Malaysia's office construction boom could lead to a Dubai-style property bust, CIMB warns, but other analysts expect a more muted correction.
Dubai's early story is similar to Malaysia's current ambitions, CIMB said, noting both had plans to build iconic "tallest" office towers and other commercial projects to lift industry standards and alleviate Grade-A office space shortages.
But CIMB noted, Dubai had a "one-up" given demand from Fortune 500 companies already located there and steady occupancy rates around 97 to 99 percent, compared with Malaysian capital Kuala Lumpur's occupancy in the low to mid 80 percent range.
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After years of frenetic development, which included constructing the world's tallest building, Dubai suffered a massive real-estate crash in the wake of the 2008 financial crisis, with property losing more than 50 percent of its value by 2011 as excessive speculation came home to roost. CIMB noted half-empty buildings continue to plague Dubai's skyline.
On the slate for the Kuala Lumpur area are the 118-story Warisan Merkeka Tower, targeted as the tallest building in Southeast Asia and part of a huge complex that will include two condominium blocks, a hotel tower and an underground subway station, as well as the 28-building Tun Razak Exchange project targeted as an international financial hub, CIMB noted.
The report estimates around 17 million square feet of gross office floor area will come on-stream between 2015 and 2017, adding that even if demand doubles, it won't absorb the influx.
It's not just about empty offices, CIMB said.
"Without the solid backing of fundamental demand, the overbuilding of commercial real estate could result in painful long-term issues, such as a magnified oversupply of office space, depressed rentals and yields, wastage of strategic land resources and knock-on effects on the financial sector as borrowers default on their loans and the industry's non-performing-loan ratio rises," it said, adding that if the government offers funding for the projects, any losses will pressure public debt.
But other analysts note that not all of Malaysia's office vacancies are created equal.
"A lot of the vacancies are found in buildings that are not built to a specification that a multinational tenant would want," said Alan Cheong, senior director at Savills Research in Singapore.
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He noted tenants tend to leave buildings that are 10-15 years old as the maintenance isn't up to the standards seen in neighboring Singapore.
Overall, "grade-A vacancy rates are quite low," especially in centrally located buildings, he noted.
Cheong doesn't expect Malaysia to see an office-market crash as demand is likely to remain constant. "You'd have to scare the daylights out of the supply side," he said. "Even if it's down 10 percent, it's not a crash. It's just a reaction to greater supply."
Even the planned Warisan Merkeka Tower, which he calls a "hypothetical building," could act as "pump priming," as it may generate temporary office demand for the construction companies and material suppliers in Kuala Lumpur, Cheong said.
The government's plan to increase the population of the Kuala Lumpur area to 10 million from the current 6 million by 2020 will also spur greater property demand, he said . The population plan is contingent on more Malaysians moving into the Kuala Lumpur area and not on immigration, he noted.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter