Thursday 28 Mar 2024
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THE big-ticket commercial real estate market in Kuala Lumpur has attracted considerable interest in the past 18 months, judging from the number of deals involving development land and office towers that have fetched record prices.

What is interesting is that consumer sentiment on condominiums and serviced apartments in KL was weakening even as these huge undertakings involving corporate buyers and institutional investors picked up.

Not only did transactions of non-landed residences, for example in the KLCC area, decline or remain flat overall last year but average prices softened in 3Q2014 to RM1,076 psf from RM1,167 psf in 4Q2013.

In contrast, due to renewed buying interest, prices per square foot in the KLCC area remained strong and are now at around RM3,280 psf for land and RM1,400 psf for office space.

To show how active corporate and institutional buyers have been, over RM6.7 billion worth of transactions involving land and commercial buildings, excluding three Tun Razak Exchange (TRX) deals worth at least RM2.7 billion, have been either completed or executed since early last year, according to a compilation by The Edge. Meanwhile, another RM3.5 billion worth of commercial buildings in downtown KL have been put on the market.

The above values are based on reports and announcements made over the past 1½ years (see Table 1 on Page 65). However, there could have been some private deals, which means the real value of transactions executed since early last year could be bigger. In fact, property consultants describe this 18-month period as one of the most dynamic for commercial real estate in over a decade and the monetary value as a record.

“The market is very vibrant. The last time it was like this was about a decade ago,” Zerin Properties CEO Previndran Singhe tells The Edge.

The fact that property consultancy firm Rahim & Co sealed deals to the tune of RM2 billion in the past three months alone shows the vigour of KL’s commercial real estate scene. In April, the firm handled the sale of Integra Tower, which forms part of The Intermark in Jalan Ampang, by US-based fund manager BlackRock to KWAP (Kumpulan Wang Persaraan [Diperbadankan]) for a whopping RM1.065 billion. It also handled the sale of Menara CIMB in KL Sentral to CIMB Group for RM646 million and was appointed to seek buyers for the German Embassy land in Jalan Kia Peng.

The size of these deals generated a lot of attention.

“A decade ago, we did not see many transactions above RM1 billion. Values have become so big now because of asset inflation. For instance, land price has doubled or tripled [from 10 years ago]. It used to be RM1,000 psf in the KLCC area in 2006 and 2007. Today, it is over RM3,000 psf,” Rahim & Co managing director of real estate agents Robert Ang tells The Edge.

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Why the sudden surge in interest?

Property experts cite a weak ringgit and ample liquidity in the financial system and capital market for the robust transactions. “The sudden surge in interest could be due to the Malaysian market looking attractive to investors. This is mainly due to the US dollar strengthening against the ringgit and the still strong fundamentals of our property market,” reasons Previndran.

He points out that while institutional investors have always eyed KL’s commercial real estate, the ailing local currency has boosted their interest.

The ringgit started to depreciate against the US dollar last September. It dropped to as low as 3.72 in early March from 3.14 in August last year, and is currently hovering at around 3.65.

Some point to the local institutional funds and major developers that are flush with cash. “There is a lot of liquidity in the market, whether from the Employees Provident Fund (EPF) or Lembaga Tabung Haji. Large developers, which have been making huge profits, are also contributing to the liquidity in the property market,” Rahim & Co’s Ang points out.

When these factors come together in an environment of stable and low interest rates, institutional investors are motivated to invest in real estate, he adds.

Moreover, government-linked companies (GLCs) and statutory bodies were directed by the Ministry of Finance (MoF) late last December to prioritise domestic investments and postpone foreign asset acquisitions in order to contain capital outflows and boost local consumption.

This could have motivated Putrajaya Ventures Sdn Bhd, a unit of Putrajaya Holdings Sdn Bhd, to recently buy the 7.98-acre French Embassy land in Jalan Ampang for RM834.26 million, a few weeks after another GLC, Malaysian Resources Corp Bhd (fundamental: 1.3; valuation: 0.8), bought the nearby 1.87-acre German Embassy site for RM259.2 million.

