THE flood of office space in Greater Kuala Lumpur today is a result of policies and responses by both the public and private sector before the 2008 global financial crisis.
Khong & Jaafar group of companies managing director Elvin Fernandezsays it is necessary to look back in history to understand the current office market. The second thing to note is capital value of office space is driven by rents.
Elvin says the Klang Valley office market was peaking before 2008. Prime rents for new buildings were shooting up from an earlier base of RM6 per sq ft to between RM8 and RM9 per sq ft in 2008. When rentals began to head towards the RM10 per sq ft a month level, the capital value of the office space began to move up. It is rent which drives capital value.
“It was during this time, when capital values began to shoot above RM1,000 per sq ft and we saw a lot of transactions,” says Elvin, who is also an adjunct professor at Universiti Malaya's Faculty of Built Environment.
As a rough rule of thumb, if the rental is RM6 per sq ft, the capital value would move roughly in tandem at RM600 per sq ft.
“So if the value of RM6 per sq ft was going towards RM10 per sq ft, the capital value would move towards the RM1,000 per sq ft level. But instead of even hovering at the RM1,000 per sq ft level, capital value went past it,” Elvin says.
While at times capital values do run ahead of fundamental factors like rents and there were many transactions like that this at once indicates froth in the market, says Elvin.
The global crisis did not affect Malaysia that much but it did affect the office and condominium markets in Kuala Lumpur, he says. Rents fell. The question is: If the Malaysian economy was not much affected, why were the office and condominium markets affected? The answer: Both these markets had over-extended themselves, he says.
“Weaknesses had built into the market and the affected markets shook as a result of the external events,” he says.
Since then, the markets have come down and rents for both the office and condominium sectors are no longer aggressive.
The market is no longer dreaming of RM10 per sq ft for average prime office market rents, but there exists today in the city, very prime office space by virtue of their location or the facilities/amenities or what property professionals call prime plus and are in places around the Petronas Twin Towers.
“Rents for average prime have fallen to between RM7 and RM8 per sq ft. Hence the capital value, at one time past the RM1,000 per sq ft mark, is also retreating,” says Elvin.
Nonetheless, there are developers who are selling strata office space at RM1,000 per sq ft. But these are minor distractions and the focus should remain on the wider office sub-segment. What is fundamental today is that the Klang Valley office market is on a more realistic level, driven by rent of RM7 to RM8 per sq ft, and capital value of between RM700 and RM800 per sq ft for average prime office space with exceptionally well located or green buildings commanding higher prices.
The next question is, why has the capital value remain at this RM700 and RM800 per sq ft level?
This, says Elvin, is the replacement cost. It will cost that much to replace new buildings. The cost of replacement (or cost of construction) is also a driver in the market. It benchmarks the bottom line. But there is a caveat and it is this during times of severe stress, the capital value can go below cost of replacement. This was seen in Japan and in Kuala Luimpur itself post the 1997/98 Asian financial crisis. It is demand and supply which dictates the capital value, and not just cost of replacement. The policies of the day are also important drivers.
In the case of the Klang Valley, between 2010 and the present, something important has taken place.
Transformation
Between 2010 and today, a new euphoria has entered the overall property market.
“The Economic Transformation Programme (ETP), and its focus on property and transportation, has created a new emphasis to turn Kuala Lumpur into a more liveable international city. It is a policy that hinges on nearly every segment of the property market,” says Elvin.
As of September last year, the Klang Valley office market has total vacancies amounting to about 23 million sq ft while the annual net absorption rate will not exceed 2 million sq ft. This vacant space covers all buildings, both old and new, but excludes government buildings.
Demand is also shifting. “There may be less hope for the old ones unless they are refurbished or redeveloped,” he says.
From that perspective, the vacancies will probably be in the older buildings. The onus is for owners of older buildings to decide if they want to invest in redevelopment, says Elvin.
Fresh ideas and policies are needed to look into what can be done as companies migrate to newer, grander buildings.
He says there is an approved total incoming supply of about 18 million sq ft and a planned supply of about 2 million sq ft as at March this year. This total of 20 million sq ft is a huge figure, and may not include all the big ticket projects announced but not detailed out or given development orders as yet. It is imperative, therefore, he says that decision-makers and lenders understand the market.
“The long and the short of it is, don't be aggressive in building. But to suggest that the local authorities step in is not a good idea as they may not have the expertise to navigate a good balance. It would be better to impose the burden on banks as they are the lenders of these projects, and to insist they play a more effective role through the mechanism of requiring detailed market and feasibility studies before financing approvals through loans or other means,” he says. - The Star
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