Greater KL sees positive market movements across all sectors in Q1 2024

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 real estate market last year, JLL Malaysia has observed improved market movements in Greater Kuala Lumpur in Q1 2024. Greater KL refers to the area stretching 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: “We have seen positive market movements across all market segments. The move towards quality is driving demand in the commercial and industrial segments. Rents for high-quality, eco-certified properties continue to rise, providing these properties with high levels of net absorption.”

JLL Malaysia representatives showcased various sectors on display and provided insight into the market this year.

Presenting the office market in the Greater Kuala Lumpur region, Quiny Lee, member of JLL Malaysia’s office leasing advisory team, said the overall office vacancy rate decreased to 21.1% in the first quarter of 2024. In terms of submarkets, there was a marked improvement in KL City, where the vacancy rate dropped from 30.2% in Q4 2023 to 28.7% in Q1 2024, while KL Fringe saw a slight improvement, falling from 7, 9% in the fourth quarter of 2023 to 7.7% in the first quarter of 2024.

KL City and KL Fringe recorded an upward trend in rental rates in the quarter under review. Lee attributed this growth to demand for high-quality and sustainable office space. She noted that tenants are willing to pay a premium for spaces with an ecological certificate.

In turn, in the decentralized submarket there was a decline in rental rates. “Due to the lack of green areas, tenants were forced to leave office space in the decentralized submarket. “The average rental rate for this submarket decreased to RM5.02 psf per month in Q1 2024 from RM5.05 psf per month last year,” she said.

The main driving force behind demand in the office market remains a flight to quality, Lee said. “As a result, green space rents have seen faster growth compared to the overall market. Despite this change, tenants remain cautious about overall lease costs and seek greater efficiency by reducing square footage or maintaining the same amount of square footage when moving to green spaces.

“As a result, net absorption, which indicates the net change in occupied space, is growing at a slower pace compared to last year, when we saw companies moving from older Class B facilities to prime space. Nevertheless, net absorption remains positive, signaling that the overall market continues to grow.”

Agreeing with her, Tan said the supply of such offices is currently low and demand is high. “Especially when we talk about multinational corporations (MNCs) coming to Malaysia, they have internal policies that require them to source office space within certain requirements.”

He further added, “Malaysia’s multicultural talent pool makes the country a top choice among MNCs, and the quality of our buildings is also better than other Southeast Asian countries.”

He also said that rental rates in the country are still low compared to Thailand and Indonesia.

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

While Class A prime and Class A offices are gaining in popularity, Class B and lower office buildings are lagging behind. Lee said these buildings have really low occupancy rates and owners tend to get rid of them. Buyers then repurpose them or transform them into other assets.

Tan noted: “Class B and below continue to lose tenants and face the dilemma of whether to upgrade or not. But, of course, some smaller companies managed to retain their tenants. Overall, I think most of them are stuck in a scenario of where they should spend the capital expenditure on modernization first, or whether they should wait until rents improve and they have enough income to cover the capital expenditure. It is a bit of a challenge for them, but the demand seems to be for premium Class A office space.”

Office developments currently in the planning and construction phase 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.

Office Towers 1 and 2 at Sunway South Quay in 2025 and TNB Platinum Tower Phase 2, Tower 5 and Menara PKNS in PJ Sentral, i-City Corporate Tower 4 and KDCC Tower 2 in 2026 will also be completed.

A total of 1.05 million sq m is expected to be delivered in 2024. office space. Lee said a similar amount of space will be delivered in 2025, although there could be a significant increase in supply in 2026 due to the need for the announced 2.5 million square feet of space. These projects are expected to have green certificates.

In terms of achievable gross rents for office space, all three submarkets recorded growth last year. JLL Malaysia forecasts that KL City will be able to achieve around RM6.60-7.20 psf per month, KL Fringe around RM6.10-6.70 psf per month and decentralized locations around RM4.50-5.10 psf per month over the next two years.

According to the National Real Estate Information Center (Napic), Tan said there were 3,814 transactions in KL in the fourth quarter of 2023. In the second half of 2023, there were 749 transactions worth over RM1 million each. In 2023, the number of premises included in the transaction increased by 4.33% year on year.

In the Greater KL housing market, he highlighted the most important high-rise investments that he believes will be the most attractive this year. “The best conditions on the housing market have improved significantly. This is visible in the growing number of top-quality and luxury property launches.”

According to the monitor, the current stock of prime residential high-rise buildings increased to 57,685 units in Q1 2024 from 57,155 units in Q4 2023. Average gross rent increased by two sen to RM3.32 psf per month in Q1 2024 from RM3.30 psf per month in Q4 2023.

JLL Malaysia has classified 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 see an average of around RM966 psf (in these areas) compared to the previous quarter of RM965. Market yield also increased slightly to 3.4% per annum from the previous quarter of around 3.38%,” Tan said.

Meanwhile, the total number of apartments sold also increased quite significantly year-on-year. “We also noticed that the number of unsold apartments decreased between 2020 and 2023. It is gradually decreasing and this is a very good sign. This shows that the market is slowly but surely recovering. The absorption rate is also improving,” he added.

“The ongoing demographic trend, coupled with the growing rental preference among local residents, creates attractive opportunities for investors to capitalize on rising rental yields in the prime segment,” Tan said.

Areas such as Mid Valley City-Brickfields-Seputeh, Damansara Heights-Kenny Heights-Bukit Tunku, Ampang Hilir and KL City Center continued to see improvement in asking rents in Q1 2024.

“This trend is supported by the growing number of tourists in the country. “Rents in prime areas are expected to continue to rise in the near future, although they will be constrained by new supply entering the market,” he said.

While prime residential property prices remained unchanged in 2023 and the first quarter of 2024, Tan said he expected sales prices to increase slightly in the rest of the year. He attributed this to an expected increase in demand, reduced property overhang and an increase in construction costs.

He added that the upcoming easing of requirements for the Malaysia My Second Home (MM2H) program and the expected increase in foreign buyers could stimulate demand for high-end residential properties and drive up prices.

JLL Malaysia’s head of research and advisory, Yulia Nikulicheva, said the retail sector is on a gradual growth path following the large decline in footfall observed at major shopping malls in Q1 2024.

“The performance of the city center submarket indicates a fairly strong recovery from the Covid pandemic, with the main drivers being demand from local consumers who consistently spend in shopping centers. In addition, owners reported that they witnessed quite a large influx of tourists, which is confirmed by government statistics,” she added.

“Last year, the number of tourists who visited Malaysia exceeded their expectations. Looking ahead, as the government has imposed some restrictions on tourists from China and India, we should expect the impact of foreign tourists on the city center submarket to be even stronger as we actually see an increase in tourist numbers.

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

In terms of upcoming supply, in the near future the supply pipeline is expected to be concentrated in the suburban submarket, while the supply in the inner city submarket will be lower.

In terms of rental rates, Nikulicheva noted that the city center submarket is showing a positive trend, adding that many real estate investment funds that own city center shopping centers have seen increased footfall and an overall increase in rental income last year .

In turn, the suburban submarket was characterized by mixed dynamics. She explained that malls with good locations, a strong tenant mix and a more flexible approach to tenant relations managed to maintain or improve occupancy and rental rates.

Going forward, Nikulicheva expects the city center submarket to show positive growth. However, she warned that rent rates for retail properties may not return to pre-pandemic levels in the near future.

Summing up the launch of the monitor, Tan said: “As macroeconomic factors remain positive for Malaysia, we expect positive momentum across all market segments in the medium term. The fundamentals for all market sectors are strong and the real estate market is expected to continue its positive streak unless we encounter any external shocks.”

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