Office space glut entirely a gov’t creation

A QUESTION OF BUSINESS | As Kuala Lumpur trundles headlong into a massive oversupply of commercial space, including offices and shops, one way to ameliorate the effects is to delay the projects by 1MDB and Permodalan Nasional Bhd (PNB), who will jointly add 25 million square feet in the coming years.

This plus the freeze on new developments ordered by the government may help to keep commercial development in check and avoid a major oversupply in future years which could see as much as one-third of offices unoccupied and possible failure of some commercial developments.

Recently Bank Negara Malaysia or BNM, warned in its latest quarterly report: “The oversupply of office space and shopping complexes in the major states will be exacerbated by incoming supply, potentially becoming more severe than during the Asian Financial Crisis.”

That’s a rather chilling statement that needs to be taken very seriously. Since the first quarter of 2015, the office vacancy rate in the Klang Valley has increased steadily from 20.9% to 23.6% in the first quarter of 2017, the central bank said.

This is higher than the national average of 18.1%, and here’s the clincher - more than three times the regional average of 6.6%! This is obtained by computing a simple average for Hong Kong, Beijing, Singapore, Shanghai, Seoul and Bangkok in the first the quarter of this year.

BNM further says: “The incoming supply of 38 million square feet of office space could exacerbate the glut. The office vacancy rate is projected to reach an all-time high of 32% by 2021, far surpassing levels recorded during the Asian Financial Crisis. In other words, if current supply-demand dynamics persist, 1-in-3 offices in Klang Valley could be vacant in 2021.

“Total incoming supply could potentially be higher if future phases of the ongoing large development projects are taken into account. This may result in further downward pressure on office rentals, which are already the lowest in the region.”

That is a rather bleak but realistic outlook and needs strong action to be taken now. A freeze alone would not do because that only affects projects which have not obtained approvals yet. And it is not even certain if government projects under its various companies such as 1MDB or PNB are affected by the freeze. It does not seem so.

The figures show that if the projects being undertaken by these two entities - 1MDB’s Tun Razak Exchange, or TRX, and PNB’s Merdeka PNB 118 - are deferred, a huge amount of supply amounting to some 25 million sq ft of space with a gross development value or GDV of RM46 billion can be stopped in the coming years.

The above chart shows that new supply of 38 million square feet of office space will come on stream between now and 2025. The amount being developed by 1MDB and PNB of an estimated 25 million square feet account for a giant two-thirds of this. In other words, the office space glut is an entirely government creation! That means the government can easily undo that.

Unnecessary new skyscrapers

Much of the glut is created by TRX itself, which describes itself on its website as an iconic 70-acre development in the heart of Kuala Lumpur “that is set to become a leading centre for international finance and business”. TRX accounts for 21 million sq ft of space, or 84% of the 25 million sq ft.

According to its website, it has an estimated Gross Development Value (GDV) of RM40 billion with “investment grade A office space underpinned by world-class residential, hospitality, retail, leisure and cultural offerings”.

“The master plan includes a total of 26 buildings and over 21 million sq ft of total building Gross Floor Area (GFA) spread across office, residential, hotel, retail, F&B and cultural offerings. TRX has a development period of 15 years to be completed in phases with the initial Phase 1 slated for completion in 2017/2018,” it said.

PNB’s 118-story tower in the vicinity of the historic Merdeka Stadium, called Merdeka PNB 118, will have a GDV of RM6 billion and office space of some RM4 million sq ft, and will exceed the Petronas Twin Towers in terms of height, beating it to become the tallest tower in Southeast Asia.

This is a needless extravagant project because PNB already has its own headquarters building and moving all the units into the new building will leave the current spaces occupied by PNB and its companies empty, raising problems of lack of occupancy.

On top of that, tall buildings are enormously expensive and unless rental rates are very high, for example, in cities such as New York, Tokyo, Singapore and Hong Kong, they are not feasible - Malaysian rentals are among the lowest in the world. This seems to be an ego project more than anything else with PNB, under Najib Razak as PM, trying to outdo Petronas, under then PM Dr Mahathir Mohamad, for reasons which are clearly not commercial. 

PNB’s new chairperson Abdul Wahid Omar, who inherited the project, said recently there were plans to redevelop some of the commercial blocks (owned by PNB and its companies), pending the completion of the mega-tower in 2021.

“We will allocate some buildings for redevelopment, depending on its location, but we still have another four years before that happens,” he said. That is clear indication that PNB really does not need the new space this new building will create.

Both 1MDB’s grandiose TRX and PNB’s extravagant tower are showpiece projects which are not needed now with their success being premised on drawing existing tenants into new, seemingly more prestigious areas but unless prices are low, take-up will likely be low and feasibility suspect.

When the 88-storey Petronas Twin Towers were completed just before the Asian financial crisis of 1997, it remained under-occupied and rentals remained low for many years after while Kuala Lumpur suffered a glut of office space.

If the government does not defer at least some of the projects within TRX and Merdeka PNB 118, a worse fate than that will befall the office property market in the capital. If it has the wisdom to defer, it will avert a major property, and potentially financial, crisis.

The office space glut is entirely a government creation and only the government can stop it from spiralling into a full-blown crisis. It will be highly irresponsible not to take the right steps now.

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P GUNASEGARAM says the current government is known neither for its wisdom nor for its responsibility. E-mail: t.p.guna@gmail.com.- Mkini