Two sides to Old Klang Road

THE EDGE WEEKLY ISSUE#1002

THE WEEK OF FEBRUARY 17 – 23, 2014

City & Country Section

COVER STORY

By: LAM JUAN WYN

The strategically located thoroughfare continues to draw investors.  However, while it boasts flourishing townships and soaring values on one side, properties on the other side of the road tell a different story......

"Friendly neighbourhood with good food"

Old Klang Road had in recent years seen new developments spring up – amid its sprawling housing estates, there is a haphazard mix of factories, office buildings, nurseries and automobile yards.

The developers behind the new projects were attracted by the strategic location, high plot ratio of 1:6 for developments on commercial land (according to Draft Kuala Lumpur City Plan 2020), redevelopment potential and pent-up demand from the locals for newer projects.

Several neighbourhoods fall under “old Klang Road” – Seputeh, Taman Desa, Taman Shanghai, Taman Lian Hoe, Taman Continental, Kuchai Entrepreneurs Park, Taman Oversea Unions, Kampung Pasir, Taman United, Taman Gembira, Taman Manja, Taman Desa Ria and Oversea Union Garden (OUG).  Due to its nebulous borders, some adjacent localities include Bukit Jalil, Puchong and PJS 6 of Bandar Sunway.

In total, more than 200,000 people live in the approximately 5,000 acres in Old Klang Road, says Landserve Sdn Bhd managing director Chen King Hoaw.

The century-old trunk road – so named because it was the only road between (KL) and Port Klang – is also linked to the New Pantai Expressway (NPE) and the expressway between (KL) and Shah Alam.  Despite road-widening works that cost RM359 million, its infamous traffic snarls seem to get worse every year.  Perhaps it is so not only because of the sheer size of its population, but also the fact that it is a toll-free alternative to town.

“I tell you, Old Klang Road is too-free, 10 (min) to Mid Valley, 15 (min) to (KL) and (PJ), and is connected to the Maju Expressway (MEX), which goes all the way to the city centre and (KLIA).  There are also many wet markets such as the famous NSK Trade City in Kuchai Lama.  There is a lot of good food and it’s a friendly neighbourhood.  I know because I stay here.  What more can you ask for?” says iProp Realty Sdn Bhd managing director Victor Lim.

Gapurna's 9 Seputeh is coming up on over 17 acres
of land

In recent years, condominiums and serviced apartments have sprung up along the road and further inside the townships, especially the Kuchai Lama area.  This is partly due to the availability of land and older low-rise properties with redevelopment potential and small acreage, coupled with high density allowed.  A notable exception to this is mixed-use development 9 Seputeh by Gapurna Group, which covers 17.3 acres and has a (GDV) of RM2.5 billion.  It will comprise nine residential and commercial blocks.  A dedicated link bridge will connect the project to the NPE and Old Klang Road.  A Pedestrian bridge to the monorail extension, which is purportedly coming up, has also been proposed on the Old Klang Road side of the project.

“Old Klang Road has seen a number of developments since 2010 and the newer developments show that the area has become more upscale.  Prices of condos and apartments, which were hovering around RM300 to RM400 psf range in 2010, have now moved up to RM500 to RM700 psf, with one project even touching the RM1,000 psf mark,” Henry Butcher Malaysia Sdn Bhd director Tang Chee Meng tells City & Country.

Lucky Plaza was closed last year and is earmarked for
redevelopment

Meanwhile, the 3.4-acre Lucky Plaza in OUG will be redeveloped by Singaporean developer Far East Organization.  However, no details are available yet.

Over in Jalan Sepadu, the Pearl Suria serviced apartments are being redeveloped into a retail complex with 403 serviced apartments, with built-ups of 763 to 1,213 sf.  The project will be connected via a bridge to the Pearl International Hotel and Pearl Point Shopping Mall across the road.

Verve Suites KL South was a former office building
and is being refurbished by Bukit Kiara Properties

The wrong side of the road?

However, some newer developments have not been as well received despite the area’s potential.  Two such examples are Verve Suites KL South and The Scott Garden KL.  Both projects have a number of things in common – they are practically neighbours on the same side of Old Klang Road and they pioneered new concepts in the area.

