Investments in commercial buildings in Malaysia more than doubled last year to a record RM2.67 billion (S$1.18 billion) as real estate investment trusts (Reits) and foreign investment funds piled into A-grade buildings, according to a survey.

Office investments have accelerated considerably since 2004, when Malaysia sought to boost Reits by exempting them from tax on income distributed to unit-holders.

From 2000 to 2003, investments in the office sector amounted to a mere RM1.16 billion. But they soared 490 per cent in the following three years to almost RM5.7 billion, according to a survey by Zerin Properties Corporate Real Estate Services.

Local Reits have been aggressive in the market, but foreign investment funds have not been idle. Zerin’s annual survey shows foreign funds accounted for just under a fifth of the value of office transactions in 2005 - but 45 per cent last year.

In 2000, foreigners accounted for 100 per cent of office transactions - all two of them worth RM245 million: the sale of Wisma Goldhill to Jeddah-based Saudi Economic Development Company or Sedco and Menara Phileo to Singapore’s Asia Life.

Office supply in Kuala Lumpur is estimated at 63.5 million sq ft, with KL City accounting for 62 per cent of total space. Average occupancy in the city has increased over the past two years to about 84 per cent now.

Because of the interest in commercial buildings, office space continues to expand noticeably, notwithstanding a general freeze on new offices in the Kuala Lumpur city centre - unless developers can show they have ready buyers or tenants, said Zerin CEO Previndran Singhe.

Current developments in the city centre have readily found buyers and/or tenants - many of them foreign.

Baitak Asia Real Estate Fund, a joint venture between Kuwait Finance House and Singapore-based Pacific Star Group, owns 49 per cent of The Pavillion, a RM3 billion mixed development project of offices, shops, a hotel and apartments now going up in KL’s shopping belt. Al-Batha Real Estate Co of the United Arab Emirates is the 49 per cent joint venture partner of Glomac Al Batha, which plans to build a 40-storey office tower in the city centre at a gross development value of RM450 million.

And HSBC said recently it will lease a 25-storey office annexe to be constructed by the Quill group. The annexe could later be injected into Quill Capita Trust, the Reit that Quill co-owns with Singapore’s CapitaLand.

CapitaLand, which is bullish on Malaysian real estate this year, has established the Malaysia Commercial Development Fund - a US$250 million closed end private equity investment fund - in partnership with Aseambankers. The fund has a gross development value of US$1 billion and has already identified a number of projects for seed capital injection.

Foreigners have also increased equity investments in listed property companies. California-based Capital Group has taken substantial stakes in E&O Properties and SP Setia. Other property firms, too, are substantially held by foreign funds. YNH Properties for example, is owned as much as 40 per by foreigners.

Mr Singhe does not expect foreign interest to diminish any time soon. Because Malaysian real estate is much cheaper than some elsewhere, foreign investment funds will continue to seek ‘arbitrage opportunities’, he said.

Not surprisingly, land prices in KL are rising. A property developer who declined to be named said they have jumped 40-60 per cent in just a few months.

Source: The Business Times, 27 April 2007