Kuala Lumpur is known to be one of the more affordable options for investors keen on office assets in Asia Pacific. However, some have shied away because of industry buzz of an impending oversupply.

A large amount of office supply (about nine million sq ft) is coming into the Kuala Lumpur CBD office market in the next five years, increasing the current stock by 25 per cent. This supply could potentially come from mega projects and iconic towers such as the Tun Razak Exchange (TRX), Bandar Malaysia (underplanning development), Merdeka PNB 118 and Cititower.

While a nine million sq ft office supply might seem like a huge statistic , pre-commitments of up to 50 per cent have been secured for some of this future supply (pre-leasing is not common in this market), while in some buildings, as much as 70 per cent of the space will be owner-occupied.

To attract tenants, landlords have given tenants various types of incentives, such as longer rent-free periods and tax exemption for government-led projects. For example, TRX, set to be the new financial hub, provides financial incentives such as tax exemption and deduction on relocation costs.

However, if we take a closer look at the amount of supply and the pre-commitments, there is likely to be a reduction on real available space.

The upcoming new supply will likely rejuvenate office stock, as more than 50 per cent (in terms of NLA) of current office stock is more than 15 years old. Kuala Lumpur’s office stock is also older than many other Asian cities.

Currently, working practices in Malaysia are still relatively traditional, but many companies are starting to adopt new workplace strategies to attract and retain talent. Changing workplace strategy will likely to drive demand for new and efficient office space.

The older office buildings have floor plates of less than 10,000 sq ft, while new ones have an average of 15,000 sq ft. The offices in future supply can go up to 30,000 sq ft – which is more flexible for today’s modern needs.

The future of work

Offices with modern designs enable organisations to achieve broader business agendas. The Future of Work will drive demand for this newly designed office space. We observe that newly built offices that form part of integrated developments are usually popular with tenants.

Coupled with the incentives provided by landlords, it makes reasonable sense for occupiers to want to move into newer buildings. When this future supply comes on stream, demand in the market is likely to be driven by tenants’ emphasis on wanting quality in their office space.

For a city to develop, older buildings will need to make way for the next generation of corporate real estate. There is also the possibility of a shift in the CBD boundary or even the emergence of multiple CBDs. With these tall and large iconic buildings typically found in a CBD, it will definitely change the landscape of the Kuala Lumpur real estate market.

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