Demand for offices outside KL city centre

Business owners looking for office space in the Klang Valley for their operations will find themselves spoilt for choice in the current slow market with the wide selection of new office developments that offer various facilities, convenience, competitive rental and perks such as rent-free periods. Beyond Kuala Lumpur city centre, the pull factors for tenants are even more compelling as rents are usually cheaper outside the city centre.

The office decentralisation trend has been ongoing for some time, but lately, new start-ups and some existing business owners are choosing to locate their operations in the city limits rather than in the city centre.

Knight Frank Malaysia corporate services executive director Teh Young Khean has noticed that some companies have been moving out from their KL city centre offices to the fringes of the city.

“The reasons people move away from KL city centre are mainly to avoid the heavy traffic congestion and for easier accessibility between home and workplace. They are also drawn by the cheaper rents,” he tells TheEdgeProperty.com.

According to data from the National Property Information Centre (Napic), both KL and Selangor have seen a rise in supply of office space while occupancy rate has dropped.

Selangor’s office occupancy rate has seen a minute decrease to 75.5% in 2016 from 75.7% in 2015, maintaining at the 75% and above level. KL office occupancy rate, however, saw a more significant drop in 2016 to 77.9% from 81.2% the previous year.

Oregeon Property Consultancy director Kok Chin Yee says there are no significant data to show that business owners are actually moving their operations from KL city centre, but he has observed that the development of office buildings outside KL city centre has picked up in recent times, many with impressive designs and concepts that have drawn the attention of companies including start-ups.

“It’s not only about work anymore, but life after work. Offices in mixed developments with various lifestyle elements, such as shopping malls, F&B outlets, hotels and entertainment, are in demand now,” Kok says.

For instance, mixed developments that allow its occupants to “live, work and play” like Mid Valley City, Bangsar South and Publika in Dutamas are gaining momentum in terms of popularity.

Other similar developments that offer office spaces with easy access to shopping, food and leisure include Bandar Sunway (offices near Sunway Pyramid), Bandar Utama (near 1 Utama Shopping Centre), offices at Mutiara Damansara (near The Curve) and new integrated developments in Bandar Sri Damansara.

Kok notes that small- and medium-scale companies are more likely to consider setting up office in the suburbs or fringes of the city centre due to their lower rents and cost of doing business.

Property consultancy MacReal International Sdn Bhd founder Michael Kong says rents in KL are facing downward pressure due to the increased supply of office spaces and decreased demand due to business consolidation and reduced staff headcount as a result of downsizing.

“It is basically a tenant’s market now. Tenants are spoilt for choice as there is plenty of good grade office space in the market,” he adds.

Kong notes that landlords are reducing rents and offering attractive tenancy terms such as longer fit-out periods and rent with option to purchase schemes or lower security deposits. Thus, in his view, if there are movements away from the KL city centre, it is more likely to be due to factors other than tenancy terms and rates.

Selangor areas with high occupancy rates

Although overall, KL office spaces still enjoy higher occupancy than those in Selangor, in the micro view, some areas in Selangor have recorded occupancy rates as high as 100% in the purpose-built office segment.

According to Napic’s Property Market Report, as at end-2016, there were 218 existing purpose-built office buildings providing 3,394,403 sq m of office space while seven buildings would be built that will offer 418,424 sq m in incoming supply. However, there was no new construction of new purpose-built offices last year.

The report stated that purpose-built offices in Selayang, Gombak and Sabak Bernam enjoyed a 100% occupancy while Bandar Utama and Sunway City enjoyed over 90% occupancy. Similar office spaces in Selangor’s Ampang, Kuala Selangor, Kelana Jaya, Shah Alam and Sepang had more than 80% occupancy.

Office rents in Selangor were generally stable with offices in good locations and close to city transit hubs enjoying strong demand and rents.

Damansara Uptown 1 has enjoyed the highest office rental rates in Petaling Jaya ranging between RM55.97 and RM118.40 psm over the last two years (2015 and 2016).

Meanwhile, Menara PKNS recorded the highest annual rental growth of 17% last year to between RM41.98 and RM61.89 psm from 2015’s rates of between RM37.67 and RM44.13 psm.

KL remains an appealing address

In comparison, KL’s office property in the Golden Triangle and Central Business District have enjoyed an occupancy rate of over 80%. The overall occupancy rates in the capital’s city centre and its suburbs were 75.1% and 67%, respectively.

