OLD OFFICE BUILDINGS: TO REFURBISH OR NOT TO REFURBISH
by Rahim & Co Research Sdn Bhd
Generally, building condition for older office buildings often deteriorate over time and this would affect the occupancy and rental rates of office buildings. Due to the emergence of new prime office buildings in Kuala Lumpur 's Golden Triangle area and companies looking to relocate to these newer office buildings, it is inevitable that a substantial amount of vacant space would be available in the market when relocation takes place. Some major relocations that have took place in 2004 were companies in the financial, IT and advertising industry.
While older office buildings located in secondary location or on the fringe of Central Business District (CBD) area like Jalan Raja Laut, some parts of Jalan Ampang and Jalan Bukit Bintang and Jalan Tuanku Abdul Rahman are more susceptible to being left vacant due to its unpopular office addresses and poor building images, similar buildings located closeby KLCC area gained from the strategic location and continued to enjoy sustainable occupancy rates mainly due to its competitive rentals rates.
But then again, strategic location alone would not always guarantee long term profitable investment portfolio. How then do these older buildings sustain its competitiveness? It is deemed necessary and even critical for older office buildings to undergo refurbishment to retain their building tenants. A market survey undertaken by us indicated that most building tenants prefer to operate within the Golden Triangle area, compared to relocating to other areas in KL City.
Therefore it is not surprising that tastefully refurbished older office buildings located nearby KLCC area such as Wisma Selangor Dredging, Bangunan Angkasa Raya, Wisma Getah Asli and Wisma Equity remained popular among established clients who appreciate the privileges of being located in the heart of the city which include convenience of accessibility, prestige office address, competitive rental rates, availability of public transport and many other advantages.
A good majority of the survey respondents also indicated these older office buildings enjoy excellent amenities such as food and beverages, shopping and parking facilities a part of the building owners' commendable track record in building management. Another factor that attracts tenants into these older office buildings is the building management's office response to tenant's complaint.
In order to make refurbishment a success, building owners would need to realise that refurbishment works and capital expenditure for a building are a necessity for a building to maintain its functionality rather than something luxury, more so, if the building management is targeting multi-national corporations and major local companies. Furthermore, these companies have the propensity to occupy buildings that portray good corporate image and reputation. The provision of certain facilities such as fast-moving lifts, CCTV surveillance and broadband connections are deemed as 'minimum facilities' as their expectation are usually more sophisticated.
From the point of view of the tenants, they would fully support the refurbishment work provided it would directly benefit them and should the rental rates are to be reviewed, the refurbishment work must justify the amount increased in rental.
In some cases, the capital expenditure in refurbishing an office building does not automatically translates into increase in rental rates or giving immediate direct financial benefit to the building owner. More often, rental value for office space is a function of supply and demand, the latter of which is dependent on various other variables. The rentals are also dependent on the macroeconomic situation and the office market sentiments amongst occupiers.
Nevertheless it has to be viewed as a long-term gain to attain benefits such as high occupancy, competitive rental rates, attractiveness to future tenants and for the building owner - profitable investment profile, all vital reasons in ensuring continuous market competitiveness.
From the operation point of view, the building owners should up-date its Building Audit Report to ensure the maintenance of essential services has been managed professionally while sustaining an efficient building operation. Subject to the building's age, facilities available in the building, monthly maintenance cost must be within acceptable level for the owner or the shareholders to be financially satisfied.
Refurbishment work should be considered vital primarily to keep the office building in desirable condition while ensuring the investment value of the building remains attractive. From our survey, it was highlighted that the most critical improvement works that need to be carried out immediately include an upgrading work of the toilets and improvements on the air-conditioning system.
In determining the projected rental rates subject to the completion of the proposed refurbishment work, the following factors should be well considered:
- the prevailing property market conditions, particularly the oversupply situation of office space;
- the project cost; and
- the perception of the completed project to the prospective tenants.
The projected rental rates upon completion of the refurbishment exercise should ideally conform to the following criteria:
Rentals must be competitive with other similar / comparable buildings;
Rentals must be able to generate the required rate of return;
Rentals must be able to achieve the required leasing take-up rate;
Rentals must be able to generate the required rate of cash inflow for the building owner.
The chart below depicted the trend of rentals rates of some of the older office buildings located on strategic location in the city.
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