KUALA LUMPUR: Permodalan Nasional Bhd’s (PNB) RM5 billion plan to redevelop the tract of land near Stadium Merdeka, which includes building a 100-storey office block, is a move to diversify the investment group’s asset portfolio, said its group chief executive Tan Sri Hamad Kama Piah.

He said PNB expected an annual return of 8% to 10% from the massive property redevelopment plan, which he stressed was a well-thought investment decision. “It was not a ‘one-day thing’,” Hamad told a media briefing that was called at short notice yesterday.

The meeting was called after growing public criticism over the 100-storey tower project, which was announced in last week’s 2011 Budget. Many quarters had lamented the tower as lavish and unnecessary, and questioned its viability in the face of a looming glut in Kuala Lumpur’s office space market.

Hamad reiterated that PNB could finance the mega development project in the city centre solely from profits that it had made over the past three decades. “We are not taking the government’s money (for the project),” he stressed.

“(Since) many years ago, PNB has been talking about shifting its asset class. Over the years, we have bought many properties, for instance the Kenanga (International) building, the MAS (Malaysia Airlines) building,” Hamad explained on the rationale of the project.

The massive development project on 19 acres of land, which PNB bought for RM310 million from Danaharta, would stretch over 10 years until 2020. The market value of the land has appreciated to RM800 psf versus the purchase price of RM220 psf, Hamad estimates.

The new tall tower, called Warisan Merdeka, will cost RM2.5 billion to RM3 billion and is expected to be completed by 2015.

Warisan Merdeka will be the world’s second tallest building with a height of 525 to 550 metres, after Burj Khalifa in Dubai, based on the current roster of the world’s skyscrapers. The Burj Khalifa opened in January and stands at 828 metres.

Warisan Merdeka will be the second state-initiated mega property project in the country after the Petronas Twin Towers.

According to Hamad, Warisan Merdeka could house about 10,000 people or more with a total floor space of three million sq ft.

He revealed that PNB would be an anchor tenant, making Warisan Merdeka its headquarters. “We need a new office for expansion,” Hamad replied when asked about the tenancy.

As for PNB’s existing headquarters, along Jalan Tun Razak, Hamad said the group planned to refurbish and upgrade the building to fetch a better rental yield.

The 100-storey Warisan Merdeka may be another attractive icon for tourists, but for the locals though, the massive project raises concerns of a possible glut in office space supply — apart from concerns of infrastructure challenges, such as traffic congestion, and whether it will bring much benefit to the country’s economic development.

Statistics from National Property Information Centre (Napic) show that as of September 2010, Kuala Lumpur has 72.7 million sq ft of existing office space supply, of which 58.5 million or 80.5% is occupied.  The rate has dropped over the past nine-month against 83.2% in December 2009, as more office space came into the market.

According to data extrapolated by The Edge Financial Daily from the Napic statistics, the nine-month period saw a rise of 3.9%, or 2.75 million sq ft, in office space supply. However, occupancy rose only 0.36 million sq ft. As a result, vacant office supply increased by 20% from 11.76 million to 14.16 million sq ft.    

Meanwhile, another 10.4 million sq ft of office space is expected to come onstream later, based on projects that are under construction as at Sept 30, 2010. The take-up rate for Kuala Lumpur office space is estimated to have averaged 1.72 million sq ft annually from 1985-2009. Based on this calculation, it implies that the incoming office supply is equivalent to about six years’ worth of demand.

When the Petronas Twin Towers were conceptualised in the early 1990s and started construction in 1994, the office market was tight.

The office occupancy rate for Kuala Lumpur was above 90% from 1990 to 1997. It reached as high as 98.1% in 1997, just before the Asian financial crisis and the completion of the twin towers.

Following the completion of the Petronas Twin Towers in 1998, however, the city’s occupancy rate plunged to about 82.1% as total office supply increased by about nine million sq ft or 18% in that year.

Since then, occupancy levels have remained around the 80% mark. It dropped below 80% from 1999-2004 — to as low as 72.6% in 2001.

Going forward, there is a number of government-initiated massive development projects in the capital, in addition to the numerous private projects.

Examples are the joint development between Mubadala Real Estate & Hospitality (MREH) and 1Malaysia Development Bhd (1MDB) on the 34.4ha tract near Kampung Pandan and Jalan Tun Razak. 1MDB also partners with Qatar Investment Authority to redevelop the Royal Malaysian Air Force base near Sungei Besi.

The federal government also intends to redevelop its large tract of land near Cochrane Road area.

Outside the city centre are the upcoming Matrade development in Mont’Kiara-Dutamas, and the massive Rubber Research Institute township in Sungei Buloh.  

Should all the projects kickstart, simple logic tells there will be ample supply of office space in Kuala Lumpur. Will there also be a surge in demand for them?  

Much will depend on Malaysia’s ability to transform its economy and attract more foreign direct investments.

Still, PNB’s Hamad is more optimistic.

He said all developers lived through the cyclical property cycle. “When we are taking calculated risks, we also ensure reasonable returns,” he commented.

This article appeared in The Edge Financial Daily, October 21, 2010.