City & Country: Cover Story: Global trend to sell embassy plots

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A stretch of Jalan Ampang in Kuala Lumpur, popularly known as Embassy Row — thanks to the numerous consulates lining the road — is slowly being transformed as more countries cash in their prime overseas assets and shift their embassies into office buildings for cost-saving and security reasons.

Given that the prestigious neighbourhood is one of the last places in the Golden Triangle that have large parcels of land, the luxurious mansions and sprawling embassies are expected to gradually make way for more high-density developments.

The latest properties to be put on the market are the French embassy and two parcels of land belonging to Germany. The French embassy sits on eight acres of freehold institutional and residential land and houses the ambassador’s residence, two bungalows and the embassy office. The property is located next to The Intermark, which comprises the Doubletree by Hilton hotel, offices and retail lots.

The French embassy will be sold through an exclusive tender by CB Richard Ellis Malaysia. CBRE associate director Nabeel Hussain says the tender is expected to be concluded by next month and the reserve price has yet to be set.

However, it is learnt that the French government is expecting bids of around RM600 million, which equates to RM1,800 psf, considering what was paid for the British High Commission’s property three years ago.

The French embassy is located opposite the British High Commission’s parcel, which was acquired by S P Setia Bhd. The developer had successfully bid RM294.96 million for the 3.07-acre commercial-titled property, which comprises a 3-storey building, a 2-storey clubhouse and a swimming pool. The group plans to redevelop it into an integrated commercial project with a gross development value of RM1.04 billion. The British High Commission has since moved into Menara Binjai in Jalan Binjai.

“The Embassy Row is not clearly defined, and the French embassy is the best located of all the properties along this strip. It is the closest to the main commercial area of Jalan Tun Razak/KLCC/Golden Triangle and has the best access and frontage,” says Nabeel.

Germany’s parcels are in Jalan Kia Peng and Jalan Tun Razak, measuring 1.87 acres and 0.38 acre respectively.

The German government called for tenders for the properties on Dec 15, 2014, which will end on Jan 26, 2015, says James Goh, head of investment at Rahim & Co Chartered Surveyors Sdn Bhd.

They are being sold via tender by Rahim & Co Chartered Surveyors. According to Goh, both parcels have been left idle for more than 10 years.

The Jalan Kia Peng land, which is next to the Kuala Lumpur Convention Centre, is a freehold mixed-use residential plot. On it, is a vacant mansion with a staff quarter and swimming pool — the former residence of the German ambassador. The land has a guide price of RM2,300 psf.

The Jalan Tun Razak plot is next to the Brazil embassy and has two vacant detached buildings. It is a freehold commercial parcel and used to house the Goethe-Institut, a cultural centre, which has moved into Menara See Hoy Chan. The land has a guide price of RM1,500 psf.

Goh says the guide prices are based on the plot ratio of six, as accorded by the Kuala Lumpur City Hall (DBKL). “However, the regulations are quite outdated, as developers that have developments in similar locations had plot ratios of 10 or more, and this was a few years ago. I believe we have seen some developments with a plot ratio of 12.”

He believes that a plot ratio of 10 is a reasonable expectation, given that previously, DBKL had granted higher ratios.

“If you look at UEM Sunrise Bhd’s parcel, which is the old Wisma Angkasa Raya, they got a plot ratio of 12 or more. So, we think 12 is the new benchmark and believe some developers are targeting even more.”

Should the developer require a high plot ratio, it may need to appeal to DBKL, and may have to pay certain charges, he says.

Changes abound

As more embassies are expected to sell their assets and the area is gradually redeveloped, Embassy Row is poised to see its tranquil environment become more vibrant with the entry of commercial properties and high-rise homes.

According to Nabeel, residents in the area are a combination of expatriates, diplomats, professionals working in the city centre and affluent Malaysians.  

“Property values in Embassy Row range from RM800 to above RM1,400 psf. Rents vary as well. Yields depend on the age of the property and other factors, but can exceed 6% for some of the older developments,” he says.

Metro Homes Sdn Bhd director See Kok Loong tells City & Country that the sold embassy parcels will most likely be turned into commercial properties with residential features like serviced apartments or small offices/home offices.

“It will create a new market, especially with retail and commercial properties around the area, such as the Great Eastern Mall, Suria KLCC Mall and Pavilion. Residential properties will see strong demand due to their prime location,” he says. “I believe it is a positive move for the area. Instead of embassies occupying big plots, resulting in a quiet environment after office hours, we can expect the area to be lively with new developments.”