Verve Suite KL South was formerly an office building.  The building was acquired and is being extensively refurbished by Al Batha Bukit Kiara Holdings Sdn Bhd (better know as Bukit Kiara Properties), which also built the unique Verve Suites condominiums in Mont’ Kiara.  Verve Suite KL South comprises two towers that will house 321 serviced suites, 45 small office / home office (SoHo) units and three retail units.  The serviced apartments have built-ups of 555 to 876 sf and will be fully furnished.  Prices start from RM600,000 for one-bedroom units while two-bedroom units will be priced at RM750,000 onwards.

Verve Suite KL South has sold 50% of Tower A since it was previewed to its existing clientele people who registered their interest in the project in the middle of last year.

The Scott Garden is a well-known after-work destination
but is not as vibrant in the daytime

The Scott Garden KL is a mixed-use development comprising a 3-storey retail podium housing 100 lots and three blocks of SoHos.  The launch prices of the retail units were between RM500,000 and RM600,000, which is fairly pricey, says Landserve’s Chen.

When Scott Garden was introduced, the market hailed it as the new face of Old Klang Road.  Chen says it was intended as the area’s anser to Sunway Giza in Kota Damansara, but it did not achieve that level of vibrancy.  Today, Scott Garden is known as an after-work destination, with several pubs and restaurants on the ground floor.  A Tesco hypermarket occupies one of the basements.

In contrast, on the top floors are many empty cob-webbed units, including “prime” units that face Old Klang Road.  The SoHos, however, have a healthier take-up and occupancy rate.  All of the units have been sold since they were launched in 2011.  The building manager did not respond to enquiries on the building’s occupancy rate.

So despite their unique selling propositions, what went wrong with these projects?

It’s a classic case of location, location, location.  Verve Suite KL South and Scott Garden are literally on the wrong side of Old Klang Road, consultants opine.

“They sit on the commercial part of Old Klang Road, sharing the space with haphazardly-built factories and car showrooms.  Furthermore, there aren’t as many amenities, and few roads lead out to Bandar Sunway, KL and other areas,” says Chen.

Moreover, Verve Suite KL South’s immediate neighbours are government-own apartments.

iProp’s Lim elucidates on Verve Suite KL South’s “awkward” location: “Not only does it face a T-junction, those coming from KL need to go quite far to make a U-turn to access it.”

The individual projects have their challenges to overcome.  In the case of Verve Suite KL South, the property has a chequered past.  Formerly an office building, it failed to take off as Old Klang Road was not a preferred corporate address, says Chen.  The building was eventually rented out to a local college as a hostel.

The building’s past casts a shadow over Verve Suite KL South among Old Klang Road folk.  Lim says there is a perception there is a disconnect between the development’s price and the building’s age.  “Being such as old building, the property does give the feeling that it’s not worth that much (over RM1,000 psf).”

Chen says Verve Suite KL South needs a radical physical transformation to shake off its past identity.  “It needs a wow factor!  That way, people will see it as a modern serviced apartment project, and not a failed office building.”

However, Lim is more optimistic about the project’s outlook.  “I Think BKP, being famous for delivering quality products, will live up to its standards and expectations.  The images in its showroom show that it is a total revamp of the building.  It even added a sky bridge, which is something you have not seen in Old Klang Road before.”

The double-volume Vercadiscos sky bridge will join the two blocks at levels 14 & 15.  Inspired by the ancient Arkadiko arch bridge in Greece that linked the cities of Tiryns and Epidauros, the sky bridge will have facilites such as a theatrette, a sky gym, chill-out areas, and a kitchen and dining area for private functions.

“We have closed our on-site showroom since November to facilitate demolition works and the refurbishment of the common facilities.  Now, we are building a gallery on the sky bridge to prepare for the official launch,” says BKP group managing director Datuk N K Tong.

Meanwhile, Scott Garden is riddled with problems – some by default, some by design.  For starters, it is sandwiched between a flyover and a row of old, low-rise shops.  The entrance of the building is also easy to miss with the nearest U-turn several kilometres down the road.

While Lim agrees that Scott Garden was initially very quiet, with some tenants moving out early on, he says it is well known as an entertainment hub now, drawing crowds from as far as Klang.

The “right” side of the road

What’s happening on the residential side of the road?  Over at the freehold Taman Desa, values shot up after the neighbourhood was turned into a guarded scheme, says Chen.

“Prices of homes here used to be on a par with those in Bangsar.  Even then, 2-storey houses were priced at RM70,000.  However, Bangsar blossomed after Bangsar Village opened.”