Putrajaya Holdings, the master developer of Putrajaya city, is owned by Petroliam Nasional Bhd, Kumpulan Wang Amanah Negara and Khazanah Nasional Bhd.

Meanwhile, after purchasing Integra Tower, KWAP was said to be considering buying a plot in TRX from 1Malaysia Development Bhd (1MDB) to build an office tower but that changed after Tabung Haji’s acquisition of 1.56 acres in TRX for RM188.5 million caused a furore.

Nevertheless, Indonesia’s Mulia Group has signed with 1MDB to acquire 3.4 acres in TRX for RM665 million, though there are scant details of the deal.

When contacted, LaurelCap Sdn Bhd director Stanley Toh agrees that the weak ringgit is contributing to the surge in commercial real-estate transactions in KL but adds that Malaysia’s relatively cheap land on a psf basis is also a lure. Besides, he says, foreigners can wholly own freehold land in this country unlike in Thailand, the Philippines or even Cambodia.

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If the price is right …

In KL alone, a substantial number of commercial buildings — office, hotel and retail — as well as parcels of land are available for sale (see Table 2).

Rahim & Co was appointed to put all the components of The Intermark, except the Double Tree by Hilton, up for sale. Two of the components — Vista Tower and the mall — have yet to be sold. The former is going for RM600 million and the latter for RM155 million.

There are also some property owners who are willing to divest their assets “if the price is right”. Goldis Bhd (fundamental: 0.5; valuation: 1.1) CEO Tan Lei Cheng recently said the company was willing to let go of its hotel-cum-office building, G-Tower, for RM1.3 billion. Renaissance Kuala Lumpur Hotel, which belongs to Goldis’ subsidiary IGB Corp Bhd (fundamental: 1.2; valuation: 2.0), is probably another piece of real estate that may be sold if the price is right. In fact, over the years, news of this hospitality asset being available for sale has surfaced several times.

Within TRX itself, many more acres are likely available for sale based on news reports that have appeared thus far. The single largest area — covering 17 acres — of the 70-acre development is to be jointly developed by Sydney-based Lend Lease and 1MDB Real Estate Sdn Bhd. Other known transactions, including by Tabung Haji and Mulia Group, would take up just a fraction of TRX.

Of late, there have been some noticeable trends when it comes to the transaction of huge commercial property in KL with most of the selling parties being foreign investment funds and foreign governments. While the former typically recycle their property asset portfolio every few years, recently, the latter have begun to sell embassy land in order to move their consulates into office buildings and also to unlock value.

As for the sale of old office buildings, LaurelCap’s Toh attributes this to the softening rental market and falling yields. “Yields are declining because offices are also moving out of the city to the fringe of Kuala Lumpur, such as Bangsar South and KL Sentral,” he says.

These buildings offer their new owners the opportunity to refurbish, renovate, rebuild and even reposition. “The building should be redeveloped according to the demand for and supply of that particular product in the area,” remarks Toh, citing office building Menara ING in Jalan Raja Chulan, whose transformation will include hotels because of the high demand for rooms in the city centre.

He also reckons that many owners will liquidate their properties if they think the prices are high, ahead of a possible slowdown.

The Kuala Lumpur City Council has also made redevelopment more alluring by approving a higher plot ratio, which means the developer can get more out of every square foot of space he invests in and potentially make higher margins.

In the meantime, Rahim & Co’s Ang expects transactions of big-ticket commercial real estate in KL to continue to excite over the next two years, especially due to the scarcity of land.

And as Toh points out, there will always be buyers looking for bargains. “There are those who are flush with cash but they would rather adopt a wait-and-see stance. Their objective is to reserve cash and pounce on any good deal that arises in the softening property market.”

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Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on June 1 - 7, 2015.

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