PKNS, or the Selangor State Development Corp, is a name that used to be synonymous with social housing. Its operations way back in the 1960s tend to be rather localised. Today, the state housing corporation has made its foray into Australia. Yes, many things have changed ... Its general manager talks to StarBizWeek's Choong En Han.
HAVING been in existence since 1964, the Selangor State Development Corp (PKNS) started building single-storey affordable housing that cost less than RM20,000 in Petaling Jaya decades ago. But over the decades, things have changed. Whether these changes are for the better of the company, or for the strata of people it once used to serve, is debatable.
In today's housing environment, where prices have skyrocketed and where affordable, social housing is now an issue, the role that PKNS used to play and the role that it has assumed today has come into focus.
It has now evolved into a mega builder and is involved in more than 60 ongoing developments in Selangor at any given time. As if that is not enough, it has 50 more projects that it is working in collaboration with private sectors and a further 30 under several of its subsidiaries. Some of these projects with subsidiaries are in Sydney, New South Wales and Perth, Western Australia.
Besides residential, PKNS has also ventured into high end commercial developments. At a glance, PKNS seems to have lost touch with its roots of being a social builder, and its role to contribute to the five million people of Selangor.
While it carries the name of the state, its objective seems to have changed.
PKNS general manager Othman Omar explains that because PKNS does not receive grants from the Government to subsidise these projects, the state body has to create profits which can only come from its medium to high end residential and commercial developments that command a respectable profit margin.
“Profit is just a means to an end, which is to maximise our profit in order to contribute more to our stakeholders, namely the state and its people. The cost of our social responsibility in terms of providing land and required infrastructure for our townships run into billions of ringgit,” he says.
Billions more in subsidies are required for PKNS when it develops its low cost housing schemes, upkeep and maintenance cost, squatters relocation programmes and other heavily-subsidised state government projects.
Branding PKNS
Faced with a legacy image of developing many low cost housing schemes, branding is an issue for PKNS as many believe that it would not be competent enough to build quality high-end properties. “Not long after I joined PKNS in 2009, we did a branding audit to find out how the public sees PKNS and how we stack up with other private developers and other government linked companies,” he says.
Inadvertently, some of the branding audit findings took PKNS by surprise with 70% of what the public think about PKNS is false.
According to him, many think that PKNS will most probably be slow and not efficient as it is a government-owned or government-linked company.
“Over the years, as complaints appeared in the media especially regarding issues and problems with our low cost developments, the public perception on PKNS took a dive and we were labelled as a low quality builder and low cost developer,” he says.
Since then, PKNS has introduced a new quality system to ensure a much higher and consistent standard of finishing its houses, with the setting up of PKNS Response team to deliver maintenance services and also a customer service department.
All its rebranding efforts have also led PKNS to garner several prestigious awards including the Brand Laureate Top 10 Master Developer 2010 and the BCI Asia Top 10 Developers Award in 2011.
Othman says the rebranding exercise has helped to improve PKNS's image as a reputable developer that can also deliver high-end quality lifestyle products.
“Our initiatives to improve corporate governance and transparency in the organisation including the integrity pact and collaboration with Transparency International not only improve our image but deliver the bottom-line. In 2010, we saved RM115mil from our open tenders, e-sebutharga and value engineering, and we are targeting to save RM150mil from the same in 2011,” he says.
Business model
In line with the changing of times, PKNS has also re-looked its business model, driving the changes it needs to sustain its operations.
“What worked before does not necessarily work for us now. We used to get free land or at a cost of almost nothing. For the 9,000 acres we had for Shah Alam, we only paid the land premium as we developed them. Then we parceled out some of our land to private developers in the form of joint ventures and privatisation project to get good returns from them,” he says.
However, according to Othman, the last 15 years had been quite different, with PKNS buying 6,000 acres of Bernama Jaya land at market price, and to date have spent over RM480mil in land purchases and infrastructure development. It is also planning for further spending for infrastructure cost.
“At the end of the day, how much margin can you make selling houses in Bernam Jaya?” he asks rhetorically.
The state development corporation has also bought 1,500 acres in Selangor Science Park 2 (SSP2) in Cyberjaya at market price, and the infrastructure cost is said to be six times the land price due to bad soil condition.
“When we sold land to German Q-Cells for the purpose of setting its solar factory, we had to sell below cost. This, of course, benefited the nation and the state in attracting more foreign direct investments and creating more jobs. However, we still need to find a more sustainable business model so that we can continue to subsidise our infrastructure development, our low cost and affordable housing schemes,” he says.
New concept ofaffordable housing
The mega builder is also looking at various new business models and has revised the master plan for its SSP2 project and also Bernam Jaya.