Condo values have risen as well.  Over at Happy Garden in Kuchai Lama, several condominiums have come up in recent years.  Chen observes that the units are selling at RM500 psf, which is on a par that of older condos in Mont’ Kiara.

Lim notes that prices have almost doubled in the past two years.  “In 2010, condos were selling at roughly RM250 to RM400 psf.  Nowadays, it is easily RM500 to RM800 psf.  Population and wealth growth are the main reasons.  The mean age group for Malaysia is now around 29 to 30, plus most of them are earning good income, therefore they can afford to invest in properties.  Easy access to housing loans also contributed to the price increase.”

The opening of NSK Trade City drove up the prices of properties in Kuchai Lama.  The 24/7 hypermarket, which occupies the basement of Kuchai Business Park, is a popular spot among Old Klang Road folk.  It draws even expatriates living in the posh Seputeh enclaves.

“There is more variety, and the goods are fresher and cheaper,” says Landserve senior negotiator K C Chew, who not only specialises in the Old Klang Road market but also lives there.

Outlook

While several high-rise housing projects were launched recently, consultants generally feel that there is no oversupply looming on the horizon.

“I would say the supply issue is not as bad as in Mont’ Kiara.  As long as the pricing is reasonable, many would still prefer to invest in Old Klang Road, partly due to its proximity to KL and PJ and also because most of the roads here are toll-free,” Lim says with a chuckle.

“9 Seputeh is massive.  I was told that the condos have been fully sold due to the developer interest bearing scheme (DIBS).  In front of 9 Seputeh is a proposed (MRT) station.  Should this materialise, the properties near it will boom!”

Meanwhile, Chen and Henry Butcher’s Tang see the place’s strategic location and enduring popularity to continue to draw interest.

“Old Klang Road is a very convenient location.  It caters for people who work in KL and PJ.  Investors should look at investing in projects with easy access to alternative roads out of the area as Old Klang Road can be pretty congested during peak hours.  Another point to consider is the pricing of the project.  If the project is priced substantially above the prices of similar developments in the neighbourhood, it has to contain value-added elements which are not found elsewhere and that can justify the premiums paid.  Lastly, as always, buy from a developer with an established track record and who is financially strong so that the risk of the project being abandoned is low,” says Tang. E

TRX a boon for 1MDB but a bane for property owners

THE EDGE WEEKLY ISSUE#1002

THE WEEK OF FEBRUARY 17 – 23, 2014

By: CHARLES YONG

Notwithstanding the challenging financials of its power plants investment, 1Malaysia Development Bhd (IMDB) looks set to book yet another huge gain from its flagship Tun Razak Exchange (TRX) development.

The 70 acres of prime land in Jalan Tun Razak, which was bought cheaply from the government and re-valued several times to produce what some call “paper profits”, may again be re-valued to beef up the sovereign wealth fund’s debt-laden accounts.

One of the most sizeable developments to take shape in modern KL, TRX nestles in the central business district, less than 10 minutes’ deive from the Petronas Twin Towers.  Tracts in the vicinity have recently sold for as high as RM3,325 psf.

Eager for similar returns, 1MDB priced its TRX land at RM3,000 to RM3,500 psf in its recent call for tenders for the initial portion of the land, says Foo Gee Jen, managing director of C H Williams Talhar & Wong (WTW), one of two real estate advisers marketing the initial phase of the project.

The price for a specific plot depends on factors such as size and plot ratio.

“The average size (for the TRX land tendered out) is 1.25 to 1.5 acres, and the plot ratio range from six to 10.5,” Foo tells The Edge.

According to him, the net developable area for the entire 70 acres in TRX is between 50% and 65%.

Thus, based on the current land price of RM3,000 to RM3,500 psf, a back-of-the-envelope calculation yields an indicative market value for the saleable portion of the TRX land at between RM4.57 billion and 6.94 billion.

This is RM2.79 billion (157%) to RM5.16 billion (290%) higher than the RM1.78 billion recorded in 1MDB’s books as at March 31, 2012.

These estimates are likely to undershoot the value that TRX could eventually rise to.

Barring a major softening in the property market, prices are bound to increase further for future stages of development.  Bear in mind that the TRX has a development period of 15 to 20 years, and the call for joint venture partners and buyers last December is only for the first stage, comprising a total of six acres.

Stage 1 consists of four plots of land (out of 34 plots), says Foo.

