Cover Story: 1MDB’s RM1.38 bil Penang land quandary

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CONTROVERSIAL 1Malaysia Development Bhd (1MDB) has obtained sweetheart deals from Putrajaya — two power projects without tender and land on the cheap for the Tun Razak Exchange (TRX) project, which it has since revalued upwards to show a profit.

But 1MDB itself appears to have been very generous in the RM1.38 billion land deals it transacted in Penang last year. These include two that were transacted on April 29, 2013 — just six days before the May 5, 2013, general election.

The two deals were as follows:

• Aluminium Development Company Sdn Bhd (which was subsequently renamed 1MDB RE [Ayer Itam] Sdn Bhd) paid RM338 million for 6.6 million shares or 100% in Farlim Properties Sdn Bhd; and

• Aluminium Development paid RM930 million for two shares of RM1 each for a 100% stake in Gerak Indera Sdn Bhd.

Farlim Properties and Gerak Indera own 234 acres of freehold land in Penang that will be used for building affordable houses, 1MDB had said.

In a third deal, on Sept 23, 2013, 1MDB entered into an agreement with listed Farlim Group (Malaysia) Bhd to acquire “undivided shares” in several plots of land in Penang for RM113 million.

All these assets, which are primarily land but also include fewer than 20 shops and terraced houses, are located around the Air Itam town centre.

Checks by The Edge reveal that the transactions appear favourable to the vendors because:

• The price paid was 95% higher than what some of the land was valued at just two years earlier in December 2011;

• An estimated 1,200 to 1,400 “ground tenant” dwellings have been occupying the land for more than 50 years, and moving them out will be a very expensive and long-drawn affair; and

• The land is fragmented and its owners have fought many costly legal battles with each other and been unable to develop it. But thanks to 1MDB,

Farlim and the vendors of Gerak Indera have walked away with RM1.38 billion cash while the state-owned company has ended up with land that has many encumbrances and will be challenging to develop.

Who are the vendors?

The first group of vendors are all associated with prominent Penang tycoon Tan Sri Lim Gait Tong (see accompanying story on Lim and Farlim).

1MDB did two transactions with Lim’s companies. The first was the purchase of all of Farlim Properties from his holding company Farlim Holding Sdn Bhd, Sari Bunga Holdings Sdn Bhd and Gem Galajaya Sdn Bhd for RM338 million. In the second deal, 1MDB acquired undivided shares in several plots of land from Farlim Group (which is controlled by Farlim Holding) for RM113 million.

In early 2012, Farlim Holding settled a debt owed to Farlim Group by transferring the undivided shares in several plots of land (Lot 1457, 1561 and 1584 [see map]) to the latter.

(Undivided shares in a plot of land means that a piece of land with a single title has several parties listed as its owners and the land has not yet been subdivided into different plots with their own titles. Such a situation is very common in all the land bought by 1MDB as the land has other people named as part owners, albeit a very small share.)

A Dec 8, 2011, Henry Butcher Malaysia (Penang) Sdn Bhd valuation of RM58 million was used as the basis for the debt settlement. As the total land area involved is 93.86 acres or 4.088 million sq ft and Farlim Group’s share is 25% or 1.02 million sq ft, the RM58 million price tag means that the land was valued at RM57 psf.

Henry Butcher’s valuation report states that the fair market rate was RM85 psf, which would have priced the 1.02 million sq ft at RM86.7 million. But this had to be discounted to RM58 million on an “as is” basis, that is without vacant possession and subject to the titles being good, registerable, marketable and free from encumbrances.

Two years later, the same plots of land were valued by Henry Butcher on the same basis in an Oct 24, 2013, report at RM100 million or RM98 psf — a  73% jump from RM58 million or RM57 psf in December 2011.

This is a hefty spike. Henry Butcher did not respond to requests for an explanation for the big jump.

