As of the 2nd Half of 2011, the total stock of net let-able area of office space in the Golden Triangle of Kuala Lumpur was approximately 46 million square feet, out of which about 35.9% of this space is aged 25 years and above. In the next few years, it is anticipated that there will be a spat of refurbishment of office buildings in the market. In fact there have already been some refurbishments in the market (see attached story) and other owners commencing refurbishment or in the planning stages.
There are several compelling reasons on why owners are and should refurbish their buildings. The economic crisis amplified the vacancies of office space, and buildings that do not offer all the amenities for image, comfort and flexibility are difficult to rent. Newer buildings are offering better facilities and environment at similar if not higher rental rates and have taken over the market space once competed in by the older buildings.
Moreover, user's requirements have considerably changed in the last decade in terms of office equipment, communications, automation, quality of use and comfort. This dynamism in the user's needs will be continuos and constantly changing.
Another driving force to refurbish is the owners' cost to operate and maintain the office building at is present state is too expensive as compared to the rentals. The Mechanical and Electrical systems are not as efficient as compared to what it was and to the existing systems in the market. Management and energy costs do not commensurate with the rentals receivable.
It is also estimated that retrofitting a building costs much less than demolition and reconstruction (about half to one third of the cost).
What is refurbishment? Technically, refurbishment is the process of making as good as new, including essential modernization and renovations. It is the restoration of a building in order to give it a new 'lease' of life, in particular to restore its intended usefulness and style. It does not aim to alter the essential fabric and design of a building but to modernise and repair in order to preserve the building while replacing worn or obsolete components. Refurbishment, however, does not extend to reconstruction.
So now that the decision to refurbish has been made, what's next? It is strongly recommend to use a holistic marketing approach to the next step. Refurbishments should only be based on a detailed market study and a gap analysis on where to position the property after refurbishment. This will strongly determine the strategy required to market the property after the refurbishment and also what is critical for the refurbishment. Based on the detailed market study, a gap analysis is conducted for market positioning purposes. A sample Gap Analysis conducted for our clients who are proceeding with refurbishments for their office building are as follows:
|Office Building||Location||Passing Rentals|
|Petronas Twin Towers||KLCC||RM 8.00|
|Menara Maxis||KLCC||RM 5.50|
|Menara IMC||Jalan Sultan Ismail||RM 5.00|
|Menara Citibank||Jalan Ampang||RM 4.70|
|* Building XYZ||Jalan Ampang||RM 4.00 - 4.50|
|Menara Selangor Dredging||Jalan Ampang||RM 4.00|
|Menara Chan||Jalan Ampang||RM 3.80|
|Menara Getah Asli||Jalan Ampang||RM 3.50|
|Bangunan Angkasa Raya||Jalan Ampang||RM 3.20|
* AVAILABLE GAP IN THE MARKET
Based on the available gap, one then will know what needs to be done to position the building in the market. A Building Diagnosis is also conducted concurrently to evaluate the general state of the office building with respect to deterioration, functional obsolesces and indoor environment quality to users.
The Gap Analysis provides the marketing approach whilst the Building Diagnosis provides ample information on the existing condition of the building. Marrying both these analysis will provide equilibrium of what needs to be done i.e. a market driven building that is not functionally obsolescent.
As a guide, there are five main issues to consider when deciding what needs to refurbish. Firstly, the User Needs i.e. compliance with the user"s anticipated professional activities and requirements in office space. A good office refurbishment exercise is one that can anticipate the requirements of the user and fulfill it.
Secondly is that the refurbished building must have the capacity to easily modify the interior space partitioning and general office layout without any major intervention on the buildings installations and structure. This Flexibility is important as the requirements of each tenant and user will differ.
Divisibility is third issue to consider. The refurbished building must have the capacity to divide each floor plate into separate and independent zones with autonomous energy metering in order to rent part of the floor plate.
Maintainability is very important for "after the fact". All works done must have the capacity to facilitate easy maintenance of the premises, such as equipment layout in the plant room, and type of equipment.
The last issue is of course Compliance with regulations, both national and the local authorities. The will be a variety of regulations to consider, ranging from the Street and Drainage Act and Uniform Building Bye Laws to the Town and Country Planning Act.
Based on our observation and feedback from tenants and owners alike, the following items are the most crucial items in the refurbishment of office space:
- Lobbies, including the porte corchere, the main lobby and all lift lobbies. These cosmetic and functional upgrading provide an immediate impact to the building. These improvements are not only for the tenants, but also to impress the tenants' clients.
- Lifts are the most crucial of all Mechanical and Electrical Systems in enhancing the value of the building. For the tenant, an upgrade in the lifts reduces waiting time for the lifts and enhances the travel time in the lifts. In the corporate world these days, every second counts.
- Lavatories completes the last of the Three Main 'L''s in refurbishment. Again, this has to do with the environment and quality of lifestyle that is provided to the tenants
- Mechanical and Electrical. This would include the air conditioning systems, building automation systems, functional and ambience lighting levels and telecommunication systems. This factors are the hidden factors, i.e. not visible to the eye but only felt. The M&E systems are crucial in ensuring compliance with the users professional needs and activities within the premises.
