This article first appeared in City & Country, The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024

Following the overall positive growth of the country’s property market last year, JLL Malaysia observed improved market movements in Greater Kuala Lumpur in 1Q2024. Greater KL refers to the area that stretches from Kampung Datuk Keramat in the east, Subang Jaya in the south, Shah Alam in the west and Sungai Buloh in the north.

At the launch of JLL Malaysia’s Greater Kuala Lumpur Property Market Monitor 1Q2024 on April 23, managing director Jamie Tan said, “Across all market segments, we have observed positive market movements. The flight to quality is driving demand in the commercial and industrial segments. Rents in high-quality green-certified properties continue to increase, allowing these properties to have strong net absorption levels.”

Representatives of JLL Malaysia presented on the different sectors in the monitor and provided insights into the market for this year.

When presenting the Greater Kuala Lumpur office market, JLL Malaysia’s office leasing advisory team member Quiny Lee said the overall vacancy rate of office spaces decreased to 21.1% in 1Q2024. As for the submarkets, KL City experienced a noticeable improvement, with the vacancy rate falling from 30.2% in 4Q2023 to 28.7% in 1Q2024, while KL Fringe saw a slight improvement, decreasing from 7.9% in 4Q2023 to 7.7% in 1Q2024.

KL City and KL Fringe recorded an upward trend in rental rates during the quarter in review. Lee attributed the increase to demand for high-quality and sustainable office space. She pointed out that tenants are willing to pay a premium for green-certified spaces.

On the other hand, the decentralised submarket witnessed a decrease in rental rates. “Due to the lack of green space options, tenants have been forced to leave office spaces in the decentralised submarket. The average rental rate for this submarket decreased to RM5.02 psf per month in 1Q2024 from RM5.05 psf per month last year,” she said.

Flight to quality continues to be the main driver of demand in the office market, said Lee. “Consequently, rents for green spaces have experienced faster growth compared with the overall market. Despite this shift, tenants remain cautious about their total occupancy costs and are aiming for greater efficiency, either by downsizing or maintaining the same amount of space when transitioning to green spaces.

“As a result, the net absorption, which indicates the net change in occupied stock, is growing at a slower pace compared with the previous year when we observed companies moving from older Grade B stock to prime spaces. Nevertheless, net absorption remains positive, signalling that the overall market continues to grow.”

Concurring with her, Tan said the supply of such offices is currently scarce while the demand is high. “Especially when we’re talking about multinational corporations (MNCs) coming to Malaysia, they do have an internal policy that requires them to source office space within their given requirements.”

Furthermore, he added, “Malaysia’s multicultural talent pool allows the country to be a top choice among MNCs and the quality of our buildings is also better than other countries in Southeast Asia.”

He also said rental rates are still low in this country compared with Thailand and Indonesia.

Tan pointed out that the transparent legal framework here is an attractive aspect for MNCs and investors. “In Malaysia, our legal framework is more transparent than that of countries like Indonesia or Vietnam, where the laws on land ownership can be a bit difficult to navigate. So, Malaysia is more transparent in terms of its land laws, ownership rights and contract law, among other things.”

While Grade A prime and Grade A offices are gaining traction, office buildings of Grade B and below are getting left behind. Lee said these buildings have really low occupancy rates and the owners tend to dispose of them. The buyers then repurpose or redevelop these into different assets.

Tan noted, “Grade B and below are continuing to lose tenants and they are stuck in a scenario of whether to upgrade or not. But of course, some of the smaller companies have managed to retain their tenants. In general, I think most of them are stuck in the scenario of where they should spend the capex first to upgrade or whether they should wait for rents to improve and get enough income for the capex. It’s a bit challenging for them but the demand seems to be in premium Grade A office spaces.”

Office developments that are currently under planning and construction include the Lendlease office at Tun Razak Exchange, PNB Project 1194, TNB Platinum Tower Phase 1 and CT 1 at Pavilion Damansara Heights. These projects are expected to be completed by the end of the year.

Also slated for completion are Office Towers 1 and 2 at Sunway South Quay in 2025 and TNB Platinum Tower Phase 2, Tower 5 and Menara PKNS at PJ Sentral, i-City Corporate Tower 4 and KDCC Tower 2 in 2026.

Overall, a total of 1.05 million sq ft of office space is expected to be delivered in 2024. Lee said a similar volume of space is anticipated to be delivered in 2025, while there may be a significant increase in supply in 2026, with developers having announced 2.5 million sq ft of space. These projects are expected to have green certifications.

