SELANGOR Menteri Besar Inc (MBI) has identified various parcels of land — totalling 5,000 acres — in the state to be developed into townships, with a potential gross development value (GDV) of RM60 billion.

MBI group chief operating officer Soffan Affendi Aminudin tells The Edge that the state investment arm is considering several partnership structures with the private sector to develop the tracts, which are scattered across the state.

“The state-owned companies will have to either form joint ventures (JVs) with the private sector or develop the land themselves,” he says.

He adds that private entities that wish to participate in developing the land will be able to do so by submitting tenders, and the state will give consideration to companies that can help MBI monetise the land fast, as well as able to offer technology transfer.

According to Soffan, MBI has been in talks with developers, such as S P Setia Bhd (fundamental: 1.40; valuation: 1.20), Eco World Development Group Bhd (fundamental: 0.95; valuation: 0.30) and Titijaya Land Bhd (fundamental: 1.85; valuation: 0.60), to form partnerships.

The proposed townships, which will be a mix of affordable housing and commercial components, will be in prime areas such as Petaling Jaya, Shah Alam and Ampang. Also on the list are Selayang, Rawang, Kajang, Puchong, Pulau Indah, Klang, Canal City, Kundang, Hulu Selangor, Kuala Selangor and Bernam Jaya.

Although it is still not known which tract will be developed first, Soffan is of the view that through partnerships, both parties — the state government and the private developers — will benefit as the state-owned companies will be able to develop skill sets and the private firms will not have to worry about financing land acquisitions.

“Rather than them (developers) buying land and incurring borrowings and so on, now there won’t be any land holding cost because you have a structure where you can pay progressively. With this structure, the state, in a way, is financing the developer,” he says.

He adds that the state’s stake in a partnership will depend on the market value of the land and the GDV of the proposed development.

“Let’s say the land is valued at RM100 million and the GDV is RM500 million. So, RM500 million is divided by RM100 million, MBI will end up with a 20% stake [in the GDV],” he explains.

On whether the state will own a majority interest in JVs, Soffan says it depends on the value proposition by both parties.

“We have to find a balance, otherwise people will think that the government is going into business. But, in some instances, if the state-owned companies can develop the land themselves, then they might as well do it,” he says.

Mah Sing Group Bhd managing director Tan Sri Leong Hoy Kum says the partnership proposal is a good move that will help the state government speed up developments at various locations and unlock the value of its landbank.

“As a developer, we view the state’s proposal positively. We are constantly looking for landbanking opportunities that fit our business model and enhance shareholder value. These can be in the form of JVs or outright purchases — we are comfortable and have experience in both models,” he says.

In January, Mah Sing (fundamental: 2.20; valuation: 2.40) proposed a rights issue with attached warrants as a sweetener, and a bonus issue, hoping to raise RM630 million. 

The group will allocate RM530 million from the cash call for land acquisitions and property developments.

Echoing Leong, another veteran property player says the move will benefit developers.

“When developers buy land, they have responsibilities to shoulder. But, with JVs, it will be better because there are fewer conditions. Even though developers won’t need to take loans, raise funds, undertake rights issues or private placements for the land purchase, they may still have to take loans for the construction of the project … Construction may cost more if the development is far away from prime areas,” he says.

Nevertheless, partnerships between governments and private companies to develop land are not uncommon.

Kwasa Land Sdn Bhd, a wholly-owned subsidiary of the Employees Provident Fund, was set up as a master builder to develop a 2,330-acre tract in Sungai Buloh, with a GDV of RM50 billion. It will work with private or public companies to build a township with eight precincts.

Last year, TSR Capital Bhd (fundamental: 0.85; valuation: 2.40), Lembaga Tabung Angkatan Tentera and Pembinaan Bukit Timah Sdn Bhd formed a JV to develop the 1,007-acre former Royal Malaysian Air Force base in Butterworth, Penang, into an integrated mixed-use project in a land swap deal with the Federal Government. The project has a GDV of more than RM10 billion.

Similarly, S P Setia signed an agreement with the Federal Government last June to build a RM845 million integrated health and research institute — the 1National Institute of Health in Setia Alam, Selangor — in exchange for a 52.3-acre site in Bangsar, Kuala Lumpur, which is to be developed into luxury apartments and integrated commercial properties.

Meanwhile, developers building affordable housing have raised concerns about profit-margin compression due to the rising cost of raw materials.

Bina Puri Holdings Bhd (fundamental: 0.15; valuation: 1.80) group executive director Matthew Tee, however, says where affordable housing schemes are mandated, developers can be “compensated” by allowing them to have a higher density in the development area.

“The government should also look out for developers who have a good reputation for delivery,” he says.

“There had been too many instances whereby the government formed JVs with developers who could not deliver … over-promising returns.”

For instance, in 1999, Delpuri Corp Sdn Bhd was appointed by the Selangor government to reorganise squatters in Bukit Botak, Selayang, by building houses for them, but it failed to complete the project. A few years later, the Selangor State Development Corporation took over the 55.2ha project, which is ongoing.

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 March 2 - 8, 2015.

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