This initial phase includes four office towers (including a signature tower), up to five residential towers, up to two five-star hotels, and a retail mall.  The whole district has an indicative (GDV) of RM26 billion.

1MDB has said that it plans to continue holding equity interests through joint ventures for the majority of TRX’s developments.  This means even higher profits in the long run.

Such a significant revaluation may prove a boon to the company, which has been engulfed in debt and controversy.  As at March 31, 2012, 1MDB had RM8.38 billion in liabilities.  But the gearing ratio is much higher today as it has racked up at least RM22.69 billion in new debt since 2012 to finance its power business and other investments.

Power is not the only contentious investment made by 1MDB.  To generate income, the sovereign wealth fund lent US$1.5 billion of its own borrowings to PetroSaudi International Ltd, a privately owned oil company, through two bullet bonds expiring in 2015 and 2021 with interest rates northwards of 8% (see timeline).

The “profit rate” from these Islamic instruments provided RM331.58 million of its RM938.42 million income in 2011.  TRX’s revaluation made up the rest.

Opposition leaders claim that 1MDB has provided few details on the investment and on PetroSaudi, and that the loans put public money at risk.

1MDB has re-valued TRX at least twice.  It bought the 70 acres from the government for a mere RM320 million (RM105 psf), according to media reports.  In 2011, it re-valued the land to add RM826.6 millin to its income and rescue itself from the red.

By 2012, the land was re-valued again, to RM1.78 billion.  Under conventional practice, says an accountant, it is unusual for developers to re-value their land held for development regularly.  It is also uncommon for them to record the gains in their income statement.

At such high prices for TRX’s land, the question is, will there be enough buyers?  After all, only two recent transactions have reached such record prices: Singapore’s Oxley Holdings’ purchase of a 3.1-acre parcel in Jalan Ampang last November at RM3,325 psf and KSK Group Bhd’s acquisition of a 3.95-acre tract near Jalan Conlay last December at RM3,299 psf.

However, Foo says that demand has been “very encouraging” and that there are reasons to expect TRX to attract buyers.

Oxley acquired the Jalan Ampang plot before securing the approvals for development.  The TRX plots, on the other hand, come not only with approvals, but with wide-ranging incentives such as tax breaks, allowances, cost deductions and stamp duty exemptions.

These include a 50% deduction on rental payments for 10 years, further deduction on relocation costs, an industrial building allowance worth 10% of qualifying building expenditure, and an exemption of 70% of statutory income derived from the disposal of buildings and from five years of rental.

Foo adds that TRX is also attractive because it is an integrated development rather than a standalone one.  “And the price is also on a net basis.  This means that developers do not have to allocate any portion of the land they paid for to infrastructure.”  He estimates that the Oxley land, on the other hand, has a land loss of (15-20 %).

Because of these special incentives and treatment for TRX, local developers have voiced concerns that the state-backed megaproject would sponge off demand for offices from surrounding area.

“The whole thing is totally unfair because incentives are normally given to attract investors to green field developments that are away from established regions, like in Iskandar, but TRX is right in the KL city centre next to established business districts,” says one property developer.  “It is not right that 1MDB should enjoy this special treatment even if it is government-owned.”

Observers say that TRX is a clear example of the government crimping the private sector, a move which is contrary to its goal of letting the private sector drive the economy.

Bandar Malaysia, the other property project in 1MDB’s pipeline, also seems promising.  It has a GDV of RM20 billion and sits on 495 acres of the current military airport in Sungai Besi.

It was reported that 1MDB has acquired the site from the government for about RM1 billion, translating into RM46.40 psf.

However, 1MDB is also bearing the cost of relocating the military airport for RM2.1 billion, which indicates that the total cost for the 495 acres is RM3.1 billion.  The development of Bandar Malaysia may take some time though, at least until after the current military airport is relocated.

Given the cheap land cost and their strategic locations, observers say TRX and Bandar Malaysia will be the real money spinner for 1MDB, compared to its debt-laden power assets investments that give little room for manoeuvring.

It is, therefore, hard not to view TRX and Bandar Malaysia, which were given to 1MDB on a silver platter, as anything but a backstop for its blunders elsewhere.

However, the collateral damage to the rest of the property sector of (KL) could be heavy. 

