Influx of office space in Klang Valley worsens oversupply situation

KUALA LUMPUR: An influx of office space in the Klang Valley is putting a downward pressure on yields.

Property consultants said the entry of more office space was making the oversupply situation worse.

However, they said the situation could be remedied should the economy perform better, thus keeping demand afloat.

“In certain areas, yields will be pressured downward because of the glut situation. But this is also highly dependent on the location of the offices. Those located in prime areas will have less chance of coming under yield pressure,” DTZ Debenham Tie Lung executive director Brian Koh told StarBiz.

Khong & Jaafar managing director Elvin Fernandez said that the slightly higher vacancies this time around was “not too abnormal a situation”.

“The thing about property cycle is that there can be a glut today but this oversupply condition can be offset if demand returns. I do not view it as being serious,

“However, there could be a lot more supply that would flood the office space sector in the medium to long term,” he said.

There were 20 million sq ft of vacant space in the Klang Valley, 22.5 million sq ft of office space under construction and 25 million sq ft which had been approved for construction.

The Government recently earmarked several areas for commercial development such as the KL International Financial District in Jalan Tun Razak, the 100-storey Warisan Merdeka, the Sungai Besi military airport and the Rubber Research Institute land in Sungai Buloh which are expected to come onstream within the next 10 years.

Meanwhile, a report by CB Richard Ellis released earlier this month revealed that office yields in Kuala Lumpur prime area had been flat from 2005 until 2011, ranging from a low of 6.25% to a high of 6.75%(see chart).

The report also showed the office space vacancy rate in the Klang Valley was under 13% on an average basis, which consultants said could rise once new space came in with the completion of several mega projects.

“With all the large-scale development projects coming in, we are looking at a potential oversupply situation but if the economy does exceptionally well despite the problems in the eurozone, this problem would ebb,” said Koh.

Vacancies had risen during the 2008 global financial crisis in prime office spaces and rental rates had been on a slight decline.

The prevalent trend among corporates was to move their bases away from the city centre into newer office buildings within other established suburbs such as Petaling Jaya and Klang as many of the workers lived in these suburbs.

“After the My Rail Transit has been completed, office development would focus back to the city centre as long as they are affordable and corporates can make a decent profit even after paying off these leases. I expect this trend to reverse and that Kuala Lumpur will remain at the primacy of development in the Klang Valley,” Fernandez said.