This article first appeared in The Edge Financial Daily on January 4, 2018

KUALA LUMPUR: The oversupply in the Malaysian office market is expected to continue in 2018, but unlikely to cause the market to crash, while rental rates should remain resilient throughout the year, according to real estate advisory firm Savills (Malaysia) Sdn Bhd.

If the office market were to crash, it would have done so in 2016 or 2017, Savills Malaysia executive chairman Datuk Christopher Boyd said yesterday at a press briefing to unveil the firm’s top property picks for 2018.

“It is undoubtedly weak, but in my view it has found some level of stability. It is highly unlikely to drop sharply in 2018, but developers will continue to offer rent-free periods and other concessions to remain competitive. Office rentals have been remarkably resilient; we don’t anticipate any crash in 2018,” he said, adding the total marketed office space in the Klang Valley now stands at 120 million sq ft.

“It’s a very sizeable market indeed. Over four years, annual new supply [will be] about five million sq ft per annum, while the take-up rate is approximately two million sq ft.”

Boyd also said Savills Malaysia had estimated the take-up rate for 2017 was about 1.2 million sq ft, compared with 700,000 sq ft in 2016.

“So, the market does have an element of oversupply, not life threatening, but still enough to keep office rentals quite stable. We haven’t seen a crash, but of course neither have we seen any sharp appreciation.”

Based on the firm’s observation, Boyd said overall occupancy in the Malaysian office market has dropped to about 70% currently. However, he is unfazed. “I have seen occupancy go below 70%, and they recovered,” he said.

“What we are seeing now is, well-established tenants in an existing building for six or maybe nine years are able to move into newer buildings, and take advantage of better quality and higher specification office buildings without paying very much more rent. This is very good for the industry as a whole.”

Boyd noted some older buildings, such as those over 30 years old, and with lower density are getting ripe for redevelopment.

“Tenants are willing to pay a little bit more for better spaces, and we will see a gradual reduction of old stocks as old buildings are redeveloped. Bear in mind that some of the older buildings were built in very low density or plot ratio, perhaps four or five times to site area. Whereas now, particularly in [Kuala Lumpur’s] Golden Triangle area, it is not unusual to see approvals for twice that density or more.”

Boyd said the anticipated demand recovery in the residential market in 2017 did not materialise, but he believes it will pick up this year.

“There is no supply side crisis in the residential market. In fact, new developments are actually taking place at a very low pace, which is fine, because demand is also quite subdued. But for Malaysia, being such a young country, the demand for accommodation will grow. We can’t foresee anything this year that will put a dampener on the residential market.”

On retail properties, Savills Malaysia deputy executive chairman Allan Soo said established malls will continue to enjoy high rental and occupancy rates in 2018, while new entrants will struggle to attract tenants.

“Occupancy rate at established malls is easily in the high nineties or 100%. For newer ones (malls), many of them are struggling at 60% and below. It would take them some time to come up to even 80%,” he said.

Meanwhile, he said rentals for established players have hit a very high benchmark of RM200 per sq ft. “That is incredible, based on when some of them started in 1998, the highest benchmark rental was only RM32 per sq ft.”