MyHome grant to boost medium-low-cost segment, says housing minister

THE EDGE WEEKLY ISSUE#1002

THE WEEK OF FEBRUARY 17 – 23, 2014

By: LAM JIAN WYN

The proposed annual RM300 million MyHome grant is to encourage developers to build medium-low-cost homes but sell them at low-cost prices to eligible buyers, says Minister of Urban Wellbeing, Housing and Local Government (UWHLG) Datuk Abdul Rahman Dahlan.

“We want to encourage more developers to go into mudium-low-cost segment.  They get some margin from this segment, but there aren’t enough of them building these homes.  So we want to incentivise it, so that more people build these homes and everyone will buy them,” he tells The Edge.

“It also solves the problem of these buyers finding the money to pay a down payment and reducing the cost for developers,” he adds.

Abdul Rahman explains that this move will encourage developers to sell low-medium-cost homes at the price of low-cost homes, or build low-cost homes of a better quality.

“What we are proposing is an improvement over the lowest common denominator, which is low-cost homes.  So let’s say you are a developer and you want to start your low-cost project this year and plan to sell each home at RM70,000 instead of RM40,000 …… that subsidy gives you some breathing room,” he says.

He stresses that this low-cost programme will apply to private developers with project over 10 acres, whereby low-cost homes will have to make up as much as 20% of the project.

According to (PM Najib) earlier this week, up to RM30,000 will be granted to 10,000 eligible buyers of low-cost homes developed by the private sector.

According to the Ministry of (UWHLG)’s policy and planning division, (KL)’s low-cost homes were priced at up to RM42,000 while new launches are priced up to RM63,000.  Meanwhile, medium-low-cost homes are priced from RM42,001 to RM150,000, with new launches priced from RM63,001 to RM100,000.  Low-cost homes in Selangor are priced at under RM42,000.

To qualify for the MyHome subsidy, interested developers must first register their projects under the housing ministry, which then evaluates them to determine if they are eligible.  After that, buyers must register with the ministry to be able to buy these homes.  Potential buyers must earn below RM3,000 per month, not own ay properties, and be economically-disadvantaged.  Homebuyers are not allowed to sell their units for 10 years.  “We have not figured out a buyback mechanism for owners who wish to sell their units before the 10 years is up, but I will bring it up in the next National Housing Council (NHC) meeting.”

For now, the RM300 million will sit in a trust fund.  “The (PM) is committed to giving my ministry RM300 million a year, and I am committed to managing the funds well.  I think this is the best way to get low-cost housing to the public because if we do it through the PPR (Program Perumahan Rakyat or People’s Housing Programme), the cost is huge.  So, instead of paying RM100,000 per unit, I am only paying up to RM30,000 per unit.”

While Real Estaes and Housing Developers Association (Rehda) president Datuk Seri Michael Yam aluds it as a step in the right direction, he says the grant will only help “narrow losses” incurred from low-cost projects.

“The cost of developing low-cost homes, excluding land cost, is already at least RM100 psf.  It these units are a minimum of 800 sf, that means the construction cost alone is at least RM80,000.  If you add land and infrastructure cost, it will go up much further,” he tells The Edge.

He adds that it should come from a wider tax base as housing is a social issue.  “The subsidy comes from the other taxpayers (who are buying free market properties) … they should be asking, why am I taxed again to help another brother when it should be general taxation like social welfare?  You should have a wider tax base as housing is a social issue.”

He also notes that in the meantime, government should use the funds more effectively.  “Why doesn’t the government, as a temporary measure, give 30,000 first-time homebuyers a grant of RM10,000 to stimulate the market?  It will have an immediate impact, as opposed to almost two years later (when the qualified low-cost projects take off).”

While the council had considered disbursing the RM300 million directly to eligible first-time homebuyers, Abdul Rahman says it may be unfair to those who had bought their homes earlier. E

Sean Ng to redevelop Bangunan HL

THE EDGE WEEKLY ISSUE#1002

THE WEEK OF FEBRUARY 17 – 23, 2014

By: VASANTHA GANESAN

Datuk Sean Y T Ng of Mammoth Empire Group, known for the Empire Subang and Empire Damansara developments, is planning to convert yet another office building in Kuala Lumpur into a boutique hotel.

Ng, via Mammoth Empire Holding Sdn Bhd, is planning to redevelop Bangunan Hong Leong (later renamed Wisma Megah) at the corner of Jalan Tun HS Lee and Jalan Tun Tan Cheng Lock, into a 188-room boutique hotel that will include retail outlets, cinemas and recreational facilities.

