Retaining tenants key for commercial property landlords

Low rents and low occupancy levels of office space including retail and leisure space is expected in the oversupplied Klang Valley. (Freepik pic)

The magnitude of Covid-19’s effect on the real estate market is not yet known. It will largely depend on the scale and longevity of the pandemic.

The commercial sector is feeling the strain on corporate tenants, particularly in the office, retail and leisure sector.

Given the uncertainties ahead, both tenants and landlords may be re-looking their tenancy agreements as the industry is expecting less leasing activity and investment in commercial office space, which will impact commercial leases.

Knight Frank Malaysia executive director of corporate services Teh Young Khean told Property Advisor that, in the near term, downward pressure on rents and occupancy levels of the oversupplied Klang Valley is expected.

“Although most commercial offices in the Klang Valley are well-connected assets with a wide array of amenities, office space is expected to continue to attract a limited tenant pool.

“We are likely to see an increase in right-sizing, subletting and, as a result, more tenants looking for fitted spaces and/or co-working spaces to save on capital expenditure,” he said.

However, with social distancing measures and other standard operating procedures in place, Teh said many will continue with flexible work arrangements to avoid potential health risks to employees and reduce non-essential expenditure.

“Until the virus has been eradicated or brought under control, most business owners and investors are likely to review or put on hold any real estate decisions, leading to reduced leasing/transactional activity.”

Economic stimulus measures

Economic stimulus measures have been implemented to cushion the impact of the pandemic. The latest RM10 billion package is aimed at supporting struggling small and medium enterprises (SMEs) that contribute 40% to the national economy.

The government is also encouraging private property owners to give discounts on rents of at least 30% to SMEs during the Recovery Movement Control Order (RMCO) and the following three months by granting landlords equivalent tax deductions.

In addition, SMEs operating at premises owned by government-linked companies will enjoy exemptions on rent or discounts.

Office rents in the centre of Kuala Lumpur are expected to dip as landlords strive to retain tenants.

Although the MCO has brought the market to a virtual standstill, Teh said some activities have picked up as people start returning to work but, in general, it has been slow for most sectors.

“Technology and e-commerce have seen some growth during this period. Many companies have started to adjust to remote working and limited time working in the office, shopping and doing leisure activities.”

He said businesses are still grappling with the short-term effects of the pandemic on their finances while trying to work out how they will cope until a vaccine is found.

“While Malaysia is recovering, the region and the rest of the world are still severely affected. The uncertainty is causing most companies to act with caution, putting many real estate ventures that require high upfront capital expenditure on hold unless necessary.”

He added that the recent entry restrictions for foreigners have caused disruptions and delays in decision-making for multinational corporations planning to set up businesses in Malaysia.

Price trends for commercial rent and occupancy rates

Knight Frank’s Teh said the average achievable rent in KL City during the first half of (1H2020) was marginally lower at RM7.25 psf per month, compared with 2H2019 at RM7.28.

Office markets in KL Fringe and Selangor remained resilient with 1H2020 average rental rates holding steady at RM5.80 psf per month and RM4.32 respectively (2H2019: KL Fringe – RM5.80 psf; Selangor – RM4.31), supported by active leasing activity and positive tenant movements.

He said it is impossible to predict the effects on commercial office space, but Knight Frank expects rents in the KL City Centre to dip as landlords try to keep their tenants from relocating to cheaper options by offering attractive incentives or renegotiating the rental package.

Prior to the pandemic, Teh said the demand in the KL City Centre had been declining due to the oversupply of office space and the major drop in oil prices, causing big oil and gas tenants and the supply chain to rightsize. The pandemic has only added pressure to a highly competitive rental market.

He noted that older buildings without public transport nearby and/or other amenities will continue to struggle, especially as newer buildings adopt more aggressive leasing strategies to lure tenants.

“The flight to quality will continue in this tenant-led market as occupiers take the opportunity to move to newer buildings at competitive rates.”

This article was written by Sharina Ahmad of PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.