By comparison, the value of development land in Penang rose 28% from 2012 to 2013, according to the Ministry of Finance’s Valuation and Property Services Department report for 2013.

What is even more interesting is that in the end, 1MDB paid Farlim Group RM113 million for the land or 95% more than what it was valued at in 2011 and RM13 million more than the 2013 valuation.

Separately, Farlim Properties was sold to 1MDB for RM338 million. Farlim Properties owns at least 34.52 acres or 1.5 million sq ft of land, most of which also has other parties as part-owners.

As for Gerak Indera, according to filings with the Companies Commission of Malaysia (CCM), the shareholders who sold the company to 1MDB are Ng Kok Cheang and Mohammed Zubni Ismail, each holding a 50% stake.

Penang businessman Goh Choon Lye was briefly a director of Gerak Indera — from Jan 6 to 29, 1997 — but sources say although he has no official links to the company, he has remained close to it.

Ng, who is also executive director of Multi-Purpose Capital Bhd, has been a shareholder of Gerak Indera since 1999. Interestingly, he used to work for Penas Realty Sdn Bhd, a company owned by Goh.

Goh’s listed vehicle was Penas Corp Bhd, which collapsed during the 1997/98 Asian financial crisis. The 51-year-old resurfaced in a big way when he openly campaigned for Barisan Nasional at the last general election and was even described by the media as the adviser to 1MDB on building affordable homes (see story on Goh).

Gerak Indera owns undivided shares in at least 136 acres or 5.91 million sq ft of land.

Farlim and Gerak Indera were on the opposing sides of legal suits that involved the trustees of some of the land that has now been bought by 1MDB. The suits centred on which party had the right to buy part of the Air Itam land held by Choong Lye Hock Estates and others.

Choong Lye Hock was a tycoon and politician in the early 1900s and the grandfather of badminton great Datuk Eddy Choong. The family used to own large tracts of land in Air Itam.

Where exactly are the plots of land located?

When 1MDB disclosed these acquisitions under “significant events subsequent to the reporting period” in its March 31, 2013, accounts released in April this year, after a one-year delay and a change in external auditor, it did not state where exactly the various plots of land and properties were located in Penang.

Checks by The Edge reveal that the plots are of various sizes, from large to tiny, and that the properties — terraced houses and shophouses — are scattered around Air Itam town (see Map).

The plots are occupied by houses and some workshops and it is estimated that there are between 1,200 and 1,400 dwellings on them with water, electricity and postal addresses. Most are semi-concrete houses with zinc roofs but there are also wooden and concrete houses (see story on the history of ground tenants).

What is intriguing is that these plots have multiple owners and although some have a very small share, without their agreement, the other owners cannot do anything on the land unless it is subdivided and issued separate titles.

“Unlike a company where a shareholder who has, say, a 5% share cannot block the one who has 95%, in the case of land ownership, everyone must sign off before anything can be done with the land,” says a lawyer familiar with land titles. “1MDB will need the consent of everyone else if it wants to develop the land.”

Why did 1MDB buy these assets despite the encumbrances?

1MDB appears to have struck the deals in haste and in time for GE13.

The various plots of land are all around Air Itam town — at the centre of several state and parliamentary constituencies won in 2008 by Pakatan Rakyat, including Chief Minister Lim Guan Eng’s Air Putih state seat, which he contested under a DAP ticket.

Sources say a group of businessmen close to BN devised a plan that they thought could win back the state from PR — that is, by promising to build 9,999 houses for the people in the heart of DAP’s support base.

The businessmen included Goh and fellow Penangite Low Taek Jho (better known as Jho Low), who were also responsible for the big concert in Penang during GE13 that was attended by Prime Minister Datuk Seri Najib Razak and at which South Korean pop star Psy performed. Another link is Tan Sri Ong Gim Huat, a businessman from Penang who also sits on the board of 1MDB.