Although real estate experts see office spaces outside the city centre gaining momentum, they remain optimistic about KL city centre’s office property segment due to its standing as the capital city of Malaysia.

Napic’s data showed that in KL, there were seven new purpose-built office completions in 2016 with 320,643 sq m of space. These included Menara Guocoland and Menara Hong Leong at Damansara City, new blocks of Vertical Suites at Bangsar South, Vertical 38 Tower A&B also at Bangsar South, KL Eco City Office Tower (Signature offices), Ken TTDI in Taman Tun Dr Ismail and Sunway Velocity Designer Office phase 3C1 in Cheras.

In 2016, there were 434 office buildings providing a total space of 7,657,577 sq m with another 23 office buildings (713,303 sq m) coming into the market.

MacReal International’s Kong says KL city centre offices will continue to remain attractive due to its importance as the country’s financial centre.

“Many businesses will still require a presence in the most established financial district in Malaysia. The concentration of major banks, financial institutions, government-linked companies and agencies, MNCs, and complementary facilities and amenities make KL city centre an enduring and important location for businesses and offices,” he adds.

Knight Frank’s Teh says the fall in oil prices have impacted the demand for office space in the city centre as many oil and gas companies have sublet their unutilised space or are “right-sizing” their office spaces.

“Grade A offices in KLCC are still in good demand, but rents are facing pressure as supply is increasing,” he adds.

Although KL’s office rental rates in 2016 were generally stable, some office buildings have lowered their rents slightly than the previous year for the not-so-popular spaces or units in the building while the more popular units have seen rent increase. For instance, office rent psm for Integra Tower ranged between RM99.02 and RM102.25 in 2016 compared with RM96.87 to RM118.40 psm in 2015. Rents usually differ depending on size and floor levels. Another example was Menara IGB in Mid Valley City, which has seen rents drop slightly to between RM53.82 and RM67.81 psm compared with RM57.04 and RM67.81 psm the previous year.

Meanwhile, Kok from Oregeon Property says the competitive market will push building owners or management companies to refurbish their buildings and enhance their competitiveness.

He notes that newly refurbished office buildings have seen rents improve, such as the Kenanga International building on Jalan Sultan Ismail, which is now fetching an average monthly rental of RM7 psf compared with RM5 to RM6 psf before its refurbishment.

According to Oregeon Property’s data, the average monthly rents of KL city centre offices currently range from RM5 to RM15 psf; Bangsar South rents range from RM4 to RM4.50 psf while Bandar Sunway’s average monthly rents range between RM6 and RM6.50 psf.

Pull factors

Besides rental rates, other main considerations for business owners when choosing a suitable office space are its accessibility, ease of commute and amenities.

Kong from MacReal International says some business owners choose to relocate from the city centre simply because their businesses do not require a presence in the city.

“The advent of information technology and cloud-based computing have reduced the need for office spaces as people can work from out of office,” he adds.

Kong singled out KL Sentral as one of the more popular office destinations. “KL Sentral is located out of the traffic gridlock of the city centre and has easy access to the Federal Highway and other connecting highways,” he offers.

The integrated nature of the transit hub offers everything in one place including offices, hotels, retail elements and residences. More importantly, the transportation hub enables people to travel to various places in the Klang Valley by rail easily.

Oregeon Property’s Kok notes that with the new Mass Rapid Transit system coming into place, more business owners would consider relocating to areas outside the city centre due to better accessibility.

“The easy access to public transport, coupled with a good secure environment, can help companies attract talent and employees who are looking to commute to work by public transport and not drive,” he adds.

Kok says Bandar Sunway, Damansara Heights and Bangsar South have become popular choices for business owners, not only for their easy access but also the vibrancy of these areas that draws people to these places.

Besides these locations, Knight Frank’s Teh says Damansara City in Damansara Heights, KL Eco City and UOA Business Park in Shah Alam, facing the Federal Highway, could be the next popular destinations for business owners to set up their offices for the easy accessibility.

“Business locations with great connectivity to public transportation system, easy accessibility and integrated amenities as well as MSC status offices will be the main pull factors for business owners and also talents,” Teh concludes.

This story first appeared in TheEdgeProperty.com pullout on June 23, 2017. Download TheEdgeProperty.com pullout here for free.