By Aidila Razak
KiniBiz examines the issues in 1Malaysia Development Bhd’s property activities, the other area apart from power which it is actively undertaking. The RM27 billion Tun Razak Exchange, more costly than Putrajaya’s RM20 billion, will likely result in an oversupply of office space in Kuala Lumpur while there are questions over choice of partners.
Apart from power assets, the other main operational assets of 1Malaysia Development Bhd are in real estate sector, its babies being the Tun Razak Exchange (TRX) and the Bandar Malaysia developments. Both are multi-billion ringgit developments with a combined gross development value of RM47 billion.
Tun Razak Exchange—envisioned to be Kuala Lumpur’s financial district with a gross development value of RM27 billion is 28-hectares of land nestled between two of KL’s main roads Jalan Sultan Ismail and Jalan Tun Razak.
Bandar Malaysia—a residential project–will be built on the former Sungei Besi military airport, a 160-ha piece of land long-eyed by developers due to its proximity to the city centre. The gross development value for the project is about RM20 billion.
But the combination of these prime locations and 1MBD’s rather unconventional approach to real estate development has attracted some criticism.
As a fully-owned government company, 1MDB obtained the lands for TRX and Bandar Malaysia at a significant discount. Having purchased it about RM1 billion, 1MDB is alleged to have gotten the Bandar Malaysia land at about a third of its market price.
Meanwhile, 1MDB obtained the TRX land from the government for RM320 million. This would have later been revalued upwards, with its financial statements indicating a gain of RM820 million from revaluations for the year ending Mar 31, 2010.
Instead of producing a master plan, dividing it to interested developers and then sourcing funding based on the interest generated or estimated rental yield, 1MDB looked first to foreign investors. Its critics saw this as a way to give its Middle Eastern friends cheap access to prime land.
Others also question the need for a foreign developer, considering the track record of local players like SP Setia, which had developed projects double the hectarage of Bandar Malaysia.
“The Middle Easterners don’t have the expertise, but they do have money,” one analyst remarked.
But according to 1MDB, Qatar Investment Authority (QIA), which was part of the joint venture which developed the Pavillion mall, was chosen as a partner for Bandar Malaysia to “raise its game” to an international standard.
QIA, on its part, committed to investing US$5 billion in this development and other real estate projects. And in exchange for its commitment, 1MDB promised to give QIA first choice of the land, before opening the rest to local developers.
Not much else is known about Bandar Malaysia. Although supposed to be launched last year, it appears to have been put on the back burner, likely due to the lengthy process of relocating the military airbase. Instead, more attention has been focused on the mammoth TRX.
Do financial companies need to cluster together?
But even the TRX project seems to be taking it slow. Despite the fanfare surrounding its launch last year, no contracts have yet been awarded. Earthworks, estimated to cost RM1 billion, were scheduled to take off late last year but there was no word as yet.
The only news that is coming out of the TRX project is the its tie-up with foreign investors. Abu Dhabi investment arm Mubadala announced that it is exploring a strategic partnership for TRX in 2010 but details on that are scant.
The same can be said of its link-up with another Abu Dhabi company Aabar Investments PJS, announced earlier this month. The 50-50 joint venture is said to be worth RM18 billion, but 1MDB told The Edge that it will only reveal details like Aabar’s entry cost “at an appropriate time”.
1MDB’s former CEO Shahrol Halmi was earlier reported to say that 1MDB had already locked in a strategic investor who would stump RM3.5 billion for the first phase of the project, and was in talks with the same investor to put in another RM5 billion. It is unclear if this investor is Aabar or Mubadala.
But the future of TRX, analyst say, boils down to the fundamental question of need: Do local financial players need to clustered together to operate better? Is there value for international financial players to be located in Kuala Lumpur?
The office space glut in Kuala Lumpur also remains an issue. Occupancy rates for offices in Kuala Lumpur do not paint an optimistic picture.
“On paper, it’s difficult to justify the TRX, especially when you think of the other Grade A office developments that are coming up, like the 100-storey PNB Warisan Merdeka Tower.
“Annual absorption rate of office space is about 2-2.5 million square feet so the TRX points to oversupply of office space,” one analyst said on condition of anonymity, due to the political nature of the development.
According to the Valuation and Property Services Department, occupancy rates for purpose-built offices in Kuala Lumpur in the third quarter of 2012 was only 77.3 percent of the 72 million square feet of office space in Kuala Lumpur.
By comparison, the Petronas Twin Towers, opened in 1997, was built at a time when office space occupancy was close to 100 percent.