Goh campaigned actively for votes and The Star newspaper even described him as the adviser to 1MDB on its projects. Brochures on various housing projects that would be built were distributed and people were invited to register their interest.

The Star, in an article on voting day on May 5, 2013, quoted Goh as saying that he would provide RM150 million to help the poor pay the 10% down payment on the houses and that they only needed to repay their loans over 30 years with no interest.

A few days earlier, the BN had announced that it, via 1MDB, would build 6,666 low-cost flats of 700 sq ft each and 3,333 affordable homes of 1,000 sq ft each.

Goh also said the people living on the land would be “generously” compensated to move out.

The Edge was unable to reach Goh for his comments on the housing projects for this story.

In response to questions, Jho Low, through his public relations firm Edelman, did not deny that he knew Farlim’s Lim and Goh, but stressed that he did not have any business dealings with them.

Asked if he had connected them to 1MDB on the land deals, the PR firm said: “As mentioned previously on many occasions, Mr Low has never held any position with 1MDB or the Government of Malaysia. He was one of many advisers invited by the stakeholders of the Terengganu Investment Authority (TIA) to provide advice from January 2009 to mid-May 2009 during the initial stages of TIA but has not been involved with TIA since mid-May 2009 and has never received any remuneration from TIA, 1MDB or the Government of Malaysia.”

Will and can 1MDB proceed, and will it make or lose money?

BN chairman for Penang, Teng Chang Yeow of Parti Gerakan, when contacted on the promise made to build 9,999 low-cost and affordable homes, tells The Edge: “It was not in the manifesto (and) even if it was, the people rejected BN. Therefore, the manifesto (or promise) could not be implemented as well as it was deemed to have been rejected by the people.”

At press time, 1MDB had not responded to questions about the land purchases and whether it intended to proceed with the housing projects.

Even if 1MDB were to go ahead, it would not be easy because approvals have to be obtained from the state government and chief minister Lim is unlikely to be helpful.

An aide to the state executive councillor for housing, Jagdeep Singh Deo, tells The Edge that if the developer does not strike an amicable relocation settlement with the people who are living on the land, any proposal submitted will not be entertained.

“They have to sort that out first and after that, we will have to look at what their development plans are all about if they submit them,” says the aide. “Since GE13, it has been very quiet and no one knows what they [1MDB] want to do.”

Assuming 1MDB proceeds with the plan, do the numbers add up for it? Based on the acreage of the land and the number of new homes that the federal government has promised to build, a property consultant estimates that 1MDB may lose over RM1 billion.

These are the calculations:

The cost of building 6,666 low-cost flats of 700 sq ft each at RM100 psf and 3,333 affordable landed homes of 1,000 sq ft each at RM150 psf will come up to RM967 million. Assuming 1MDB also builds 700 shophouses of 2,400 sq ft each at RM150 psf, that will add another RM252 million to costs. This means the entire construction bill will be around RM1.22 billion.

Add to this a land cost of RM1.38 billion and conservative relocation compensation of RM108 million for 1,200 ground tenants (RM90,000 per dwelling) and the total project cost (excluding interest incurred by 1MDB to finance the RM1.38 billion land purchase) rises to around RM2.7 billion.

On the revenue side, assuming the 6,666 low-cost flats are priced at RM65,000 each, the 3,333 affordable homes at RM200,000 each and the 700 shophouses at RM500,000 each, total sales revenue will be RM1.45 billion.

Based on these estimates, the potential loss to develop the various projects is RM1.25 billion.

And if 1MDB does not proceed, it will still be sitting on losses. Assuming a financing cost of 4%, interest payment on the RM1.38 billion it spent on buying the land works up to RM55 million a year.

That cannot be a happy situation for taxpayers because 1MDB is a state-owned company.

On the other hand, those who sold the land and the brokers who brought the deals to 1MDB must be walking around with a big smile because they managed to unload more than 234 acres of land that was full of encumbrances and difficult to develop.

This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.