Office Rentals in KL City Area Resilient in 2020

The global pandemic has spared no country from its economic impact. Malaysia's economic growth for 2020, as measured by gross domestic product (GDP), is projected at between -2.0% and 0.5%. Bank Negara’s (Malaysia's Central Bank) decision to cut the Overnight Policy Rate (OPR) to 2.00% in May 2020, and another cut in July to 1.75%, is expected to have a positive impact to support property yields, releasing the upward pressure.

The restricted movement exercise or partial lockdown enforced by Malaysia’s government to curb the spread of COVID-19, has introduced working from home to all possible industries. This may have impacted the demand of office space in KL City as the market continues to correct itself during RMCO (recovery movement control order). The RMCO, which started on 10 June, is Malaysia’s strategy to exit MCO (movement control order), which started on 18 March 2020.

Occupancy Rate Close to 70% for1H2020

According to Knight Frank’s Malaysia Real Estate Highlights Research for 1H2020, the cumulative supply of office space in Klang Valley as of 1H2020 stood at circa 108.8 million sq ft following the completion of Menara Hap Seng 3 in KL City.

The report highlights that the overall occupancy rate of purpose built office space in KL City continues to be under pressure and was at 69.8% in 1H2020(p) (2H2019: 70.5%), impacted by the growing supply-demand mismatch and limited pool of tenants amid the unprecedented COVID-19 crisis. In KL Fringe, the overall occupancy rate improved to record at 86.2% during the review period (2H2019: 85.5%) following positive tenant movements in buildings that include Menara Etiqa and Menara TH One Sentral.

In the vicinity of the Smart Tunnel is TRX, where the Grade A office tower is projected to be completed in late 2021 or early circa 2.92 million sq ft. The entire project is targeted for completion in 2023.

Prices and Rentals

The average achievable rental in KL City continued to be under pressure. During the review period, it was recorded lower at RM7.25 per sq ft per month (2H2019: RM7.28 per sq ft per month). The office markets in KL Fringe however, remained resilient with 1H2020 average achievable rental rates holding steady at RM5.80 per sq ft per month and RM4.32 per sq ft per month respectively (2H2019: KL Fringe - RM5.80 per sq ft per month supported by active leasing activities and positive tenant movements.

Knight Frank’s report mentioned a notable office transaction in 1H202, which is of Menara Guoco. Located in Damansara Heights, the 19-storey office building with 232,133 sq ft NLA, forms part of an integrated commercial development known as Damansara City. It was sold to Tower REIT for a consideration of RM242.1 million.

No one can be sure of the outlook for the office market in the near future. But it is safe to say that for now, you can expect rentals to be competitive and supply in abundance.

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