Kuala Lumpur’s office supply pipeline to deliver over 3m sq ft by end-2023

JLL says this will likely keep rents suppressed and vacancy rates relatively high.

According to a JLL report, overall net absorption in Kuala Lumpur’s Grade A office market remained positive across all submarkets in the quarter, largely driven by the financial services industry. 

Specifically, the fintech and insurance industries saw various new entrants into the market in the quarter. Additionally, the recruitment sector has also remained active during the quarter. 

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On the other hand, the pharmaceutical, professional services and co-working industries have slowed in their take-up of office space. Additionally, companies within the creative sector, such as publishing and media agencies, appear to be shifting towards hybrid work models. Overall, the dynamic shift in demand keeps recovery on a slow but steady pace.

Vacancy rates drop further as the quarter saw no new completions

The quarter saw no new supply coming online as several projects scheduled to be completed in the quarter have since been delayed due to reasons such as the shortage of foreign labour and increased construction costs.

Vacancy rates posted a marginal recovery in all three submarkets due to flight-to-quality movements made by tenants relocating to newer buildings, from older buildings that are no longer being tracked in the basket. This is particularly apparent in the Decentralised submarket which has gained popularity amid changes to the working culture brought about by the pandemic.

Selective rental improvement, but investors remain conservative

In the quarter, the slight rent increase seen across all submarkets were contributed mainly by transactions in recently commissioned, well planned and designed buildings in desirable locations, which hold a healthy amount of interest from tenants. Tenants have also been taking advantage of the low rental rates to relocate into newer, more technologically advanced buildings.

With the recent formation of a new unity government following the 15th General Election, investors have been maintaining their wait-and-see approach on investment decisions, to observe any changes that may occur in terms of policy, legislation and development strategies.

Outlook: Investor’s yield requirements likely to increase

Kuala Lumpur’s new supply pipeline is expected to deliver over 3 million sq ft by the end of 2023. This will likely keep rents suppressed and vacancy rates relatively high. However, with demand showing signs of recovery, more instances of sporadic positivity may appear in the market in 2023, given the trends of flight-to-quality and occupiers’ preferences towards newer buildings.

Transaction activity in the office market is likely to remain muted, as investor’s yield requirements climb in response to expected further hikes of the Overnight Policy Rate. This should result in more expensive financing, requiring investors to demand higher yields to justify their investments. The ongoing uncertainty is expected to result in foreign investors remaining conservative.

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