Net effective rents for Kuala Lumpur offices dip 1.1% in Q2

Tenants and prospects were looking for more discounts and longer rent free period from landlords, as most companies were trying to curb operational expenditures.

This caused net effective rents in Greater Kuala Lumpur to fall by -1.1% q-o-q and -2.5% y-o-y to MYR 4.12 per sq ft per month, according to JLL.

Office investment was muted as investors were cautious over the market outlook amidst the unprecedented COVID-19 environment. Investment decisions were stalled as investors tried to assess the market situation. Active investors during the quarter were seeking value-add assets or opportunistic assets to leverage on heavy pricing discounts.

Here's more from JLL:

Demand softens across all submarkets amid economic slowdown

The slowing economy due to the COVID-19 outbreak has taken its toll mostly on lower grade offices. In contrast, occupancy of Grade A office space, specifically in Mid Valley City, KL Eco City, Bandar Utama, Mutiara Damansara, PJ Old town, as well as KLCC and its surrounding areas remained resilient as the flight-to-quality trend persisted. Occupancy in KL Sentral and Bangsar South remained at near full occupancy.

Workspace arrangements and designs, as well as building facilities were reviewed and modified following social distancing policies and new standard operating procedures (SOPs). These included spaced-out seating, biometric fever detection terminals, modern partitions to limit face-to-face interaction, one-direction walking traffic flow, customised flexible spaces, advanced air hygiene, and contactless access.

Completions delayed due to construction the ‘stop work’ order

During the Movement Control Order (MCO)/partial lockdown, construction works were paused between 18 March and 3 May. Since then, construction works were allowed to resume operation, but contractors were required to adhere to strict SOPs, such as limited working hours, limited workforce capacity, extensive protocols, and health screening for foreign workers.

These factors consequently delayed the completions of several office buildings that were scheduled for delivery in the quarter by another 3 to 6 months. While there were no new completions in 2Q20, soft market conditions pushed vacancy in Greater Kuala Lumpur up by 4 percentage points to 19.4%.

Outlook: Challenging economic and business conditions lie ahead

The COVID-19 outbreak and its consequent impact on the economy and businesses will continue to adversely affect the demand for office space. Work-from-home arrangements would impede interest for office space in the near term. Flexible space operators are likely to benefit from companies that are looking for downsizing options, more agile tenancy agreements, and lower capital expenditure.

The low oil price environment is expected to continue to hamper office demand from the Oil & Gas sector. On top of that, unresolved geopolitical trade tensions in the region should continue to subdue market sentiment.