It is understood that the building, which used to house a Hong Leong Bank branch and the Hong Leong Group’s corporate headquarters, was acquired by Mammoth Empire in April 2012 for an estimated RM38 million.

According to a submission to Dewan Bandaraya Kuala Lumpur (DBKL), Mammoth Empire plans to convert the office building into a hotel and make provisions for retail floors.  To accommodate the planned room inventory, it will add seven floors to the existing 16-storey building.

The company’s submission to DBKL specifies plans to convert the first and second floors into retail space while the sixth floor will house the cinemas.  The 188-room boutique hotel will be from floors 7 to 20 while the 21^st floor is where the recreational facilities will be.

At the time of purchase, the asset had a total land area of 9,913.64 sf but after surrendering part of the land for a road reserve, the current land size stands at 9,504.61 sf.

It is understood that the initial application made on Dec 31, 2013, has been rejected by DBKL.  Nevertheless, a modified application can be resubmitted.

Should a similar application be approved, industry players estimate that the redevelopment could be to the tune of RM75 million, not including the possible reinforcement required on the foundations since more floors are to be added.

According to sources, the boutique hotel will be named Wolo, similar to the one in Jalan Bukit Bintang.  The later, which has 110 rooms, is located at the junction of Jalan Bukit Bintang and Jalan Sultan Ismail.  The building previously housed offices and was called Wisma KLIH.  In 2010, Ng’s wonderful Vantage Sdn Bhd bought the building for RM58 million from Equine Capital Bhd.

“The group plans to expand the Wolo chain,” says a source, adding that apart from the hotels in Bukit Bintang and Jalan Tun HS Lee, there will be another in Seremban, Negeri Sembilan.  The group may even change the name of the existing Empire Hotel in Empire Subang to Wolo, says the source.

The Wolo hotel chain charts its future expansion

In fact, the company’s website also hints at a Wolo hotel at Empire Remix in USJ, Subang Jaya.  Empire Remix is an integrated mixed-use development comprising lofts, business suites, a hotel and retail lots.

Incidentally, the Wolo houses Korean bakery Tous les Jours, for which Mammoth Empire holds the master franchise.  The Tous les Jours is owned by South Korea’s CJ Foodville, a member of CJ Group.

CJ Group also owns CJ CGV, the operator of a multiplex cinema chain in South Korea.  CJ CGV has 4DX technology – which arouses the five senses as the cinema will include effects such as wind, light, scent, motion and water.  “He (Ng) has always said he wants to start a cinema hotel,” the source says.  This suggests that the proposed hotel project in Jalan Tun HS Lee may incorporate such a cinema.

It is also rumoured that CJ CGV will be the anchor at the Empire City Damansara development.  Empire City, located opposite the Damansara Perdana township along the LDP, will be developed in three phases.  The first phase, with an estimated (GDV) of RM5 billion, will house offices, hotels, serviced apartments and a shopping complex.  It was reported that the second phase will include a theme park and a concert hall.

Last year, CJ Group teamed up with Iskandar Investment Bhd to develop a 9.5ha site in Iskandar Malaysia, Johor.  The project, with an estimated GDV of RM4 billion, will include office towers, hotels, serviced apartments, loft offices, retail lots, a convention centre, concert hall and cinema.

Construction of the project, called Medini Empire, is expected to commence in 2015 and will be completed in 2018.

One of the first known projects by Mammoth Empire is its development in Subang.  It owns and operates Empire Shopping Gallery and the Empire Hotel.  It has since completed a couple of projects in Bangsar, including The Ara and The Loft.

Mammoth Empire is also involved in developments in mebourne, Australia. Reports say that apart from the A$250 million, 55-storey MY80 development, the group plans to build twin towers to complement MY80. E

Land swap deal to make TSR a major developer

THE EDGE WEEKLY ISSUE#1001

THE WEEK OF FEBRUARY 10 – 16, 2014

By: JANICE MELISSA THEAN

A land swap deal with the government to relocate the Royal Malaysian Air Force (RMAF) base in Butterworth could seal TSR Capital Bhd’s status as a major property developer when it gets more than 1,000 acres of prime land.

TSR, a joint venture (JV) with Lembaga Tabung Angkatan Tentera (LTAT) and Pembinaan Bukit Timah Sdn Bhd (PBT), will be given 1,007 acres – existing airbase in Teluk Air Tawar, Seberang Prai – in return for building a new RMAF base at a location yet to be determined.

