Integra Tower targets financial, oil and gas tenants

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THE triple-volume lobby of Integra Tower is bathed in natural light streaming in through the wall-to-ceiling glass panels, and standing in front of it, it is hard to imagine that this was once the run-down Plaza Ampang.

"We wanted the lobby to provide a dramatic arrival experience," says Patrick Liau, general manager of MGPA (Malaysia) Sdn Bhd as he takes City & Country on a tour of the recently completed building.

The 40-storey Integra Tower is part of the RM2.2 billion integrated development The Intermark by private equity real estate investment advisory MGPA that sits on Jalan Tun Razak in Kuala Lumpur. The Intermark also features the 62-storey Vista Tower, the 540-room hotel DoubleTree by Hilton and about 208,000 sq ft of retail space. It is also an MSC Malaysia cybercentre.

MGPA acquired the Empire Tower office building, Crown Princess Hotel, Plaza Ampang and the City Square shopping centre for RM760 million in 2007 and redeveloped them into The Intermark. Integra Tower was the last component to be completed and has a net lettable area (NLA) of 777,000 sq ft.

MGPA currently manages about US$11 billion worth of assets in Asia-Pacific and Europe.

Already, Integra Tower has a tenancy commitment of 12%, including from Petronas Lubricants International Sdn Bhd, JP Morgan and Michael Page International Sdn Bhd. Michael Page is the first tenant to operate in Integra Tower in a space of over 5,000 sq ft.

Space efficiency was clearly on MGPA's mind when it designed Integra Tower.

"The floors are column free with a central core. We like to keep the floor plates as efficient as possible and build large ones as that's what most multinational corporations want," observes Liau.

At an average of 25,000 sq ft, the floor plate is one of the largest in the KL city centre and provides efficiency of up to 99% per floor. It can comfortably accommodate 262 people per floor. Other features include 120mm raised floors and 2.8m floor-to-ceiling windows that ensure a healthy dose of natural light.

"The windows are double-glazed, low-emission glass as this is a Platinum LEED (Leadership in Energy and Environmental Design) office building," says Liau.

LEED is a voluntary, consensus-based, market-driven programme from the US that provides third-party verification of green buildings.

"Integra Tower has 20% energy savings compared with a typical Grade A office building," says Liau. This is achieved through an energy-efficient air-conditioning system that adjusts itself to cooling requirements throughout the day. According to MGPA, the equivalent energy savings per year is an estimated 2,771,039 kWh/year. This is equivalent to the carbon dioxide sequestered by 87,500 mature trees per annum or about the equivalent absorbed by 440 acres of growing forests over 20 years.

The building also achieves water savings of more than 40% compared with a normal building of equal size through its extensive use of water-efficient sanitary fittings, use of AHU condensate water and rainwater harvesting.

The discerning tenant

The asking rent for Integra Tower is RM11 psf while for Vista Tower it is RM9 psf. Vista Tower, which was completed in 2010 with an NLA of 555,000 sq ft, has an occupancy rate of 80% and its tenants include Hyundai Corp, the Embassy of Czech Republic, Thomson Reuters and BNP Paribas.

While acknowledging that the asking rent for Integra Tower is higher than the average in the city centre, Liau stresses that it is a premium product designed for the discerning tenant looking for a particular type of space.

"The features of the building, we believe, fairly commensurate with the rent. You have efficiency savings on the space itself as well as additional productivity by putting more people in a space.

"The reality is, office accommodation doesn't actually form a significant portion of a company's budget, but the public space or the space where a lot of the employees work. This impacts productivity and people's perception of an organisation. We believe people who look for space in Integra Tower recognise that."

Integra Tower also stands to benefit from the current trend of relocation from older buildings as evidenced by the tenancy of JP Morgan. According to Liau, there has been a number of relocations in the market and it is partly due to the lack of Grade A office space in the city centre for a period of time.

"When we bought this development in 2007, there was very little to no Grade A office space in the city centre. After the financial crisis in 1997, hardly any new stock was built. More than 10 years later, you have a lot of tenants looking for new space."

Liau believes in the current market, the challenge is more for the landlords and owners of older space than for those with new space. It is a question of how they can keep their tenants, he says.

