Threat of oversupply looms in KL

by **Cals** Tue 08 Jul 2014, 08:42

Business & Markets 2014

Written by Cynthia Blemin of theedgemalaysia.com

Monday, 07 July 2014 10:01

KUALA LUMPUR: The frantic pace of commercial development that central Kuala Lumpur is witnessing in the past month has raised concerns among real estate experts and analysts about an oversupply, which could cause property prices to fall.

The surging supply of iconic buildings and skyscrapers providing Grade A office space and unsustainable demand are a risky mix and may be unhealthy for the market. It is this combination that had Dubai into trouble six years ago, they said.

Over a one-month span, three new projects were announced within the city centre. On June 24, UDA Holdings Bhd announced that it was partnering Eco World Development Group Bhd and the Employees Provident Fund (EPF) to develop the RM10 billion Pudu Jail redevelopment project. The five million sq ft development will comprise retail malls, an entertainment hub, strata offices, a super skyscraper signature tower, and serviced apartments.

A day later, 1MDB Real Estate Sdn Bhd said it had teamed up with Australia’s Lend Lease Corp Ltd to develop a RM8 billion retail-led mixed-used development called Lifestyle Quarter at the Tun Razak Exchange (TRX). TRX will encompass a new international financial and business district underpinned by world-class commercial, residential, retail, leisure, and cultural offerings.

At the same time, Kone Corp was chosen to supply 105 elevators and escalators to the KL118 Tower project, a 118-storey mixed-use tower at Stadium Merdeka to be developed by PNB Merdeka Ventures Sdn Bhd. Comprising more than 400,000 sq m of residential, hotel and commercial components, KL118 Tower is expected to be the tallest building in Malaysia upon completion in 2019.

“This is in addition to the existing office space within the city centre that is already seeing lower take-up rates. Nevertheless, an oversupply may not happen now because it will take a few months before these developers can launch their projects and start construction works,” a real estate expert told The Edge Financial Daily.

“But once these developments hit the market in two to three years, the commercial real estate here may suffer like what happened in Dubai,” he said.

It was reported that over-inflated Dubai real estate prices slumped by more than 50% in 2009 and 2010, triggering a corporate debt crisis which unsettled financial markets around the world.

“We are obviously taking a keen interest in these projects [TRX, KL118 and the Pudu Jail redevelopment project] because the magnitude of these projects means that they will have a significant impact on overall office supply, occupancy and rental rates,” said Henry Butcher Marketing Sdn Bhd chief operating officer Tan Chee Meng said.

“As it is, the completion of several new office buildings in Kuala Lumpur have resulted in a decline in occupancy rates over the past two years and have been putting pressure on rentals,” he said.

Unless the three upcoming projects can attract new companies from overseas, Tan pointed out that the regulators as well as property developers should monitor the situation closely and pace the development of new office buildings.

“This is to ensure that the supply of office space does not increase too dramatically and cause a drastic impact on occupancy and rental rates,” he said.

According to the Property Market 2014 report by property consultant CH William Talhar & Wong Sdn Bhd, the office stock in the Klang Valley in 2013 totalled 92.7 million sq ft, of which 43.15 million sq ft were located in central Kuala Lumpur.

It noted that last year, the office supply grew by 3.6 million sq ft, which was similar to the average annual supply growth of about 3.7 million sq ft between 2008 and 2012.

Malaysian Institute of Estate Agents president Siva Shanker said commercial tenants are moving out from the city centre and into suburbs like Bangsar and Petaling Jaya.

“Rental rates in these suburban areas are comparably cheaper and there is less traffic,” he said, adding that the average occupancy rates for office space in the city centre hover between 80% and 85%.

AllianceDBS Research Sdn Bhd property analyst Quah He Wei believes that new developments like the TRX, KL118 and the Pudu Jail redevelopment project will not have problems finding tenants as the buildings will be mostly occupied by the owners themselves.

“Demand for office space in the city centre has been steady and I foresee the developments to be timely,” he said.

Zerin Properties chief executive officer Previndran Singhe is of the view that the collapse of the property sector in Dubai and China will unlikely happen to Kuala Lumpur, as the local market is expected to remain bullish over the next 10 to 15 years.

BIMB Securities Research, in a reported dated June 9, said property prices and transactions, which had surged since 2009, had led to fears of an inflationary asset bubble.

“This has prompted the introduction of cooling measures via the withdrawal of developer interest bearing schemes, the real property gains tax hike and the setting of minimum property prices for foreign buyers.

“Since the implementation of such measures, growth in residential property prices has increased by a slower 8.1% in the fourth quarter of 2013 against a 12% jump in early 2013, as prospective buyers adopted a wait-and-see approach,” it said.

“Our preliminary checks with property agents revealed that property prices so far in 2014 have declined by 5% to 10%.

“However, we believe the average affordability ratio is not reflective of the overall property market in Malaysia as the surge in property prices is centred on certain hot spots. For instance, the affordability ratio is one of the lowest in Kuala Lumpur and Penang, at 40% of gross monthly household income,” BIMB Securities Research added.

This article first appeared in The Edge Financial Daily, on July 7, 2014.