- Security Systems. We have seen an increase in request for security systems in new office buildings that now most systems are already a norm. These items are also to be seriously considered,e specially the need to attract multi national companies that place a heavy consideration on security. Items will include CCTV systems, Access card systems, Intrusion Detection Systems and the normal smoke and fire detection systems.
- Facade. This is the most obvious of all upgrading, but we would not put too much emphasis on a total refurbishment of the facade as the translation to increment in rental value is minimal. It is important but simple and elegant efforts are more appreciative than extensive retrofitting of the facade. Improvement to the facade is only recommended for buildings with real functional obsolete facades i.e. does not play its part as an outer shell and protect the interiors.
The danger of refurbishment is refurbishing for the sake of refurbishing and overdoing it i.e. spending X million of dollars but the eventual rental returns do not commensurate with the expenditure. There is a life case right here in the Golden Triangle of Kuala Lumpur whereby the owner spent tens of millions (close to one hundred actually) of ringgit to refurbish the high rise office building but only to realize the rentals were the same as before they refurbished.
Why? Because firstly, the refurbishment was conducted in a manner to refurbish for the sake of refurbishment without thought on positioning the property with its competitors. Secondly, the money spent did not add value to the building in terms of attracting high paying tenants. Thirdly, there was no communication into the market that the building has been refurbished and is available.
The average expenditure we recommend for refurbishments of office buildings is in the range of RM150-200 psf-based on market study/gap analysis and the building diagnosis. Generally, the majority of the allowance would be allocated for Mechanical and Electrical systems. (based on the above price per square foot, the total cost for an office building the size of Angkasara Raya would be in the region of RM22M to RM25M.
The targeted incremental rental based on the above budget should be in the range of RM0.80-RM1.50psf, depending on the level of refurbishment, the location and the marketing efforts conducted. Other than increase of rentals, owners in most cases will also experience lower outgoings as more efficient systems are in place.
Refurbishments generally take between 12 - 18 months and up to 24 months for bigger buildings. Owners are also caught in a quandary on how to manage tenants during this period. Three alternatives are available. Firstly, reduction in rental rate and providing rent free periods during the refurbishment. If the works are major, then vacating the building would be the best option, though it would result in lost of income in the sort term. The last alternative is to structure a rental scheme for "during" and "after" the refurbishment period.
The last and the most crucial part of the refurbishment exercise is the Sales and Marketing of the refurbished building. This specialized sub sector of the refurbishment would entail a Pre-Launching Exercise 3 to 6 months prior to completion of the refurbishment, Launching Exercise and the After Launch Sales. It has to be focused in its effort, mainly communicating the existence of the refurbished office building, as one can spend any amount of money on refurbishing but it is to no avail if the tenants, end users and consumers do not know about it.
|Name of Building :||Straits Trading Building|
|Date of Completion :||1960s|
|Date of Commencement of refurbishment :||Mid 1999|
|Date of Completion of refurbishment :||Mid 2001|
|Rental Before Refurbishment:||RM3.40 psf (inclusive of service charge) as it was tail end of tenancies that commenced in 1996/1997 which was still quite a healthy market
However, based on Zerin Properties research, the rentals for similar office buildings to the then Straits Trading Building (and even new ones )in the same vicinity during 1998/1999 was about RM1.80 - RM2.50 psf
|Rental After Refurbishment :||RM2.80 - RM3.25 psf|
Refurbishment at Straits Trading Building were mainly focused in the lobbies and the M&E systems. The building is now a real prime building with very good finishes, good M&E systems, great ambience lighting creating a very warm environment.
Write Up For Straits Trading Building
Straits Trading Building is located just by the Federal and Appeals Court in Kuala Lumpur, is a newly upgraded prime office building and is indeed a gem as compared to the surrounding buildings. It is a seven storey purpose built office building with one basement car park, central air-conditioning and serviced with 3 modern lifts. The lobby has been upgraded and has a very warm welcome as you drive and walk in. All lobby's are finished with simple yet elegant polished granite, offering a truly warm atmosphere. The lifts are really modern and offer very quick travel and waiting time. Security is good, with 24 hr manned guards and also hi tech CCTV systems. The whole building is fitted with modern fire fighting facilities. The lifestyle retail podium is also nicely done, offering some nice al fresco cafes. The views vary from Selangor Club, the retail podium, Dayabumi and some without views.
By virtue of its close location to Selangor Club, ample additional car park is available at Dataran Merdeka, besides easy accessibility to the LRT station at Masjid Jamek within a short walk away.,
Its existing tenants at present include small, mid and large sized legal firms, a University Representative Office and other consultants.
The building with its flexible layout offers spaces from 494 sqft onwards and ample space for even bigger setups up to about 20,000 sqft per floor. Rental rates are between RM2.80 to RM3.25 spf (inclusive of service charges)
The total nett let-able area of the building is approximately 108,000sqft