Avoiding a potential glut
Need for review of commercial projects to space out supply
BY ANGIE NG
[email protected]
Posted on August 2, 2014 | 201 views | Topic : Investment.
THE high number of ongoing commercial projects in the Klang Valley is causing some jitters in the market, leading property consultants to call for a review of project plans including the need to phase out projects to avoid a glut and high vacancy rate.
VPC Alliance Malaysia Sdn Bhd managing director James Wong says there is already an oversupply of office space in the Klang Valley, as demand is not keeping pace with supply, and with another additional 18.61 million sq ft office space expected to be completed by 2016, the supply situation “has indeed reached a critical stage”.
“It is more alarming as some of the mega projects such as Warisan Merdeka and the Tun Razak Exchange developments are not included in the incoming supply as building plans of some of these mega project developments have not been approved and hence not included in the incoming supply statistics,” Wong tells StarBizWeek.
Wong says there should a central planning authority for the 10 local authorities in the Klang Valley to provide planning guidelines and a “master record” of what has been approved “so that supply and demand of the commercial projects can be better regulated.”
Between 2014 and 2016, the projected office supply completion in Kuala Lumpur and Selangor is 18.61 million sq ft of which the bulk of the new supply will be in 2014 and 2015 accounting for 87.4% or 16.25 million sq ft. Meanwhile, occupancy rate this year is estimated at 79.9% and in 2015 at 78.5%, he discloses.
The projected new retail space in Kuala Lumpur and Selangor these two years will be 5.89 million sq ft of which 52% of the future supply will be completed this year, with occupancy rate estimated at 79.4% this year and 78.4% in 2015.
Knight Frank Malaysia managing director Sarkunan Subramaniam says that with the high number of ongoing projects, the gap between demand and supply will continue to widen and there will be growing pressures on rental and occupancy as competition heightens.
“As at the first half of this year, purpose-built office space in the Kuala Lumpur city centre was around 48.6 million sq ft with another 21.5 million sq ft in the city’s fringe, bringing the cumulative supply to 70.1 million sq ft. In the retail sector, there are some 46.5 million sq ft of retail space in the Klang Valley currently,” he says.
Sarkunan says the market is expected to become more challenging going forward and several developers are reportedly reviewing their proposed developments to ensure the viability and marketability of their projects to commence construction only when the key or anchor tenants are secured.
He says development projects on government land that offer a high commercial component of office and retail space are also competing with those by private developers.
“Stakeholders should be prudent in the planning, approval and construction of these developments as they may lead to overbuilding and oversupply. As an alternative, government land within the Klang Valley could be better utilised by building affordable housing to cater to the demand of the masses,” Sarkunan notes.
Echoing Sarkunan’s views, Wong says: “As the development projects on government land in the Klang Valley are skewed towards high commercial components and there is already an oversupply of office and retail space, the government should reallocate some of its land for residential development, including affordable housing. However, this will only be applicable on government land of township development such as Kwasa Land at Sungai Buloh where land prices are not so high.”
Wong opines that for Kuala Lumpur to be a world-class international city that is liveable, there must be a balance of commercial and social developments, and the planning authorities should encourage developers to promote arts, culture, performing arts, and green landscapes with parks, incorporated within their developments.
Sarkunan concurs saying some of the land available for development could be designated as public spaces to promote arts, cultural, sports and other creative uses to help keep social ills at bay.
Stressing the importance of proper planning in terms of development consultancy, Sarkunan says design and layout, market analysis on the demographics of the target catchment, trade and tenant mix, and proactive marketing campaigns are crucial in determining the success of shopping malls. As for office developments, pre-leasing is the key.
Well located, good grade modern office buildings that are dualcompliant will continue to be in demand while secondary and dated buildings will feel growing pressure to undergo asset enhancement initiatives such as refurbishment, redevelopment or even conversion to other alternative uses to optimise returns on the properties.
“Occupancy and rental rates will face increasing pressure and will likely decline due to a widening gap between supply and demand as well as further market dilution. In the short term, rental rates are expected to remain fairly resilient due to existing lock-in tenancies although there will be growing pressures on occupancy due to the high supply pipeline.
“The overall vacancy rate will increase due to heightened competition between commercial buildings (office buildings and retail malls) as a consequence of a mismatch between supply and demand. Also, the pace of rental increases (if any) is expected to slow down,” he says.
Landlords of office buildings may need to offer longer rent free periods and attractive rental rates to retain and attract tenants. Similarly, for the retail segment, owners and operators of shopping malls may see decline in their revenue due to weaker sales as a result of market dilution and growing competition, as a vast majority of tenants have a provision in their lease for payment of a turnover rent in addition to the base rent.
While well-located good grade offices at both KL City and KL City Fringe as well as well-managed prime and suburban shopping malls are expected to maintain their position (in terms of both rental and occupancy levels), others that are under-performing may be forced to close or undergo redevelopment due to low occupancies and rental income amid high maintenance costs.
In the retail sector, prime and established shopping malls will continue to perform well in terms of rental rates and occupancies (at more than 90% occupancy), while those not in the same league are under-performing. Amid growing competition with a high existing and impending supply pipeline, the retail market is also set to become more challenging.
“In the tenant-favoured market, landlords are offering attractive tenancy terms to retain existing tenants and attract new occupiers. Landlords need to continue to strive to maintain the exclusivity of their malls to attract consumers,” he adds.
CB Richard Ellis Malaysia group executive director Paul Khong expects to see some compression in rent when lots of new space comes on stream.
“Many developers are willing to take lower yields in the initial term or even give away some rent free incentives to attract tenants to their buildings. During preleasing periods, the packages would be more attractive as developers minimize their leasing risks and reduce the void periods if tenancies are secured early. In certain buildings, fit-out packages are also offered to anchor tenants,” Khong says.
On the risk of a supply glut, he says developers are generally sensitive to the demand and supply situation of commercial space available.
“When the equilibrium point is breached, developers will automatically exercise the necessary caution to safeguard themselves financially.
However, many will try to push the limits but will review plans to slowdown projects accordingly and will keep their land banks intact till demand returns,” Khong says.
Moving forward, he says larger number of strata projects with high commercial components will be built within the city limits. Given the high land costs, the current trend in many of the major development projects is to build mixed development which comprises residential service apartments, mall, hotel and office space within the same site.
“There are a lot of approved development projects on government lands with good products planned in the pipeline. But based on market conditions, many of these phases could be postponed indefinitely if demand is not forth coming,” Khong says.
http://www.starproperty.my/index.php/articles/investment/avoiding-a-potential-glut/
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