City & Country: Cover Story - New kid on the block sees period of opportunity ahead

A RECENT SURVEY by the Real Estate and Housing Developers’ Association (Rehda) indicates that many developers are not very optimistic about the outlook for the property market. While they may continue to launch more properties — up 37% from the almost 11,000 units in 1H2013 — before the Goods and Services Tax hits the market next year, sentiments are weak.

However, new kid on the block, M101 Holdings Sdn Bhd, sees this as a period of opportunity. It is forging ahead with its plan to launch 10 projects — which will include a total of 1,500 small offices/flexible offices (SoFos) aimed largely at foreign investors — with a gross development value of RM3 billion in Kuala Lumpur over the next three years. In fact, the developer has allocated up to 70% of the SoFos to investors who hail from China, Hong Kong, Taiwan, Japan and the Middle East. And it has an extensive marketing campaign to match its ambitions, splashing millions of ringgit on media coverage, road shows in key markets and offers of free hotel stays in its future integrated developments.

The company launched M101 Dang Wangi in the middle of last year and next week, it will unveil its Bukit Bintang project at a cost of RM1 million, even inviting the international press to cover the event. In the pipeline are similar mixed-use developments in Jalan Raja Chulan and Jalan Imbi.

So, why is the company — named after Malaysia’s coordinates — pushing its M101 series so aggressively?

“This is the ‘golden age’ of Malaysian property. We have three years starting from now. If we miss the boat, we will never be able to catch up with our peers. Malaysia is very underpriced in the region and we are the only country in Southeast Asia that sells freehold property to non-Malaysians. Foreign investors see our potential and coupled with our lower ringgit now, we are a bargain,” director Datuk Seth Yap tells City & Country.

“We want to promote the country. What we are doing is to promote ‘property tourism’ ... so we are exporters, but what we are exporting, these investors cannot take away.”

The valuers …said nothing was transacting at close to what we were asking for, but we decided to sell the SoFos at [RM1,400 psf] anyway — Chua

This, no doubt, encouraged the company to charge above-average prices for its products. For instance, the 400 sq ft SoFos in M101 Dang Wangi in Jalan Kamunting, Kuala Lumpur, which it began selling in the middle of last year, cost RM1,400 psf. They were sold on a leaseback basis over 4+3+3 years with monthly rents of RM2,800 to RM3,500 by Best Western. Yap says similar properties in the area are going for RM1,000 psf.

“The valuers could not accept our price point because they said nothing was transacting at close to what we were asking for, but we decided to sell the SoFos at that price anyway. Foreign investors are interested and agents from abroad have come to our office, asking whether they can market our properties abroad,” says Datuk Chua Eng Pu, also a director of M101 Holdings.

M101 Holdings plans to continue with this arrangement in its future projects. To commit, the agents must pay RM5,000 per unit up front and sell the units in three months with a signed sale and purchase agreement and loan approval as proof. The agents are limited to 10 units at a time and the up front payment is forfeited should they fail to deliver, observes Yap.

This strategy of the company has raised eyebrows. According to CBRE Malaysia associate director Nabeel Hussain, research shows that purchases by foreign buyers accounted for only 20% to 25% of total units.

“While it is possible to achieve greater foreign participation through more intensive marketing campaigns, even reaching 40% to 50% of foreign sales would be considered an achievement in the KL context. Foreign buyers, while usually more affluent than locals, will still have many of the same considerations when purchasing a property — its location, what it offers and its investment potential. In other words, who they can rent it out to and how it will be used.”

However, Yap is quick to explain that the developer’s projects, which will be spread across 10 sites, are low in density with only 150 units each. “It is very important to distinguish us from projects that launch 600 to 700 units per location. We are proud of positioning ourselves strategically in terms of marketing and substantially reducing our financial risk. For instance, we only need to sell about 60%, or 90 units, per project to be financially strong enough to complete the whole project. Should there be an economic downturn, we can delay launching new projects,” he says.

We look at small parcels of 10,000 to 30,000 sq ft that nobody wants — Yap

“We do not do en bloc sales. As you correctly pointed out, it is too risky. As for foreigners, most of them take loans from Malaysian banks and we trust that the banks have looked at their gearing before issuing loans to them. Therefore, we do not see selling to foreigners as highly risky. On the contrary, foreigners are expected to apply for consent and … with all the process they need to go through, we consider them highly committed to the property.”

So, how does M101 Holdings manage to build in KLCC? Its secret, says Yap, is building efficiently on small plots. “We look at small parcels of 10,000 to 30,000 sq ft that nobody wants. So, while it is expensive per square foot, the absolute value is relatively low. Then, we ensure that the efficiency of the building is at over 80%. This means that we don’t build buildings with strange shapes and create odd-sized units like 200 sq ft that nobody wants to buy.”

