Kuala Lumpur Offi ceAsian Cities Report – 2H 2019

REPORT

Savills Research

savills.com.my/research

Kuala Lumpur Offi ce

Strong interest in quality offi ce space is being led by the expansion of fl exible space operators

NEW SUPPLY Stock of offi ce space in Greater KL, the single largest offi ce market in ASEAN, stands at approximately 126 million sq ft, with the completion of four new offi ce buildings contributing 1.08 million sq ft in 1H/2019.

The fi rst offi ce tower within the Tun Razak Exchange, namely Menara Prudential, was completed this year and serves as the headquarters for Prudential Assurance Malaysia Bhd. The KYM Tower in Mutiara Damansara and Symphony Square in Petaling Jaya were also completed in early 2019. With the exception of the EkoCheras Offi ce Suites, the other three new buildings are single-owned en-bloc buildings, built with quality features and modern specifi cations.

By the end of 2019, the stock of offi ce space is expected to expand by 3.8 million sq ft, touching approximately 130 million sq ft – with the completion of Southeast Asia’s tallest building, The Exchange 106, which will replace the Petronas Twin Towers as the tallest building in the country. This landmark offi ce tower, located within the Tun Razak Exchange (TRX), stands at 492m tall, off ering 2.4 million sq ft of column-free offi ce space with spacious fl oor plates ranging from 22,000 to 34,000 sq ft. It is reportedly up to 20% pre-leased and targeted to be half-fi lled by the end of 2020.

Construction of new buildings continues unabated, with approximately 18 million sq ft coming on stream between now and 2022. The bulk of the incoming offi ces are situated within KL City, accounting for 63% (11.50 mil sq ft), with the remaining located within Outer KL (26%, 4.6 mil sq ft) and KL suburban (11%, 2.10 mil sq ft).

About a third of the incoming space is located in the Golden Triangle area, predominantly from offi ce towers in TRX as well as another future iconic tower, the Merdeka 118, which will dethrone Exchange 106 as the tallest tower in Southeast Asia and is set to be the fourth tallest tower in the world. Merdeka 118 off ers 1.65 million sq ft of offi ce space and Park Hyatt will take up the top 17 fl oors of the tower. The skyscraper is scheduled for completion in 2021.

VACANCY RATESThe overall vacancy rate in Greater KL (excluding Cyberjaya) improved to 21.6% in Q2/2019, compared to 22.9% in Q1/2019, attributed to the mushrooming of co-working space operators, predominantly in Grade A offi ces. The performance of Grade A offi ces remained resilient across the board, with vacancy rates hovering between 10% and 15% over the past fi ve years.

While the KL city centre remains the preferred address for large corporations, the Grade A offi ce space within KL Suburban is performing well, as several multinational technology companies in expansion mode show a preference for suburban offi ces. The vacancy rate of KL Suburban has fallen by approximately 3 percentage points to 20% in Q2/2019 (Q4/2018: 23%), attributed to the relocation of some companies from the city centre into the suburbs due to cheaper rents in newer, better-specifi ed offi ces. Khazanah Nasional Bhd, the country’s sovereign wealth fund, has also announced plans to move from its Petronas Twin Towers offi ce to a KL Sentral address, as a cost cutting measure.

Nonetheless, leasing activity in newly completed offi ce buildings remains a concern with most of the newly completed offi ce buildings recording discouraging pre-commitment of less than 40% of the available leasable space upon completion.

RENTS & PRICESSupply has outpaced demand since 2009. The average offi ce asking rent in Greater KL has remained fairly resilient, remaining at around RM5.39 per sq ft per month since Q4/2018. Similarly, in the Grade A offi ce rental market, there have been no major fl uctuations to the average asking rent, which is holding at RM8.55 per sq ft per month.

The lack of demand will put further pressure on the current competitive rental market, especially for aged offi ce buildings. Hence, apart from off ering attractive rental packages and incentives, some building landlords have invested in enhancing building features and specifi cations through asset enhancement initiatives (AEI). This is in response to the current fl ight to quality phenomenon, and the evolution from contemporary workspace into fl exible and collaborative oriented workspace. An example of this is Hong Leong Group which has embarked on a reinvention of 65% of the offi ce space (250,000 sq ft) in Menara HLA for an initial investment of RM40 million into HLX Integrated Innovation Centre. The initiative is aimed at off ering a collaborative platform for start-ups, corporates, technology companies and venture capitalists.

