This article first appeared in The Edge Malaysia Weekly on December 24, 2018 - December 30, 2018

ON Dec 17, after 11 months and two missed deadlines, Malaysia’s two largest funds finally concluded a £1.583 billion (about RM8.33 billion) acquisition of the commercial assets in Phase 2 of the Battersea Power Station (BPS) redevelopment in London.

Touted as the UK’s most expensive yet, the property deal had been labelled as a bailout since it was announced in January, given news reports that the project had been suffering from financial strain and cost overruns.

However, the forward purchase of commercial assets mid-construction is not a bailout, says asset manager Permodalan Nasional Bhd (PNB), which is partnering retirement savings fund the Employees Provident Fund (EPF) on the acquisition.

“It is an arm’s length transaction and we went through very rigorous processes to make sure that the project is viable and meets our stringent investment criteria,” PNB group CEO Datuk Abdul Rahman Ahmad tells The Edge.

“So, we do not feel (the bailout perception) is correct because to us, the investment itself is attractive,” he says, adding that while “everyone recognises that there had been cost overruns, (the project’s) value had increased significantly too”.

Responding to The Edge separately, EPF CEO Tunku Alizakri Alias stresses that the fund had conducted thorough due diligence before finalising the deal.

“This is the ‘crown jewel’ of the greater Battersea development, which will generate healthy rental income for the owners and has very strong potential for capital appreciation in the future,” he says.

PNB owns 65% of PNB-Kwasa International 2 Ltd, the special-purpose vehicle set up for the acquisition. The EPF holds the other 35%. The acquisition is expected to be concluded in the first quarter of 2019.

The ultimate selling entity is Battersea Project Holding Co Ltd (BPHCL), in which S P Setia Bhd and Sime Darby Property Bhd (SDP) each control 40%. The remaining 20% is held by the EPF, making it both part-buyer and part-seller.

“In this instance, we set up a completely different purchasing team from the one involved in the project and conducted the sales and purchase process at arm’s length,” says Tunku Alizakri.

It is worth noting that PNB is the majority shareholder of both SDP and S P Setia. The EPF is also a substantial shareholder of the listed developers.

Despite the relationships, it is not a related-party transaction under Bursa Malaysia’s listing rules, SDP said on Dec 20.

Abdul Rahman reiterates that PNB-Kwasa’s interests are safeguarded by a 5% yield guarantee on the base price during the construction period and for five years following completion.

In addition, there is a price-adjustment mechanism — by the end of the fifth year, the base price will be adjusted downwards if the returns are less than the guaranteed 5%.

That said, any amount exceeding the 5% rate will be payable to BPHCL.

When asked who initiated the transaction, Abdul Rahman says BPHCL had originally approached a wide range of investors, including PNB and the EPF, to raise debt financing. “But we felt that rather than providing debt, it was probably better to do the investment.”

Abdul Rahman adds that getting the structure right contributed to the multiple delays in finalising the deal, originally slated for April 30.

Since announcing the deal in January this year, both PNB and the EPF have seen leadership changes sparked by the change in federal government after the 14th general election on May 9.

The assets include one million sq ft of lettable commercial space, over half of which is already let out to Apple Inc and Number 18, a unit of IWG. However, the assets are yet to be completed.

Tunku Alizakri explains that “early timing is key to securing ownership at a price that is favourable to the purchasers and makes sense to the developer”.

After the sale, BPHCL will be appointed to finish building the commercial assets on behalf of PNB-Kwasa. Note that the Battersea Power Station Development Company will be the property manager post-completion for 10 years.

As part of the acquisition, PNB-Kwasa will also provide funding of up to a maximum limit of £1.396 billion and any cost overrun will be funded by BPHCL.

This has raised eyebrows, given reports that the construction works had been facing heavy cost overruns amid a challenging London property market that had been whittling down projected returns.

The Financial Times, among others, reported that expected returns had fallen from 20% to 8% while renovation costs had ballooned from £750 million in 2012 to nearly £1.2 billion.

Officially launched with much fanfare in July 2013, the redevelopment was planned to span seven phases up to 2025. At the time, the overall development was said to be worth £8 billion but more recent reports have put the value at £9 billion.

Last year, while renegotiating the affordable housing allocation in the project with the Wandsworth Council, the developer warned that the project’s viability hung in the balance.

“The current financial strain on the project in terms of equity draw versus projected return is not sustainable,” said the developer, according to documents quoted by www.constructionnews.co.uk.

Without higher return prospects, the developer warned that its shareholders “have considered stopping the project to allow the finances to be more tightly controlled”.

The council’s planning committee had narrowly voted to reduce the affordable housing allocation from 636 to 386 units last year.

So, could the developer have carried on the construction of the commercial assets without the funding that comes with this transaction?

Abdul Rahman acknowledges that the deal is “important” for the continuity of the project. However, he stresses that the process was transparent and the transaction structure mutually beneficial to all the parties involved.

“We are aware that because of the relationships, this transaction will always be scrutinised. But I think we have taken our time to ... make sure that the transaction is truly at arm’s length, truly fair and beneficial to both sides.” 

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