By Tim Leonard (The Edge)More forward purchases and higher benchmark prices are expected in the sale, purchase and rental of office space in Klang Valley this year. Knight Frank Malaysia’s executive director Sarkunan Subramaniam, presenting The Edge/Knight Frank Klang Valley Office Monitor for 4Q2007, says the lack of premium office space in the Klang Valley will also be a contributing factor towards the downward movement of yield compression.

“Traditionally, yield rates for office space in the Klang Valley are between 6.5% and 6.7%. But in 4Q2007, we saw yield compression rates at 5.05%,” says Sarkunan, referring to the sale of Menara Commerce on Jalan Raja Laut. “The reason for this is simply because investors are willing to take lower returns on their property.”

Lower yield compression means the rental is not moving as fast as the capital value but the current rate of between 5% and 6% is a natural phenomenon in the Klang Valley office space sector, according to Sarkunan. “While the outlook and prospects are positive this year, the lack of premium office space contributes to various movements in selling price and rental rates,” he says.

“More corporate expansions and the country’s strong economic fundamentals are expected to drive the demand for office space the next couple of years, setting the stage for an exciting period, once several new developments, which are currently under construction, are completed.

“Benchmark prices will continue to be set this year and we are waiting to see how much the next transaction will be,” he adds.

Glomac Bhd first set the benchmark price of RM1,120 psf late last year when it sold off en bloc its Glomac Tower on Jalan P Ramlee to Prestige Scale Sdn Bhd, a company linked to Kuwait Finance House (KFH), for RM577 million.

A few days later, Mah Sing Bhd’s East Wing of The Icon on Jalan Tun Razak was sold en bloc to KFH-linked Prompt Symphony Sdn Bhd, for RM237 million, or RM899 psf. Then in early January this year, YNH Property Bhd set the highest benchmark price of RM1,230 psf for the sale of its Menara YNH on Jalan Perak, to KFH for RM920 million. The 45-storey office building will have a net lettable area (NLA) of 741,935 sq ft.
A local developer, TTDI Development Sdn Bhd, launched and sold en bloc its first tower in the prestigious Platinum Park project in KLCC for RM640.7 million to the Federal Land Development Authority, at RM930 psf. The 50-storey building will have a NLA of 689,000 sq ft when completed within the next five years.

After the ground-breaking ceremony on Jan 22, Deputy Prime Minister Datuk Seri Najib Tun Razak disclosed at a press conference that there were offers for the tower at RM1,250 psf.

That itself shows the direction of price movement for prime office space and we can only guess how much TTDI Development is going to lock in for two other Grade A office towers in its development parcel, says Sarkunan.

TTDI Development group managing director Datuk Johan Ariffin disclosed recently that they are having strategic talks with a few parties on en bloc sales for the office towers.
“While the KLCC is a preferred choice, there are other sought-after addresses and more competitive locations,” says Sarkunan.

“These include Damansara Heights, Mid Valley Centre and KL Sentral. These alternatives are close enough to the city and are by no means secondary choices.
“Newer buildings, better locations with a lesser degree of congestion, and the establishment of supporting infrastructures are some of their attractions.”

For example, KL Sentral is desirable because it’s a transportation hub. Based on the data sampled, Sarkunan says the overall supply of office space in KL city stood at 39.9 million sq ft while decentralised KL had 10.9 million sq ft. Newly-completed UOA Damansara II in Damansara Heights has 400,000 sq ft. Average occupancy rate (AOR) is generally increasing with office space in the central business district (CBD) recording the highest growth rate of 11%, jumping to 88% from 77% within a period of one year, q-o-q.

Golden Triangle properties saw an increase of 8%, up 96% from 88%, while office space in Damansara Heights recorded a 7% jump to 96% from 89% q-o-q. Overall, AOR for all Prime A offices in the data sampled rose 8% to an average of 93% from 85% q-o-q.
In terms of average rental rate psf, prime office space in Damansara Heights recorded a jump of 23.4% q-o-q. From the data, average rental is RM5 psf, a 95 sen increase, in Damansara Heights.

Second highest was Prime A offices in Golden Triangle which saw rates increasing 14.2% or 71 sen over a period of one year.

Offices in CBD rose 12.9% or 50 sen while Prime A+ offices went up 12.3% or 95 sen q-o-q.

“While rental rates have consistently gone up, they moved rather slowly compared to capital values,” says Sarkunan.

Among the buildings in the data sampled in the Golden Triangle (Prime A+) were Menara Citibank, Menara Maxis and Petronas Twin Towers, while Menara IMC, Kenanga International, Kompleks Antarabangsa and Menara Standard Chartered came under the Prime A category.

In CBD, the buildings were Menara Multipurpose, TH Perdana, and Wisma Hamzah-Kwong Hing, while Prime A buildings in Damansara Heights include UOA Damansara II and HP Tower, and Setia One and Wisma Chase Perdana for secondary grade.
Sarkunan says secondary office space’s AOR improved steadily quarterly from 83% to 91% (Golden Triangle), 66% to 80% (CBD), and 86% to 92% over the period of one year.

He adds that rental rates for secondary office spaces are also on an upward pressure.
“Investment demand will continue to drive the increased interest for prime office buildings in KL city and decentralised KL,” says Sarkunan.

“Yield will be compressed as investors compete for good quality investment grade offices.”

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