Flight-to-quality still dominates Kuala Lumpur’s office market

Various submarkets continue to experience this trend.

Overall net absorption for 1Q22 in Kuala Lumpur’s Grade A office market was mostly held up by expansions and new lettings in the Decentralised (DC) submarket. 

A JLL report says the KL City (KLC) and KL Fringe (KLF) submarkets recorded negative net absorption as these submarkets saw market activity being mostly driven by flight-to-quality within their respective submarkets.

Here’s more from JLL:

Some significant movements this quarter include a local technology company expanding its office footprint in the DC submarket, a foreign technology company relocating to a recently completed building within the KLC submarket whereby the company has relocated with flight-to-quality and another local technology company downsizing their operations within the KLF submarket.

No new supply noted within the quarter

There were no new completions in 1Q22. Significant incoming supply is expected for the rest of 2022 which will further elevate vacancy rates in the city. The quarter saw PNB Project 1194 which was initially scheduled for completion in 1Q22 delayed. This project will now complete in 3Q22 amidst the recent inconveniences of the COVID-19 pandemic.

Vacancy rates stabilised in KLC and KLF as leasing activity in these submarkets are largely made up of flight-to-quality movements and downsizing activities. In the DC submarket, vacancy rates improved as the submarket saw more expansions within the technology and logistics sectors.

Further slowdown in decline of rents and capital values noted

This quarter, KLC and DC saw well-performing buildings in desirable locations commanding healthy interest bring rents up slightly while KLF saw rents remain stable. This points towards a further slowdown in the decline of rents as rental rates were largely maintained or slightly decreased. Overall capital values showed some stability as they moved in tandem with rents.

In 1Q22, there were some office transactions; however, we note that the assets purchased were for each respective purchaser’s self-use as opposed to the asset being an investment asset. On the investment front, the market remained quiet as investors maintain a cautious stance amidst an uncertain market.

Outlook: Rents likely to remain under pressure in 2022

Rents in Kuala Lumpur to remain under pressure in 2022 as the market expects some significant supply joining the market in the next 12 months such as Merdeka 118, Pavilion Damansara Heights as well as Affin Bank’s new headquarters in TRX among others.

Demand for office space is expected to remain challenging as trends of remote working remain very prevalent in the market. In terms of market drivers, flight-to-quality is likely to remain a dominant theme in the market moving forwards as multinational companies look to push forward their ESG agenda in the coming years which can increase demand for newer, more sustainable buildings.

Note: Kuala Lumpur Office refers to Kuala Lumpur's Grade A office market.