GRAPH 1: Greater KL Offi ce Stock, 2010 to 1H/2019

86.791.5

97.9102.2 105.4

111.5115.4

120.4125.3 126.4

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20

40

60

80

100

120

140

2010 2011 2012 2013 2014 2015 2016 2017 2018 1H2019

KL City The Rest of Greater KL Greater KL

MIL

LIO

N S

Q F

T

Source Savills Research

GRAPH 2: New Offi ce Supply in Greater KL, 2011 to 1H/2019

3.43

5.435.15

2.60

7.21

3.97

5.51

4.15

1.08

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2

3

4

5

6

7

8

2011 2012 2013 2014 2015 2016 2017 2018 1H2019

MIL

LIO

NS

SQ

FT

The Rest of GKL KL City Greater KL

Source Savills Research

GRAPH 3: Grade A Offi ce Supply And Vacancy Rate, 2010 to 1H/2019

0%

5%

10%

15%

20%

25%

0

2

4

6

8

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2010 2011 2012 2013 2014 2015 2016 2017 2018 1H2019

VA

CA

NC

Y R

AT

EMIL

LIO

NS

SQ

FT

Grade A Supply (LHS) Grade A Vacancy (RHS)

Source Savills Research

Kuala Lumpur Offi ce

TENANTS NEW OFFICE EST FLOOR AREA (SQ FT) REMARK

KL City

Standard Chartered BankEquatorial Plaza*

106,000 Relocation

McDermott 60,000 Expansion

CapitalandNaza Tower

14,000 Relocation

Co-labs 28,000 New Set Up

Common Ground KL33 27,000 New Set Up

Spaces Menara Prestige 55,800 New Set Up

KL Suburban

Volkswagen

Menara Etiqa*

14,000 Relocation

CIMB Howden Insurance Brokers 14,000 Relocation

Reinsurance Group of America 6,900 Relocation

Samsung

Mercu 2 KL Eco City

78,000 Relocation

Wework 60,000 New Set Up

RAM Holdings 26,000 Relocation

BHP Billiton Southpoint, Mid Valley City 100,000 Relocation

Telemarket Malaysia Menara Bank Rakyat 70,000 Relocation

Spaces Platinum Sentral 70,000 New Set Up

Outer KL (Selangor)

Colony KYM Tower 19,500 New Set Up

Co-labs Uptown 7 15,000 Expansion

Common Ground Nucleus Tower 22,000 New Set Up

TABLE 1: Notable Offi ce Leasing Activities/Tenant Movement In Greater KL

Source Savills Research & Consultancy*Savills Malaysia is the exclusive leasing agent for Equatorial Plaza and Menara Etiqa.

Offi ce investment sentiment remained muted in 1H/2019. Five offi ce buildings transacted in the fi rst half of 2019, amounting to RM480 million. In KL City, Singapore’s Royal Group reportedly agreed terms for the proposed acquisition of Wisma KFC for a total consideration of RM130 million, while Asia New Venture Capital Holdings Sdn Bhd is reportedly entered into agreement to acquire Wisma MPL along Jalan Raja Chulan for RM189 million. In the Kuala Lumpur suburban region, Nexgram Tower and Ikhlas Point (Tower 11) at Bangsar South changed hands in Q1/2019, amounting to RM113 million.

MARKET OUTLOOKThe impending supply of offi ce space will continue to pressure the offi ce rental market, with vacancy rates expected to rise. Upcoming new offi ce buildings in prime locations with quality building features and competitive rents will continue to be well received, compared to older buildings. In order to stay relevant and competitive in the prevailing market, older offi ce buildings may consider enhancing building features along with providing attractive rental packages and incentives.

Changes in the workforce composition and the disruption of technology are changing how we work and communicate, which are key drivers in the evolution and innovation of today’s workspace. The offi ce space of tomorrow must be future-proofed, be it in the form of technology or space planning, by considering the curation of fl exible, convenient and collaborative work environments suitable for all categories of workforce.

Asset Enhancement Initiatives (AEI) are an alternative solution for aged offi ce buildings, in

order to stay relevant and competitive in today’s challenging offi ce market.

GRAPH 4: Average Offi ce Rents In Greater KL,2010 to 1H/2019

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4

5

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2010 2011 2012 2013 2014 2015 2016 2017 2018 1H2019

RM

PS

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All Grade Offices Prime Offices

Source Savills Research

Savills MalaysiaLevel 9, Menara MilleniumJalan Damanlela, Bukit DamansaraKuala Lumpur 50490Malaysia+603 2092 5955