreciation.

Retail

Supply increased marginally, with the completion of the refurbishment and extension of one suburban, prime-retail centre, adding approximately 92,000 sq ft to the total stock and a further 1.4 million sq ft of prime space is expected to be completed by the end of the year in both the city centre and the suburbs.

The average occupancy rate declined marginally from 91.7% to 91%, predominantly due to retail centre owners and retailers undergoing refurbishments of their outlets. However, strong demand prevailed with the majority of the vacant space in new retail developments being pre-committed to by tenants.

Rental and market prices generally remained stable for the first quarter of this year with limited investment stock available. No en bloc transactions involving prime-retail centres were recorded. Investor interest, however, remained strong with a keen focus on prime-retail investment opportunities in either the city centre or the suburbs.

In the city centre, the average occupancy rate is forecast to increase over the next 12 months as retailers take physical occupancy upon completion of their fit-outs and renovations. In the suburbs, however, the market is expected to enter a temporary adjustment period where the occupancy rate is anticipated to reduce marginally as substantial supply will be completed during 2012.

We expect rental values to generally remain stable this year, but there is room for improvement in select prime retail centres in the city centre. Market prices are more likely to see an upside as interest from both local and foreign investors remains strong and many owners remain “unwilling” to sell at the prices most investors are prepared to pay. - The Star

David Jarnell, senior vice-president and head of research at Jones Lang Wootton, has over 25 years working experience in the property market and has been based in KL since 1996. This is an extract of a report released this week.