Office space supply will also continue to grow, said real estate services firm CB Richard Ellis, which expects 18 million square feet of new office space in the Klang Valley by 2015, not including mega developments like the TRX, PNB’s 100-storey Menara Warisan Merdeka and the KL Metropolis which will include another 100-storey office tower.
It said that while Grade A office in the city centre enjoys higher demand, occupancy rates as at mid-last year stayed level at 87 percent, despite sparkly new buildings like Menara Felda at Naza’s Platinum Park coming onto the market.
Who will call TRX home?
So where will the demand come from? Who are these financial powerhouses expected to make TRX their new home?
Mohd Hazem Abd Rahman
Locally, 1MDB’s new CEO Hazem Abdul Rahman has said that he believes that it makes sense for the likes of Securities Commission and Bursa Malaysia to move in to TRX.
But sources said that there are no solid plans as yet for the regulator to move out of its RM270 million-complex in the lush Bukit Kiara suburb and it is just 1MDB who is “trying to reach out”.
A UOB Kay Hian analyst said that while an office space glut will likely take place, the TRX is unlikely to bear the brunt as it will get the support of the government, through government-linked companies.
“They might get local banks in. 1MDB says that (GLCs) CIMB and Maybank have expressed interest and they are also asking Bank Negara Malaysia and the SC to take up some space,” he told KiniBiz.
He added that 1MDB also said that they have recorded interest from at least 30 fund houses from the United States and European Union countries interested to move to TRX.
“The names they mentioned are good names, too,” he said, adding that 1MDB is looking to attract those in Islamic finance.
However, others are skeptical that fund houses would see value in relocating to Malaysia which has a shallow capital market, compared to neighbouring Singapore.
“Why would a foreign fund management house set up here? The foreign houses in Malaysia mostly only depend on Employee Provident Fund money,” one analyst said.
Even if the cost of operations is a factor, he said, these companies are more likely to set up their back offices in Johor rather than Kuala Lumpur, as they would want to be close to Singapore.
“This might change with the (KL-Singapore) high speed rail,” the analyst said.
Local players, too, he said, may not see much value in relocating from their current spaces, as the banks are not large enough to require huge trading floors. Neither does it need to be located next to each other.
He added that recent consolidation exercises in the banking and financial sector also show that the banking sector is not in the position to splash on fancy digs. Analysts expect that TRX space will be rented out at at least 50 percent more than the RM6 per square feet surrounding offices are asking.
But generous tax incentives—like the offered 10-year income tax holiday for TRX status companies –he admits, could sway local players to take up some of the lettable space. Will it be enough for foreign companies to move away from Singapore?
However, it is not clear what companies will be given TRX status.
Not competing with Singapore
1MDB’S senior vice president of commercial real estate management Saleha Yusoff in addressing a convention last year, however, said that the aim is not to compete with Singapore.
She said that TRX aims to position Kuala Lumpur as an “alternate” financial hub, which can complement Singapore, especially with the advent of the high speed rail linking the two cities.
A real estate services consultant close to 1MDB said that that unlike popular belief, 1MDB will be developing the TRX “in phases” so as to avoid having a lot of empty office spaces on its hands.
“They’re looking at a 10 to 15 year horizon. They aren’t going to launch a phase if there is no demand,” he said, adding that its location and specialised focus on the financial sector will remain an edge for the TRX.
Doubts over take up have also dogged the actual construction process. Unlike Bandar Malaysia where giving QIA first preference were met with pouts, the idea of empty office space is scaring developers away from TRX.
“1MDB proposed a model where they provide land, and developers build. Then developers sell the building and 1MDB and the developers share the profit. But why would developers take that risk if they don’t have buyers lined up?” one property analyst asked.
“It would be a good to know if the Middle Eastern investment includes actually buying those buildings.”
The developers’ jitters could perhaps explain the 70 percent five-year income tax break offered to real estate developers who take on TRX projects and yet, the analyst said, no developer is willing to take the bait.
In the shorter term, the UOB Kay Hian analyst said, the upcoming election and possibility of changing of the guards either in Putrajaya or within Umno weigh even heavier on the minds of those eyeing TRX.
More than other mega projects like the Mass Rapid Transit (MRT) or the Iskandar development, he said the TRX, and indeed 1MDB, is “Najib’s project” and its future will closely follow his political fate.
1MDB did not respond to questions sent by KiniBiz for the purpose of this series.
Tomorrow: 1MDB and Khazanah Nasional Bhd compared
Yesterday: Will 1MDB’s power acquisitions pay off?
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