The integrated developments in the M101 series will stack all or some of the elements in a tower, starting with the retail units, the car park, the SoFos, the hotel and rooftop dining. According to Yap, the rooftop bar is an important way to make the project stand out. “I bet you know Sky Bar, but not Traders Hotel where it is located. So, that’s one way to turn it into a destination.”

At M101 Bukit Bintang, which will be unveiled on Monday, there will be 150 SoFos with a typical built-up of 800 sq ft. They will be fully furnished with air-conditioning units, refrigerator and loose furniture. As the SoFos are commercial properties, they will not come with parking bays. They will be priced at RM1,600 psf.  This time, the SoFos will not be sold under a leaseback scheme to capture a wider market of investors who want more freedom in deciding whether to sell or to rent out their units. “The returns from the leaseback scheme may be unsustainable if you factor in capital appreciation,” Yap explains.

An artist’s impression of a fully furnished SoFo in M101 Bukit Bintang

The retail units, which have an average size of 1,000 sq ft, are priced at RM2,000 to RM3,000 psf. “The tenants you must have for a mixed-use development with a hotel like this are a pharmacy, a travel agency, a salon and a cigar and wine lounge. These are the tenants we want,” says Chua.

M101 Bukit Bintang will also feature 200 mechanical parking bays that cost RM70,000 each and are designed as a safety feature to prevent crime in car parks.

The SoFos in the development may not come with parking bays, but in view of the nearby Star LRT and KL Monorail Hang Tuah stations and upcoming MRT Bukit Bintang and Merdeka stations, Yap says the tenants and visitors need not rely on cars.

Best Western, the world’s largest hotel operator, will manage M101 Holdings’ hotels in the 10 projects. It already runs four in Kuala Lumpur, including a Best Western Premier. The US-based hospitality group is on an aggressive expansion drive and is set to open nine hotels here over the next two years, five of which are scheduled to open this year.

Some consultants opine that the market may not be able to stomach 1,500 SoFos over the next three years. “With regard to SoHos/ SoFos/ SoVos and other similar developments, sales and achieved selling prices in the past five years have been driven, to some extent, by attractive packages, such as high loan margins, the developer interest-bearing scheme and other incentives. As there has been a reduction in the availability of such incentives, there will be a gap between asking and achieved prices,” says CBRE’s Nabeel.

Remarks Knight Frank Malaysia’s Sarkunan Subramaniam: “With the current lacklustre occupational demand for high-end condominiums/serviced apartments in KL amid a high level of existing supply/new completions, particularly in the KLCC and selected localities of the KL city centre, it may not be a sustainable strategy to sell about 70% of the proposed units [or over 1,000 units] to foreign investors. While primary sales rates for foreign investors could be encouraging due to attractive pricing [following the recent weakening of the ringgit], the occupancy of the said developments upon completion could be of concern amid a challenging leasing market, which adds further pressure to the rental market. Foreign investors are likely to buy for potential capital appreciation, thus leaving many units unoccupied upon completion.”    

However, Yap does not believe such incentives are a factor when it comes to tapping foreign investors.

“As a committed and proud Malaysian developer, I think we are better off without these schemes as they perpetuate a vicious circle. Our fundamental marketing strategy is to push our products based on the following: location, location, location!”

What the consultants say
Nabeel advises prudence when investing in SoHos and similar developments. “The SoHo rental market is still quite untested as most of these products are newly completed or still under construction. While there certainly is a rental market, the question is, can it absorb the incoming supply? A good proxy may be smaller condos/apartments, which typically achieve between 3% to 5% gross yields. At this level, most investors would be buying in the hope of capital appreciation.”

According to Sarkunan, a “substantial number of SoHos are being launched, proposed and planned” as the scarcity of land has driven up prices while cooling measures have further affected property affordability.

However, being a typical component of mixed-use developments, on top of boasting flexible usage and lower absolute prices, they have better leasing prospects. As a result, SoHos are becoming a mainstay of the market.

“The strategic locations of SoHo developments, coupled with good accessibility and connectivity to public transport links, such as LRT, Komuter and the upcoming MRT, as well as the flexibility of their space, which can easily be converted into an office/workstation area or bedroom/private space when required, are other reasons for their acceptance by the market,” says Sarkunan.

His firm’s research shows that take-ups are encouraging with the market cottoning on to the concept of working and living in the same place instead of wasting time in heavy traffic.

“SoHos appear to be gaining market acceptance and seem popular among those looking for convenience and flexibility in their daily working schedules, such as sole proprietorship or small partnership of consultants/professionals in creative and entrepreneurial fields [for example, ICT-related businesses, insurance, architecture/design, advertising and real estate, among others], where work requires them to always be on the move with no need for large office space,” he explains.

An artist’s impression of M101 Bukit Bintang

This article first appeared in The Edge Malaysia Weekly, on March 17, 2014.