“We have spent RM1.15bil in land acquisition, earthwork and infrastructure cost since five to 15 years ago, and it is time to realise part of its value.
Understanding that low cost housing schemes suffer from quicker deterioration due to poor living conditions and maintenance, PKNS has embarked on a new concept of affordable homes.
“The new concept of affordable homes we are constructing in Bangi, for instance, requires five times more subsidy per unit than the typical low cost housing in order to provide the enhanced facilities offered. We are selling them at RM85,000-RM120,000 per unit while the cost and market value are at RM180,000 and RM220,000 per unit respectively,” he says.
The new concept of affordable homes priced below RM120,000 will also be further fine-tuned for implementation.
“The prototype development in Bangi is currently in progress, while the second affordable homes development in Gombak will be launched soon. Facilities include tuition centres, nursery, libraries, surau, commercial centres, lush landscaped gardens, planting and gardening areas and ground-floor units for families with old folks and the handicapped. A total target of 21,000 units has been set for implementation in the next 10 years,” he says.
With a higher standard of living, he says, hopefully it can bring families out of the vicious cycle of poverty. Some families have been staying in low-cost apartments for three generations.
With PKNS in operation for almost 50 years, most of its strategic townships have been fully developed and a major part of its strategic landbanks has been depleted.
“As a result, the biggest chunk of our land-banks are presently outside the Klang Valley. To overcome these challenges, we have been transforming dilapidated brownfield areas like our old flats and industrial areas built 30 years ago into vibrant, sustainable, integrated mixed developments.”
Othman says PKNS is now looking at increasing its land bank by a further 1,500 acres this year.
“As we work on these high-yield projects, we also develop the remaining smaller land parcels in the Klang Valley, regenerate our old flats to produce the profit required to cross-subsidise the less strategic developments outside the Klang Valley and offer affordable homes. We have identified at least 10 new sites for urban regeneration and at least five new strategically located development land belonging to private and state government agencies for reverse privatization and joint ventures,” he says.
The future of PKNS
With its vision to mould itself towards a more sustainable business model, Othman says PKNS needs to continue to build quality assets that can produce a more sustainable income.
“In the next 10 years, we hope to create about RM10bil worth of assets that yield about 6% to 8% yield thus creating a sustainable passive income to help finance our social obligations,” he says.
He says in the last two years, the business development arm of PKNS has been busy churning out new projects worth more than RM14bil, which he believes will be able to provide the pipeline of projects that can be converted into the quality assets to transform its business model to a more sustainable one.
“We will be looking forward to more public-private collaboration with local and international partners to participate in our projects, especially the high profile ones.
Recently, AmanahRaya Real Estate Investment Trust (ARREIT) and PKNS mutually terminated a proposed venture into the REIT industry with the injection of three properties Menara PKNS, Kompleks PKNS and SACC Mall with a combined value of RM270mil into ARREIT.
“We are looking forward to injecting more of our existing properties into this REIT and lining up potential properties from our more strategically located redevelopment and urban regenerations projects in the Klang Valley,” he says prior to the termination.
The injection mooted in 2010 would be in exchange for new shares and cash, which would make PKNS the second largest shareholder of ARREIT with a 33% stake.
The deal was called off in light of potential planned asset enhancements to be carried out by PKNS on the properties, which would affect their market values.
A local property analyst says the termination may not be the end of the deal, instead it may potentially be the start of PKNS injecting more properties into the REIT.
“If the deal doesn't go through, PKNS could also venture into the property management industry by injecting key assets into a vehicle and seek for a listing as a REIT. Looking at how things are, PKNS seems to have the ability to get things going even if it is on their own.”
On the outlook of the property sector in the Malaysia, he says the sector may see a slight decline in prices although it is currently on a stable plateau.
“One advantage that we have is that we have a range of products, and even when there is a financial crisis, consumers would buy different products and we have all of them. Even during the financial crisis in 2009, we made more profit than we recorded in 2008. We have survived three recessions, and we are much more well prepared and have the capacity to complete the projects we started,” he says
Although PKNS is still linked to the state government, Othman says, as government servants, they have to be apolitical and just serve the government of the day.
“I would also like to highlight that our board representation is well diversified with two representatives from the Finance Ministry, one from the Economic Planning Unit and state councillors. We don't take sides. We have to do our job and fulfil our agenda, and we only need to focus on those,” he says.
In fact, he hopes to have more collaborative works between the state and the federal government.
As holistic as it seems, with profit being just a means to an end, PKNS would still be treading on a fine line to strike a balance between being a social builder and a commercial developer.
On one end it needs to fulfil its social obligations to contribute to a bigger agenda, but on another end it needs to make a profit to sustain its operations.
As Othman says “balancing our profit and social responsibility is a major challenge”.
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