The parcel has been slated for an integrated mixed-use project with a potential (GDV) of more than RM10 billion, TSR said in its announcement to Bursa Malaysia last Wednesday.

“This development will take us at least 10 years (to complete),” TSR group accountant Ng Kim Keong tells The Edge.

“We will start planning the mixed-use development about two years after signing the agreement with the government,” he says, adding that the relocation of the airbase will be done first.

The proposed deal, which is now in the negotiation stage, is due to be signed a year from now.

Last Wednesday, TSR announced that it has received the government’s approval in principle to set up the JV company to enter into negotiation with the latter to redevelop the RMAF base.

TSR will have a 51% stake in the JV, while LTAT and PBT will hold remaining 30% and 19% respectively. 

“We need to buy new land in Penang (to relocate the airbase),” says Ng.

He adds that the new airbase is estimated to cost RM3 billion, including land cost.  “But it could be cheaper as we are looking for land further from town.”  The existing airbase is sitting on seafront land, directly opposite Penang island and 8km away from Butterworth.

It is still early days and , thus, the valuation for the 1,007 acres has not yet been determined.  As this parcel is payment from the government to relocate and build the new RMAF base, theoretically its value should match the estimated cost of the airbase.

“The land may not be worth RM3 billion, so the government will have to provide more if it falls short.  In the same way, there may be an excess if the construction cost is less than the value of the land, and we will have to return that to the government,” says Ng.

The JV partners have yet to work out the financing structure for the construction of the new airbase, but he says the aim is to have a 90:10 debt-equity ratio.  At most, 80% will be debt-financed.

The partners will have to fork out the equity portion according to their respective stakes in the venture. 

“We have broken it down into six phases, so each phase will cost roughly RM500 million.  It will take us four to five years from the signing of the agreement to complete the new airbase,” says Ng.

TSR’s growing property portfolio

“In future, our focus will be more on property development.”  At present, the construction and property development segments contribute equally to TSR’s revenue.

While the 10-year project TSR has envisioned for the Butterworth tract is still some time away, it is expected to add significantly to the group’s GDV pipeline.

TSR says the tract will be redeveloped into a “city of arts, culture and leisure that promotes an eco-sustainable and modern lifestyle”.

“For the next six years at least, we expect to launch GDV of RM100 million to RM150 million each year,” Ng says.

TSR’s flagship development is the 70-acre PD Waterfront in Port Dickson, Negeri Sembilan.  Phase One, with a GDV of RM130 million and from which TSR gets rent income, is completed.

It launched Phase Two, comprising service apartments worth some RM120 million, last September.  “This year, we will launch another serviced apartment project with a GDV of RM150 million,” says Ng.

The total GDV of PD Waterfront is expected to be about RM2.2 billion and TSR will take another eight years to complete the project.

“We are also finalising other land developments in Bandar Enstek, Negeri Sembilan,” he says.

The group has submitted its development order (DO) application for a mixed-use development on a 20-acre tract.  The project, with a GDV of RM400 million, is expected to be carried out in three phases.

TSR has also made DO submissions to build a RM100 million office block in Jalan Semantan, Kuala Lumpur.  “We should be able to launch this by the end of this year,” Ng says.

Based on these projects, TSR could have a potential GDV of more than RM12 billion over the next decade (see table).

Its construction division has an order book of some RM400 million, which will last another three to four years, according to Ng.  This includes the two (MRT) jobs, worth RM330 million, awarded in 2012.  He says the packages are 30% completed currently.

TSR’s market capitalisation stood at RM148.4 million as at last Thursday’s closing.  Its share price moved up 10 sen, or 7.62%, to RM1.43 the day it announced the RMAF land swap, a high not seen since 2007.  Year to date, it has risen 15% before retreating to close at RM1.31 last Thursday.

As at end-September 2013, TSR had net assets per share of RM1.10.

For that quarter, TSR posted a net profit of RM251,000, flat from the RM223,000 in 2012.  This is on the back of 35.03 million in revenue, up from the preceding year’s RM26.4 million.

Net profit amounted to RM1.1 million for the nine months ended Sept 30, 2013, compared with RM1.33 million the year before.  Revenue for period came in at RM77.05 million, higher than 2012’s RM65.83 million. E