City & Country: CEO Round Table: Penang’s magic comes at a price

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AS THE local property sector braces for a tough year ahead, Penang’s real estate developers are appealing to the state to lower their cost of development.

In 2012, the state government increased the cost of development by introducing new contribution charges and raising existing ones.

For instance, the infrastructure contribution charge for residential developments of over 15 acres was tripled to RM15 psf, while charges for commercial projects were likewise tripled to RM21 psf. In addition, rezoning fees were doubled to 50% on the difference based on current value.

While recognising that the contributions were channelled into infrastructure projects and other public and semi-public goods, many developers are now baulking at the steep charges.

They argue that the higher cost will force them to raise prices which, coupled with the credit crunch, will further put properties out of the reach of regular Penangites.

“I’ve said many things about the cost of development in Penang, but to the credit of the state, they are very clean. They tolerate no corruption and delays but it’s a tough place because the cost is very, very high. What we want is a competent and clean government but of course that doesn’t come cheap,” says Real Estate and Housing Developers’ Association (Rehda) Penang chairman Datuk Jerry Chan.

“It is a tough market now, these are tough times and not everyone may survive, so the state may need to review the charges,” he adds.

Chan raised this issue at the CEO round table on Jan 10 that was part of the Penang International Property Conference 2015. The round table was a closed-door session that saw Chief Minister Lim Guan Eng discuss with the heads of some of the largest property developers in Penang issues affecting the real estate investment industry.

The session was moderated by The Edge Media Group CEO and publisher Ho Kay Tat. The Edge was the official media partner of the three-day Penang Property Summit 2015, which included the conference and a property exhibition.

Participants included the heads and higher-ups of the following developers: Berjaya Land Bhd, Eastern & Oriental Bhd (E&O), Hunza Properties Bhd, Ideal Property Group, IJM Land Bhd and Sunway Bhd. Also present was Penang Development Corporation (PDC) general manager Datuk Rosli Jaafar, Seberang Perai municipal council (MPSP) president Datuk Maimunah Shariff and Raine & Horne International Zaki + Partners director Michael Geh.

The chief minister explained that the charges are to invest in the state’s future. “[The charges are] a form of subsidy for better infrastructure, which we are building. It’s not only on the island but also the mainland. Yes, you must transfer that to purchasers, but if developers can revise their project estimates — maybe you are looking at 15% or 50% profits — perhaps that would make it more affordable. That is where we come from,” he said.

“We want you to make money because then you can go on to do more projects. But we only ask that you don’t make so much. Think of it as a contribution to the state for our infrastructure work. All these things — RM27 billion transport master plan, undersea tunnel — cost money.”

He added that developers also benefitted from these improvements and being associated with Penang. “When you are in Penang, don’t forget that there is a cachet to the name. Here is where magic is happening.”

‘A virtuous cycle’    

Explaining how the charges came about, Lim said they needed to jumpstart investments in the state, which lacked the resources or the infrastructure for growth. To gain investors’ confidence, they must first show that they are serious about improving the state and clamping down on corruption to ensure that there is no misuse of funds.

“When we became the government [in 2008], we had to adopt business-friendly policies to become an engine of growth. Right away, we decided that the private sector will be the main driver of economic growth.

“Bear in mind that we had no funding from the current government and we had to be creative in seeking new sources of revenue. As far as the state government was concerned, we only had two areas under our control — land matters and local government. The property sector would become a key component, apart from the manufacturing and services sectors.”

“But we had to ensure that there was value, and coming from an accounting background, the simplest term I would use is, ‘How do we unbundle assets and unlock value?’ So in order to determine value, I began to look at the property sector, not from a past value approach or a present value approach but on a future value approach, bearing in mind that the future projects we were to carry out were interconnected with each other.

“We had no money, and at the same time, I knew we had to build infrastructure projects to gain confidence, so we had to find money. Money can only be sourced if there is confidence, and confidence can only be gained from resolving issues.

“So we were in a vicious circle, and in order to break that vicious circle and enter a virtuous cycle, I think we started off by gaining the confidence of investors and then once we got that, then we could unlock the value of the property sector. And we were fortunate to be able to pull that off,” Lim said.

The investment in the state paid off when Penang drew RM10 billion in the new state government’s first year.

“Once we got RM10 billion, for a small state like Penang, it’s hard to digest that sum of money. Developers saw opportunities there, they found that they didn’t have enough projects to launch. If they had a project, they were guaranteed to make a killing.

“Maybe there are some difficult times now, but then again, we continued with our infrastructure projects, we leveraged the price of land to do more infra projects so this is the virtuous cycle we talk about.

Addressing concerns about rising land prices, he said the state will deal with this by investing in more infrastructure projects, including land reclamation.

“When there is a land price boom, what do you do with the capital gain appreciation? You do more infrastructure projects. The great testimony is E&O, and they are used to doing infrastructure projects (like Seri Tanjung Pinang). We did it not to enrich a few cronies … Instead, we turn it into a public good — parks, roads, schools. So we must continue that virtuous cycle.”

‘Earn, but don’t earn so much’

Lim assures developers that this is only a temporary setback and that the market is poised for a rebound. However, they should not expect to earn as much as before.

“Well, you may not agree with me now but I believe another bounce is waiting to happen. I said the same thing in 2008. ‘Come, invest in Penang because things will boom!’ but no one wanted to believe me. Then the boom happened and now there is a long list of people who are interested. But why come now, when the boom has already happened? So, if you already have land, rest assured, so long as you are scaling it to a reasonable level, then you will make money. But if you are looking at huge margins like previously, I’m sorry, I don’t think it can happen anymore,” Lim said.

“Rest assured that the contributions are put to good use and to allow you to earn profits… I always feel that developers can earn, but don’t earn so much. Think of it as your contribution to Penang. As I said, even though it is painful, it will be put to good and constructive use. Think of it as investing in the future, and we are very future-oriented. We want to make sure that our children can live better than us, that they can live with dignity in a world-class city.”

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This article first appeared in City & Country, The Edge Malaysia Weekly, on January 19 - 25 , 2015.