In terms of achievable gross rents of office spaces, all three submarkets recorded an increase last year. JLL Malaysia forecast that KL City would be able to achieve about RM6.60 to RM7.20 psf per month, KL Fringe about RM6.10 to RM6.70 psf per month and decentralised locations about RM4.50 to RM5.10 psf per month in the next two years.

Tan said there were 3,814 transactions in KL in 4Q2023, according to the National Property Information Centre (Napic). In 2H2023, there were 749 transactions that were more than RM1 million each. There was a year-on-year (y-o-y) growth of 4.33% in the number of units transacted in 2023.

On Greater KL’s residential market, he highlighted the prime high-rise developments, which he expected to be the most attractive this year. “The prime residential market conditions have significantly improved. This is evident in the increasing number of launches of prime and luxury properties.”

According to the monitor, the current stock of prime high-rise residential properties went up to 57,685 units in 1Q2024 from 57,155 units in 4Q2023. The average gross rent rose two sen to RM3.32 psf per month in 1Q2024 from RM3.30 psf per month in 4Q2023.

JLL Malaysia has categorised areas such as Ampang Hilir, KL city centre, Bukit Bintang, Mid Valley City-Brickfields-Seputeh, Bangsar, Mont’Kiara-Hartamas and Damansara Heights-Kenny Heights-Bukit Tunku as prime residential areas.

“We are seeing an average value of about RM966 psf [in these areas] compared to the previous quarter of RM965. Market yield has also gone up slightly to 3.4% per annum compared to the previous quarter of about 3.38%,” said Tan.

Meanwhile, the total number of units sold increased quite significantly on a y-o-y basis as well. “We also noticed that from 2020 to 2023, the number of unsold units had dropped. It is gradually decreasing and it is a very good sign. It shows that the market is recovering slowly but surely. The absorption rate is also improving,” he added.

“The ongoing demographic trend, combined with the growing preference for renting among locals, presents attractive opportunities for investors to capitalise on rising rental yields in the prime segment,” said Tan.

Areas such as Mid Valley City-Brickfields-Seputeh, Damansara Heights-Kenny Heights-Bukit Tunku, Ampang Hilir and KL city centre continued to see an improvement in asking rents in 1Q2024.

“This trend was supported by the increasing number of tourists in the country. Rental rates in prime areas are expected to continue their upward trajectory in the near future, although tempered by the introduction of new supply to the market,” he said.

Although the price psf of prime residential properties remained unchanged in 2023 and 1Q2024, Tan said he anticipated a slight appreciation in selling prices for the rest of the year. He attributed this to the expected growth in demand, decrease in property overhang and increase in construction costs.

He added that the upcoming relaxation on the requirements of the Malaysia My Second Home (MM2H) programme and expected increase in foreign buyers could stimulate demand for residential properties in the prime market and send prices higher.

JLL Malaysia head of research and consultancy Yulia Nikulicheva said the retail sector was on a gradual growth trajectory, following the strong footfall observed in major shopping malls in 1Q2024.

“The city centre submarket performance demonstrates quite a strong recovery from post-Covid and the major drivers here are demand from local consumers who are continuously spending their money in shopping centres. Besides that, landlords reported that they witnessed quite a strong influx of tourists, which has been confirmed by government statistics,” she added.

“Last year, the number of tourists who visited Malaysia exceeded their expectations. Looking forward, because the government released certain restrictions on Chinese and Indian tourists, we should expect the impact of foreign tourists on the city centre submarket to be even stronger because we do see the number of tourists increasing.”

Another positive trend Nikulicheva observed was the opening of more concept and flagship stores in the country by international brands. This included fashion retailers, F&B outlets and grocers.

For upcoming supply, she said the near-term supply pipeline is expected to be concentrated in the suburban submarket, while the city centre submarket is expected to have less supply.

In terms of rental rates, Nikulicheva pointed out that the city centre submarket was on a positive trend, adding that many real estate investment trusts that own shopping malls in the city centre reported increased footfall and overall growth in rental income last year.

The suburban submarket, on the other hand, witnessed mixed dynamics. She explained that malls with good locations, strong tenant mix and a more flexible approach to tenant relations managed to maintain or improve their occupancy and rental rates.

Moving forward, Nikulicheva expects the city centre submarket to demonstrate positive growth. However, she cautioned that rental rates for retail properties may not recover to pre-pandemic levels in the near future.

To wrap up the launch of the monitor, Tan said, “As the macroeconomic drivers for Malaysia remain positive, we expect positive dynamics in all market segments in the medium term. The fundamentals for all market sectors are strong and the property market is expected to continue its positive trajectory unless we encounter any external shocks.”

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