Zerin Properties Sdn Bhd CEO Previndran Singhe believes that redevelopment on former embassy plots will be interesting. “The plot sizes of the British High Commission and French embassy can add a huge amount of floor area to the locality, which will lead to a higher population density. The good thing is that the area has great infrastructure such as the main road and the nearby light rail transit stations.

“Some parts of Embassy Row have less attractive houses, which are located along the main road. Some of the former embassy plots could be turned into newer offices or showrooms or even redeveloped for other uses.”

However, CBRE’s Nabeel sees it differently. While he agrees that the trend of embassies moving into office buildings is growing, he believes that redevelopment opportunities are still limited in the overall property market as many embassies are small in size or occupy rented premises.

“This applies particularly to embassies located deeper in the east of Jalan Ampang, which is away from Jalan Tun Razak where there are traffic issues. This area also has lower overall density,” says Nabeel. “Other embassies and diplomatic residences are located in inner roads, such as those in Ampang Hilir or the stretch between the Kuala Lumpur Convention Centre and Pavilion, which have traffic issues and poorer access, thus limiting redevelopment. There will not be an overnight change in market conditions but a gradual increase in the efficiency of prime land use in the city centre.”
 
A global trend

The trend of selling embassy land is being seen globally, Nabeel says, citing as an example the sale of the British embassy’s 3.55-acre parcel in Bangkok to Central Group of Companies Co Ltd for THB3.5 billion in 2006. This land has been developed as a mixed-use project, dubbed Bangkok Central Embassy. The project comprises a retail mall, which is completed and opened to public, and a hotel that is currently under construction. Its hotel component is due for completion by end-2015.

Then in 2011, the Japan embassy sold nine rai (1.44ha) of land in Bangkok for THB520,000 per sq wah (four sq m) to Boon Rawd Brewery, which produces Thailand’s famous Singha Beer. The brewery, which has diversified into property development, also acquired less than one rai of land previously owned by the Japan International Cooperation Agency. The 10-rai parcel is being developed as a mixed-use project, comprising a condominium, office building and shopping mall.

“It’s not odd that embassies are selling their properties because we have seen this happening over the past few years,” says Nabeel.

“I believe [the selling of embassy plots] has little to do with the countries’ economy or corporate scene, but more of management and operation issues. It could be because today’s world is different as we become more connected due to better modes of transport and technology. It is also costly to maintain a large parcel of land, and security is another issue,” says Metro Homes’ See.

Rahim & Co’s Goh attributes the trend to countries trimming their national budgets.

“It’s possible to say this is true of countries, especially those in Europe, which are currently facing an economic slowdown. I believe it all ties up,” he says.

Previndran says it may not be a trend but a more sensible financial decision on property ownership, as owning a parcel of land with a mansion can be quite costly in terms of maintenance compared with being a tenant.

“Moving into an office also means better facilities and the latest technologies in terms of building management, security and fibre-optic Internet,” he says.

Nabeel says embassies are likely to move into office buildings within the city, not far from their former sites. He cites the British High Commission as an example, which moved into Menara Binjai, just a few hundred metres from its original premises, after the sale of the land.

“The embassy staff still prefer to work in areas around the former embassy, hence property demand should be constant. Also, some of the driving objectives of the embassy location have changed over the years. Previously, the focus was on location, size, scale and prestige. This has changed to factors like efficiency, security, economy and modernisation of services,” he adds.

See concurs, saying that embassies are more likely to choose new buildings with green features. Supply of such buildings is increasing in Greater KL, and the relatively lower rents compared with other markets in the region are an added advantage, he says.

Most of the embassies still prefer to stay within the Golden Triangle. To date, Menara Tan & Tan has eight embassies as tenants. Other office buildings such as Menara See Hoy Chan, Wisma Chinese Chamber, Wisma Selangor Dredging, Sunway Tower and Menara Keck Seng, all located in the city centre, are home to embassies as well.

Malaysian Resources Corp Bhd has said it is looking to attract embassies to its KL Sentral central business district. The 72-acre development is already home to several multinational corporations and is Malaysia’s largest transport hub, which will make it convenient for staff of embassies to move around.

Sources say a few more embassies are likely to put their properties up for sale in the near future. Two possibilities are the Vietnamese and Japanese embassy in Persiaran Stonor.

Previndran believes that the trend will not impact the office market in a significant way. However, he notes there will be pockets of demand from these embassies in the future.

See, on the other hand, believes that this trend will create strong demand for the office market in the Golden Triangle, and with new supply, the market will remain stable for the next few years.

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This article first appeared in City & Country, The Edge Malaysia Weekly, on January 26 - February 01 , 2015.