Moves by the Malaysian government to develop state land in and around the centre of Kuala Lumpur are being watched by property players amid concern that huge new projects could lead to an over-supply of office space.

The state sites add up to more than 240 ha. And in a bid to trim the budget deficit, there has been talk of developing them to 'unlock value' and create a multiplier effect.

One such site is a huge 162 ha plot at Sungei Besi - a 10-minute drive from the city centre - that is now the Royal Malaysian Air Force base. This has been earmarked for mixed development, with an Islamic financial centre at its core, once air force moves out.

According to media reports, the federal government investment fund 1Malaysia

Development and the Qatar Investment Authority are likely to be master planners for the project.

CH Williams Talhar & Wong director Foo Gee Jen reckons 40 per cent of the site could be for commercial use. And assuming a conservative plot ratio of 3.5 times, this could add about 20 million square feet of gross lettable space.

Another huge potential site is Kampung Baru - a Malay reserve township of about 90 ha. The land cost here is a fraction of that in inner Kuala Lumpur, even though it is only a stone's throw from it.

But despite the government's eagerness to upgrade the area, Kampung Baru is complicated by myriad owners holding sub-divided properties - a situation brought about by Islamic inheritance laws.

Excluding the government's projects, Mr Foo pegs new office space at some 5.5 million sq ft this year, plus another four million sq ft or so next year. DBS Vickers estimates a total of 5.45 million sq ft over 2010 and 2011.

According to DTZ Nawawi Tie Leung executive director Brian Koh, 14.4 million sq ft of purpose-built office space is scheduled to come on stream over the next three to four years.

Consultants differ on the average take-up rate, some pegging it at up to 2.5 million sq ft annually and others saying it has declined to a million-plus sq ft only.

For now, rents have held, especially for A buildings. And general occupancy is reportedly in mid-80s to 90 per cent.

Most property players are confident new supply over the next two years can be comfortably absorbed. But others are less certain, pointing to competition from new offices sprouting up in the greater Klang Valley, in areas such as Bangsar, Mont Kiara, Petaling Jaya and Sentral, among others.

Unless the planners get it right, the government's projects could put additional pressure on rents post-2012. Yields would also suffer should foreign investors be slow in making Kuala Lumpur home and setting up shop.

'The next two years should be okay, after that it will be pretty uncertain,' said Mr Foo.

Source : The Business Times © Singapore Press Holdings Ltd. Reprinted with permission.