APPD Market Report Article
Kuala LumpurNovember 29, 2022
Yulia Nikulicheva, Head of Research, Malaysia
Recruitment firms emerge as a driver of leasing market activity
- Net absorption remained positive across all submarkets in the quarter as demand was generated by owner occupancies as well as the recruitment and financial services industry. Notable movements included a major bank relocating to a new building, as well as several recruitment firms moving into the newly completed Pavilion Damansara Heights development.
- Demand continues to improve slowly for the year but the demand-supply mismatch remains apparent.
Overall vacancy rates hold up well against new completions
- The third quarter saw new supply entering the market. Of the four new office towers completed, one is the owner-occupied UOB Plaza 1 and the other three are located in the highly anticipated Pavilion Damansara Heights. Collectively, Pavilion Damansara Heights’ new office towers contributed approximately 280,000 sq ft to the Kuala Lumpur Fringe (KLF) submarket.
- Marginal recovery in the vacancy rate was largely driven by the Kuala Lumpur City (KLC) and Decentralised (DC) submarkets. Several flight-to-quality movements were observed whereby the tenants, previously located in older buildings outside of the basket, relocated to newer buildings. In the KLF submarket, vacancy rates grew slightly due to a large influx of supply amid a struggling demand market.
Investment activity show signs of picking up
- The investment market showed signs of picking up, and was led mainly by local investors with smaller-scale deals. This is reflected in the two office transactions that were indicated for investment purposes, within the quarter.
- A decline in rents following the recent completions was observed in the quarter. These newly completed office assets faced stiff competition from the strong supply pipeline in the market over the past year.
Outlook: Investment market to remain dominated by local investors
- Transactions in the office market are likely to remain driven by local investors for the next 12 months and likely beyond, as investor sentiment for office assets remains weak amid oversupply concerns and economic uncertainty. This uncertainty adds to the likelihood of foreign investors adopting a wait-and-see approach for 2023.
- Kuala Lumpur’s new supply pipeline is expected to deliver over 3 million sq ft by 2023. This will likely push rental rates to decline further and keep vacancy rates elevated. With hybrid working practices and flight-to-quality movements expected to remain in the mid- to long-term period, demand recovery is anticipated to remain slow and staggered.