Oversupply of office space taking its toll

JAKARTA (JP): A huge oversupply of office space in the capital is forcing building owners to exercise a great deal of flexibility in quoting rates to absorb the shrinking market, according to property consultant PT Procon Indah.

Procon, in association with Jones Lang Wootton, said on Wednesday that the oversupply might reach about 853,400 square meters by the end of the year, resulting in an average occupancy rate of 71 percent.

Procon Director Luke Beadle said the continuing sluggish market had compelled some commercial property operators to lower their U.S.-dollar denominated rental rates.

But many others were resisting compromising as they were still burdened by foreign debts run up while developing the buildings, he said.

He cited the differences underlying the financial structures within the commercial business district markets in Jakarta.

"At one end of the spectrum you have buildings constructed with pension funds without any loan exposure, and therefore viewed in a different way than a developer who may have had to borrow money to construct a commercial building," he said.

The former had greater financial flexibility, and thus could secure a number of tenants in the first eight months of the year by offering extremely lower base rentals and service charge rates for longer periods of time.

This benefited many foreign and joint-venture companies with either U.S. dollar incomes or long-term commitments in Indonesia, he said.

"In many cases, they are taking the position that now is the best time to commit long term to premises that perhaps in the past would have been unaffordable for their business," he said.

This would allow the companies to reduce bottom-line occupation costs and increase the quality and efficiency of their operational office space, he said.

Grade A prime buildings such as the Jakarta Stock Exchange building, Sentral Senayan, Plaza Mutiara, Arkadia Office Park, and Deutsche Bank had reduced their U.S. dollar rental rates significantly to attract tenants with U.S. dollar-based income that "12 months ago would not had been able to consider such a move."

However, not all building owners exercised greater flexibility with existing or new leases, Beadle said.

"At the other end of the spectrum, a number of groups are maintaining their U.S. dollar-based rentals and service charges, preferring vacancies to rupiah," he said.

Some landlords were not even willing to compromises on service charges, it said, leading to the mass exoduses.

"A number of tenants have actually closed down operations, hoping to walk away from existing leases," he said, adding that some of the leases were not due to end for many years.

He said some landlords were currently in the process of pursuing such tenants legally, but they were concerns about how the country's existing court system would deal with the landlord- tenants dispute, he said.

"As in other similar contractual disagreements currently being worked through, clarity is difficult," he said, citing state- owned electricity company PT PLN's current disputes with independent power producing partners as an example.

PLN is currently seeking renegotiations of power purchase contracts with its private partners.

Procon also estimated that much of the projected future supply had been canceled, and no projects were expected to be completed in 2000. (das)