LAST September, CIMB published a “strategic report” on office space titled “Overbuilding Risks” and one paragraph immediately caught my attention.
It read: “It has not been statistically proven that FDI (Foreign Direct Investment) in the real estate sector complements FDI in the manufacturing and services sectors in helping to boost the economic growth of the host country. As such, liberalizing and developing property policies to attract higher FDI flows, subsequently used to stimulate the economy, may not be the most effective tool. While the policies could act as catalysts for the nation’s growth, they could also jeopardise growth should shocks or external factors hit.”
Those who know me might be wondering if this was written by me as I always use exactly the same language and this is why the report caught my immediate attention.
What is happening in Greater KL, the Klang Valley and Iskandar Malaysia is precisely this; there is a general willingness to bet on the “law of opposites” and pretend to generate economic growth using the “arrival point” as a catalyst.
Following this principle, we may find ourselves with an oversupply of office space that, if not dressed properly, may generate a painful backlash within the next few years. Here are some figures and statistics that should bring us to reconsider the direction taken and start proper corrective actions.
As Table 1 shows, the challenge that Kuala Lumpur, Greater KL and the Klang Valley are already facing is set to become tougher within the next three years as a number of projects today under construction will soon be completed without a proper backup from the demand end. The fact that the three regional capital cities are having a “per capita” office space that is almost one fourth of Kuala Lumpur is also something that should make us start thinking about. (Refer to Table 2).
An example to refer to lies in what Jakarta’s regulatory and planning authorities have been doing in the last few years – construction moratoria for commercial buildings which resulted in a whopping 94% occupancy rate for the existing ones.
New and old buildings
Generally speaking, MNCs (multinational corporations) invest in specific locations because of strong and stable economic drivers in the host countries such as a large market size, availability of skilled workers and a sustainable macroeconomic environment.
Most agree that the steady and sustainable Malaysian economic growth is propelled by stable economic fundamentals, proper Government planning through different plans (ETP, NKEA and so on) and close monitoring of monetary authorities by Bank Negara Malaysia. Even though the improved ranking for global competitiveness is generating enough appeal for MNCs to look at Malaysia as a convenient location for their regional headquarters with a consequent uptrend of FDI (foreign direct investment) flow, Malaysia is still not as competitive and attractive as some of its regional neighbouring competitors.
If we look into the future supply spanning over a 20-year period, the concern increases and it shows how it might be the right time to start looking into a more stringent regulation and planning of construction permits.
Table 3 lists the most important projects which are already under construction or expected to take off in the next few years. The numbers are already quite impressive. At first glance, with the picture given by the numbers, we should expect rental rates and yields to fall. This is not happening, or at least not on such a bad level as statistics were preparing us to see, as the new office buildings are actually taken up consistently due to better location, facilities, MSC (Multimedia Super Corridor) status and so on.
The average prices in the Klang Valley (including Kuala Lumpur) indicate office rental rates have been moving up from RM3.7 per sq ft in 2000 to RM5.7 per sq ft in 2013 (Table 4). This fact leaves investors, the ones with new office space tenanted, with peace of mind. This trend will probably remain for several more years, provided what has just been said will happen soon. The future challenge will actually not be represented by the new Grade A, a Premium or “Investment Grade” office buildings as these will be occupied by PLCs (public listed companies) and MNCs which are looking at new office skyscrapers as representative of their image and status.
The question is with the destiny of the old buildings where the already quite low occupancy rates might be further falling to unsustainable levels. While waiting for the stakeholders to define a proper regulatory framework for future buildings, we are going to see more and more old office buildings moving towards zero occupancy and hence, dragging respective owners into financial woes.
The way forward
In the last few years, a new type of development has been successfully showing up in Malaysia. Two very positive examples are the Standard Chartered Tower and the redevelopment of the Intermark even though both have resulted in the same type of products and office spaces. I’m talking about the “redevelopment-cum- recycling” of old offices or retail buildings into a new type of product.
Malaysia is developing a new level of educational offerings, there is a huge unaddressed demand for affordable houses, as the rural population migrates to urbanised areas at a rate of 3% to 3.5% annually and the Malaysian third age group (those aged 60 years and above) is going to double its number before 2050. By 2020, Malaysia should achieve the status of a fully developed country which will also result in a higher number of expatriates. These are just a few examples of future property or building demand generators which may be carrying the possible reply to the “building recycling” question.
Schools, hospitals, affordable houses and student hostels are a few of the different concepts that Malaysian developers and building owners should start looking at as the solution to an office space glut that everybody is feeling but which nobody wants to talk about. On the way towards Wawasan 2020, Malaysia has to step forward from an efficiency-driven economic model to one that is innovation-driven. Developers too should evolve towards becoming innovative and creative developers.
This, besides supporting the innovative trend mentioned will bring them good prospects for profitable future businesses which will contribute to Malaysia maintaining the leading regional position for its economy.
>> Sources: Napic Property market Report 2013, CIMB, Colliers reports, Knight Frank reports, Yearbook of Statistics Singapore 2013, REI Archive
>> REI Group of Companies CEO and co-founder Dr Daniele Gambero gives presentations on the Property Market and welcomes feedback at daniele.g@reigroup.com.my
Sources:http://www.starproperty.my/index.php/articles/property-news/office-space-the-way-forward-through-innovative-recycling/
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