"I think the first thing to realise, and I know this is stating the obvious, is location, location, location. When we define our market spectrum, we look at the Golden Triangle. If a tenant wants to be in this area, they will be in our development. If they want to look for a non-central business district space or don't really care where they are located, it doesn't really matter because they might not be our target tenants.

"The latter are more elastic about where they are and they are probably really inelastic about how much they have to pay. We are looking for a specific category of tenants that we find are in financial services and oil and gas because these are the tenants that want to be in the city centre and want to create a perception of who they are. So, these are our targets," he explains.

Incoming supply

Incoming office supply over the next few years is a subject that has been much talked about. MGPA is aware of this and has done a study with DTZ Malaysia. According to information supplied by DTZ, an estimated 632,000 sq ft of office space is coming onstream this year in the city centre, 2.2 million sq ft in 2014 and around 900,000 sq ft in 2015.

"I think when people say there is a lot of office supply coming in, they are thinking about projects like Naza TTDI's KL Metropolis and 1Malaysia Development Bhd's Tun Razak Exchange, but by our reckoning, we are looking at four to five years before those get fully completed. If you talk about the next three years, there is not that much incoming supply in the city centre," Liau points out. "When developers recognise a potential oversupply situation, they slow down or delay their projects.

"Yes, there is potential for an oversupply of office space in the future, but I think the market will adjust as usual. When developers recognise their rates are flat and construction cost goes up, they may delay or defer the development until the economy picks up. I'm not really concerned about the next three years. Yes, there's supply but it's not as much as people think."

'Future forward'

When you look at brochures of Integra Tower, you see the words "future forward" printed prominently on them.

"Most tenants around the world spend a lot of money fitting out their space. So they need to find a building that suits their purpose and enables them to grow over the longer term. We feel that we have developed a product that will allow tenants to occupy a space for a long time and still meet their needs," reasons Liau.

He expects Integra Tower to be at least 50% committed by the end of the year, noting that how a building and its leases are managed is important.

"We don't just want to lease out space, we want to stack the building properly. It will have an impact on yields. You get an early bird-type of deal when you first start leasing and the rents start picking up as you go along. We want to take advantage of the upside potential as we start leasing out the space."

MGPA is now leasing the low and mid zones of Integra Tower with each zone consisting of 10 to 11 floors. It is in talks with a potential tenant interested in leasing the entire low zone.

"When we stack, we try to keep contiguous floors available. So if we have a large-space user that wants multiple floors, we can offer them contiguous floor plates. We have to manage tenants' expectations. We can't just give them the floor they like or cut up a space for them because we might be left with 15,000 sq ft of space for the sake of an 8,000 sq ft tenant," explains Liau.

MGPA believes the tenants it has in Integra Tower and Vista Tower reflect its aspiration for the development to become an international financial and oil and gas hub.

"We have a very focused target market. We know exactly where our prospective tenants are coming from. We have visibility, we have a pipeline and we negotiate things on that basis. We also work hard to understand the market and keep track of the office leasing market in town," says Liau.

As for the company's plans for the region, he says it will continue to look for future investment opportunities.

MGPA announced an estate special fund — MGPA Asien Spezialfonds — for German institutional investors on Sept 3, 2012. The fund is a yield-focused core-plus product regulated by the German Investment Act. It is intended primarily for institutional investors in German-speaking countries seeking exposure in the Asia-Pacific real estate markets with an investment focus on established markets, such as Japan, Australia, Hong Kong, Singapore and Malaysia.

The fund had its first close recently with commitments of €85 million from three German institutional investors. The target equity capital of MGPA Asien Spezialfonds is €500 million.

"We have always said we would like to buy and turn what used to be an ugly building into one of the best in town. I think The Intermark is a testament to that and a testament to what we are able to do globally. We have always said that Malaysia is a somewhat understated market. We are still very bullish on Malaysia as we see a lot of potential in it," says Liau.

He adds that MGPA's ability to turn The Intermark into a reality for its investors is also proof that Malaysia is a place where you can do business.

"Past perception was that if you don't have a local partner you will find it difficult. We don't have any local partnership but we have a 100% local team. So you can get local expertise and you can deliver a product that is of global quality for a global community. The official launch of Integra Tower on March 20 is a milestone for us. It marks the end of one chapter and the beginning of another, which is to fill the building, stabilise it and make it one of the best-performing real estate assets in Kuala Lumpur."

This story first appeared in The Edge weekly edition of Mar11-17, 2013.