Asset enhancement benefits KL officesAugust 6, 2019 / By
In Kuala Lumpur (KL) city, where ageing buildings of more than 15 years make up 68% of the total office stock, landlords are concerned that a “flight to quality” may induce tenants to upgrade into newer buildings with higher specifications.
Over the next 5 years, a total of 11.3 million sq ft of new grade A office space is expected to be completed in KL city, increasing the total office stock by 33%. The most anticipated project is the iconic PNB 118, which is slated for completion in 2020. The prolonged oversupply situation has given corporate tenants an upper hand in negotiating for lower rental rates even for prime spaces in new office buildings.
In response, several landlords have embarked on asset enhancement initiatives (AEI) to help retain and attract tenants, improve occupancy rates and cushion the downward pressure on rents and capital values of older buildings. AEI refers to strategies to enhance the functional and aesthetical characteristics of a property, such that it has greater potential to yield more income, including via positive rental reversion*. Some of the buildings that have adopted AEI recently are Menara TA One, Wisma Goldhill, Menara Standard Chartered, Plaza Zurich, and Wisma HLA. The refurbishment works include drop-off area, lifts, common area and toilets.
A few other landlords have chosen to redevelop and convert the use of their buildings. Notable examples include the redevelopment of the former MAS headquarters in Jalan Sultan Ismail into corporate office and hotel, while the former Prudential headquarters may be converted into co-living and co-working centres, as well as conversion of Wisma Lee Rubber in Jalan Ampang into a boutique hotel. At the same time, some landlords are reluctant to invest in capital expenditure and may put their old buildings up for sale.
JLL Malaysia’s historical data shows that buildings that underwent complete overhauls and extensive refurbishments experienced significant increases in rents. Investment opportunities lie around the upcoming new hotspots in city centre, such as Tun Razak Exchange (TRX), Merdeka 118, and Bukit Bintang City Centre (BBCC), where MRT2 stations running from Sungai Buloh to Putrajaya, will be located. As office spaces in these new developments are fetching double-digit asking rents, older buildings in the vicinity should be able to attract tenants that are looking for affordable locations in city centre. While iconic buildings such as PNB 118 may attract multinational corporations, older buildings around the vicinity can attract local companies and co-working operators. The older buildings can still capitalize on the excellent connectivity and vibrant business environment around these new developments. Landlords of older buildings and potential investors are encouraged to assign property consultants to carry out market research and highest and best use analysis to unlock the real potential of these assets.
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