DTZ

13 July, 2010

Office rents continued to fall marginally due to substantial incoming supply by the end of the year

There were no new office completions in Kuala Lumpur during the quarter, but some 2.06 million sq ft is scheduled to come on stream by the second half of the year. General business sentiment turned more positive as a result of two consecutive quarters of economic expansion since Q4 2009. As a result, the office market experienced more active enquiries and higher take up of space as witnessed by the improvement in net absorption rate.

The overall occupancy rate of office buildings in Kuala Lumpur improved slightly from 87.2% in Q1 2010 to 87.9% in Q2 2010.

Office rents continued to drop marginally in the quarter; as average prime office rent fell from RM6.02 per sq ft per month in Q1 2010 to RM6.00 per sq ft per month in Q2 2010. It is increasingly a tenant’s market with ability to negotiate for cheaper rates due to substantial incoming supply in the next few years. About 14.90 million sq ft of purpose-built office buildings are in the pipeline between 2010 and 2014.

The outlook for the sector remains cautious until a more convincing economic performance is achieved. On a positive note, the recently announced 10th Malaysia Plan (10MP) that targets on creating more jobs, mainly in the services sector, would translate into more office space demand in the next five years.

Retail market remained stable due to rising consumer sentiment

Consumer sentiments continued to rise for the fifth consecutive quarter after bottoming out at the end of 2008. The overall average occupancy rate of shopping centres in Kuala Lumpur remained at 91% in Q2 2010.

Overall, the outlook of the retail sector is competitive, with an upcoming supply of two million sq ft in 2010. Occupancy is expected to fall but rental rates will remain stable, with some marginal upside of between 3% and 5% by prime retail centres. The future prospect of the sector depends on the 10th Malaysia Plan, which has placed high hopes for the retail sector, with projected private sector consumption to grow by 7.7% per annum, from the average of 6.5% p.a. in the preceding five-year period.

Selective sales demand boost residential sector

The demand for luxury residential landed properties was overwhelming, witnessed from the strong take-ups of recent launches in Klang Valley, as well as the benchmark pricing set. However, high-end condominiums in the city centre continue to face over-supply concern and decline in the number of expatriates, which triggered the decrease in both capital and rental value.

Overall, average prices of high-end condominiums in Kuala Lumpur fell 3% QOQ to RM552 per sq ft in Q2 2010, while average rents dropped marginally to RM3.53 in the quarter.

Mr Eddy Wong, Head of Residential commented: “The recent hike in Overnight Policy Rate (OPR) does not have much adverse effect on property market especially the high end residential landed properties. Generally, the buying sentiment has improved following the robust growth experienced in Q1 2010.”

Investment market rebounded strongly with REITs being the main players

The real estate investment market recorded more investment activities, driven mainly by the REITs through restructuring and injecting properties into their current portfolios. Pricing has recovered from the lows as the stock market improved. Total transaction is reported to be approximately RM1.7b.

On a selective basis, foreign buyers are still interested but do not find pricing compelling while domestic buyers are active given the stable pricing and firm economic recovery. However, the proposed listing of a few REITs will make the domestic REIT market more attractive to foreign investors.

According to Brian Koh, Executive Director of Consulting & Research in Malaysia, “The recent announcements of the New Economic Model (NEM) and 10th Malaysia Plan (10MP) will have a strong bearing on the future direction of the country and its impact on the property sector.”

Download the Property Times Kuala Lumpur Q2 2010 report for further details.