KUALA Lumpur’s office market is in for a tough year in 2010 with the expected completion of another 4 million sq ft of new office space which may further dampen rental and occupancy rates.

Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector (PEPS) president James Wong says there is also a large amount of new office space being developed around the fringe of Kuala Lumpur including Petaling Jaya, Damansara, Puchong, and Mont’ Kiara.

This is in addition to the 4 million sq ft completed last year of which a number of the buildings are still unoccupied although there are tenants that may be moving in later this year.

PEPS president James Wong (inset) says there’s a large amount of new office space being developed around the fringe of Kuala Lumpur including Petaling Jaya, Damansara, Puchong and Mont’ Kiara.

“With such a large amount of new office space, demand will not be able to keep up with the growing supply and this will result in more unoccupied space. Overall occupancy and rental rates are expected to face downward pressure this year,” Wong tells StarBizWeek.

He says while offices that are well-planned, managed and marketed will achieve high occupancy, there will be those that will be left vacant.

“Office occupancy and take-up in the city used to be around 2 million sq ft when the market was at its peak around late 2007 but it has since dropped to just over a million sq ft now,” Wong adds. The overall office occupancy rate is expected to decline further to about 80% this year from around 87% in the last quarter of 2009.

According to Wong, office demand is driven by the performance of the economy which in turn is a function of business investments.

“In Malaysia, a large part of this is foreign direct investments (FDIs). Hence, the key is to attract FDIs and to draw up incentives to change the economic model of the country to being knowledge-based and driven by high-technology.”

Hopefully, the Government’s aim of achieving a high income economic model will provide an impetus for higher take-up of office space, he says.

“The market’s revival will also depend on the implementation of the two stimulus packages and their spin offs to the economy,” Wong adds.

DTZ Nawawi Tie Leung executive director Brian Koh points out that the global economy will continue to be filled with uncertainties this year and inflow of FDIs are not expected to pick up in the near future.

“Within the next three to four years, there will be 14.4 million sq ft of purpose-built office space scheduled to be completed. Unless there is a surge in demand, the additional supply will cast a dampening impact on rental and occupancy rates in the next few years,” he says.

Koh agrees that a possible upside for the market will be the new economic model which will hopefully lift economic growth, especially in the services sector.

Re-Group Associates executive chairman Christopher Boyd says with office space vacancies hovering around 13%, it is still very much a tenant’s market.

“Tenants are spoilt for choice and rental rates have come off by around 20% to 25% so far, with grade A office space fetching between RM5 and RM6.50 per sq ft, while grade B from RM4 to RM5.50 per sq ft,” he says.

Boyd says despite the higher supply, Malaysia’s office market is not likely to crash.

“In fact, the low rental rates here are a boon for businesses. Being consistently inexpensive is a good thing for the business people as it makes it easier for them to plan ahead and make decisions,” he notes.

Zerin Properties chief executive officer Previndran Singhe concurs with Boyd, saying the rental correction in the office market is not alarming and “is just a normal market cycle.”

“The concern that the over supply will adversely impact the office market will only be short term and things should recover, especially with the ongoing liberalisation of the various business and financial services sectors.”

Demand for office space should pick up among oil and gas companies and financial services providers, he says, adding that building owners need to be more innovative to attract the right tenants. “In fact, landlords have become more realistic in how much rent they can ask for and rental rates will find their new equilibrium in time to come,” he says.

ECM Libra analyst Bernard Ching notes that there has been a pick up in the office property sub-segment with more local investors looking for quality assets.

In the last quarter of 2009, the investment market jumped by about 58% to RM1.39bil against the previous quarter. The purchasers comprised mainly real estate investment trusts, the Employees’ Provident Fund and government-linked companies.

Some of the notable deals concluded recently include a 50% equity interest in Menara Citibank by Hap Seng Consolidated Bhd, the acquisition of Tower D, Glomac Damansara by Lembaga Tabung Haji as well as the acquisition of a retail/office tower in Southgate by Permodalan Koperasi Felda.

Ching notes that the office market is expected to see more foreign participation in the coming months as the global economic recovery gathers momentum.

“This follows a series of well received economic initiatives to liberalise the economy to attract foreign participation, including the repeal of the Foreign Investment Committee which regulates mergers and acquisitions in the country,” Ching says.