This article first appeared in The Edge Malaysia Weekly on August 26, 2019 - September 1, 2019

THE recent closure of Giant stores in the country has brought into question the fate of investment assets owned by the Employees Provident Fund (EPF) that are leased out to the retailer.

GCH Retail (M) Sdn Bhd, which owns and operates the Giant chain, has already shuttered at least eight stores this year — two of them this month. At least four other stores — two in Selangor and one each in Negeri Sembilan and Johor — are expected to be shut soon. The country’s largest supermarket/hypermarket operator by store count, GCH Retail also operates the Cold Storage, Mercato and Jasons Food Hall branded supermarkets.

The Edge has learnt that the EPF owns “about a dozen” buildings and shoplots, which are or were occupied by GCH Retail, representing about a tenth of Giant’s stores. Retail industry talk is that GCH Retail may bring down the number of stores it operates to just 60.

When contacted, the EPF would not reveal the number of buildings it owns that are tenanted by GCH Retail or the years left on the leases.

The retirement fund did, however, say, “So far, only one supermarket under the portfolio has been closed down. As part of its asset management programme, the EPF is actively managing its real estate portfolio, which includes assets occupied by GCH Retail, including renewing and re-letting of its space.”

While the EPF did not name the store which has now closed, The Edge understands that it is the Giant hypermarket in Section 18, Shah Alam, Selangor. Its last day of business was June 27.

How did the EPF come to own these properties?

GCH Retail is a unit of Hong Kong-based Dairy Farm International Holdings Ltd. It entered the Malaysian market when it acquired the Giant retail chain from the Teng family in 1999.

As part of its expansion, the retailer acquired properties that were placed under Hartanah Progresif Sdn Bhd, a wholly-owned subsidiary of Dairy Farm.

In December 2005, GCH Retail decided to divest itself of all the buildings it owned at the time. Hartanah Progresif was sold to the EPF for RM382 million with a guaranteed net yield of 7.5% a year, equivalent to RM32 million.

GCH Retail also entered into a separate long-term lease agreement of 10 to 15 years for the properties. They comprised four hypermarkets, four supermarkets and 42 small shoplots and hostels as well as three pieces of vacant land.

Hartanah Progresif was renamed Kwasa Properties Sdn Bhd by the EPF. A search on the Companies Commission of Malaysia’s website shows that Kwasa Properties is involved in property investment with earnings mainly derived from rental income. In the financial year ended Dec 31, 2018 (FY2018), the company posted revenue of RM58.092 million — unchanged from FY2017. However, net profit declined 2.78% to RM48.07 million from RM49.45 million the year before.

As at end-2018, Kwasa Properties’ total liabilities were RM589.37 million, of which RM41.55 million was current. It had accumulated earnings of RM32,174.

The Edge understands that apart from the outlet in Shah Alam, the other EPF-owned assets occupied by the retailer include Giant Plentong in Johor, Giant TMC Bangsar in Kuala Lumpur, Giant Bandar Kinrara in Selangor and Giant Kelana Jaya in Petaling Jaya.

The retirement fund’s options

According to sources, the lease on Giant Kelana Jaya is up for renewal next year. If this is true, there is a possibility that the retailer will vacate the premises and not renew the lease. Recall that GCH Retail had said that many of the stores were closed after their leases had expired.

The Giant Kelana Jaya along the Damansara-Puchong Highway opened its doors in 2004. It was reported that the store, with 1,000 parking bays, sits on a nine-acre site. The hypermarket occupies a trading area of 7,400 sq m.

Should GCH Retail decide not to renew its lease, what are the EPF’s options for the site? Industry experts tell The Edge that the retirement fund has three options — find a new tenant, sell the asset or redevelop the site.

In the first option, Abu Dhabi-based LuLu Hypermarket or local retailers such as NSK Trade City and Econsave Cash & Carry could be potential new tenants. However, with the hypermarket-style business showing signs that it is on the decline, would these operators want to take up the space vacated by Giant? Wouldn’t they prefer a smaller retail floor space instead?

In the second option, the question is, will the EPF be able to fetch an attractive price? With the oversupply of retail space currently, it may be a challenge to find a buyer — especially if the building does not have a secured long-term tenant — unless the property is sold at a discount.

Valuers say the nine acres may be worth about RM156 million, based on a price of about RM400 per sq ft in the area.

As for the third option, the size of the parcel is sufficient to build an integrated development, for example serviced apartments with some office and retail space. Should the EPF take this path, a valuer pegs the potential gross development value of a serviced apartment project at around RM700 million.

These same options can apply to other large stores owned by the EPF, in the event Giant decides to move out.

In 2014, the retailer was operating 147 stores; today, it has just below 100. The four outlets that are currently having a clearance sale and which are expected to be the next to cease operations are Giant Muar in Johor, Giant Senawang in Negeri Sembilan, Cold Storage at 1 Utama Shopping Centre in Bandar Utama, Selangor, and Giant Metro Kajang in Selangor. This would bring the total closures for the year, as tabulated by The Edge, to 12.

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