KL’s Grade-A office rentals see steepest drop

by SHAZNI ONG / TMR file pix

PRIME office rentals in Kuala Lumpur (KL) slumped in the biggest drop for the April through June period this year as the glut in the segment continued to weigh heavily on rental returns.

Knight Frank in its “AsiaPacific Prime Office Rental Index” report stated the nation’s capital saw a 0.8% decrease quarter-on-quarter (QoQ), the steepest drop compared to other major cities in the region for the second quarter of 2018 (2Q18)

The independent global property consultant attributed the steep downfall to concerns over supply and slow absorption in the property market.

Knight Frank Malaysia ED of corporate services Teh Young Khean said the office market outlook for both KL and Selangor remains lacklustre as impending supply, coupled with a tight leasing market, continue to put pressure on occupancy and rental levels.

“Landlords with older and newly completed buildings, especially in KL city, are more accommodating in providing additional incentives to retain existing tenants as well as to attract potential tenants.”

The latest index report forecast the Grade-A office rentals in the KL city centre would dip further in the next 12 months.

Meanwhile, global financial hub Shanghai is the only other city that saw a fall in prime office rentals with a 0.7% QoQ decrease as looming supply concerns weigh on leasing sentiment, while occupiers opt to relocate to cheaper alternatives at other business districts.

However, Knight Frank expects the figure to remain the same in the next 12 months.

However, the index unveiled that there has been an overall increase of 2.4% for 2Q18, which saw the figure tripled from 0.9% compared to the 1Q.

The index rise was primarily driven by rent increases in Tokyo, Bengaluru, Hong Kong and Sydney — the main cities which markets are seeing constraints in supply. Rents are expected to remain steady or see marginal increase for the rest of the year, according to the report.

Its head of research for Asia Pacific Nicholas Holt said steady demand seen in the prime office market is expected to bolster rental growth for the 2Q of the year.

“Despite several headwinds, including tensions around trade, regional economic growth continues to fuel demand for Grade-A office space.”

Bengaluru, India’s own Silicon Valley and state capital city of Karnataka, topped the index chart list, with a 7% QoQ increase and is forecast to increase further in the next 12 months. The rise was due to tight supply which pushed rents up as large corporates jostle for quality space within a finite market.

Bengaluru is also India’s largest office market by size. During the first half of 2018, close to 3.7 million sq ft of 
office space in Bengaluru was taken on rent, the highest in India, signalling that real estate activity is at its peak in the city and businesses are expanding, according to local English daily Deccan Herald.

Tokyo’s Central 5 Wards Grade-A came in second with rents that grew 5.5% QoQ as limited supply drove vacancy levels down to 1.1% during the period — a 10-year low.

Australia down under cities also saw a rise in rents with Melbourne claiming the third spot, and exceeding the index expectations for 2Q18, recording a 46% QoQ rental rise on the back of limited foreseeable supply over the coming 24 months, a strengthening labour market and limited large leasing options.

Expectation was also met for Sydney, with the city persistent supply demand imbalance continues to support rental growth which was up 4.2% QoQ. Another Australian city, Brisbane, recorded rental growth of 1% QoQ which was supported by relocating landlords from the fringe markets back into the central business district.

In East Asia, a near full occupancy Hong Kong Central submarket saw rents up by 1.7 QoQ, while Taipei’s downtown rents were up 0.6% QoQ. Beijing rents grew 0.6% QoQ.

Price office rentals were also up for Bangkok and Singapore, which saw a 1.7% and 0.8% QoQ increase respectively.