City&Country: The Edge Top Property Developers Awards 2009-- Conservatism pays for BRDB

Lessons learnt from the Asian financial crisis have helped BDRB to weather the present downturn well

Datuk Jagan Sabapathy, the CEO of Bandar Raya Developments Bhd (BRDB), was cheerful throughout the interview except when asked to pose for photographs. “Shy-la… why every interview, must take photographs?” he protested with a smile.

While he finds it daunting posing for the photographer, the affable CEO has, what the Chinese proverb says, “eaten more salt than rice”, meaning that he has come a long way and is rich in experience.

One lesson he learnt from the Asian financial crisis in 1997/98 is not to panic. So, he did not lose sleep when the impact of the US banks’ collapse reverberated across the globe last year. The fact that bankers did not pull back the lines of credit for the developer must have helped.

Sharing BRDB’s experience in the global credit meltdown, he says: “This time, we were not caught. In fact, I expect we’ll deliver better results this year than in 2008 which was a record year for us. BRDB’s current debt level of RM345 million (for the property business) is purely working capital, matched by substantial unbilled sales. And in the next couple of years, we’ll be debt free.”

Still, BRDB is not about to let its guard down. Costs were reined in and there was a hiring freeze. Bonuses, including that of Jagan, was cut. Excess employees in the Johor office were laid off via a voluntary separation scheme.

Weathering the crisis
Since the Asian financial crisis, BRDB has tidied up its affairs and is now taking a conservative path. Too conservative, by any chance? Well, it’s better to be safe than sorry, responds Jagan. “It was quite clear in 1Q2008 that things were going to get bad. There was a lot of nervousness, so we started to evaluate what we were going to do for 2009, and decided to take new projects off the table,” he says.

For example, BRDB postponed the development of its landbank behind Tivoli Villa condominium in Bangsar to 2012.

However, it continued with its phased development programme to ensure profits for 2009. “Two years ago, we embarked on plans to upgrade Bangsar Shopping Centre (BSC) and to build an office tower at the annexe (BRDB Tower). This should be completed this year, along with Troika and One Menerung. Troika has been 85% sold and One Menerung is close to 95% sold. We also sold CapSquare Office Tower II in 2008,” says Jagan.

What’s more, BRDB has been beefing up its investment property portfolio to insulate its balance sheet from property development cycles. “We are looking at ramping up gross rental income to RM90 million, even RM100 million, per year from 2011 onwards. Rental income will provide more stable earnings and raise dividend yield through 2010 to 2012,” he says.

The expanded BSC will provide some 325,000 sq ft retail space while the BRDB office tower will have 220,000 sq ft. Apart from BRDB as the anchor tenant (it will be relocating its head office from Menara Multipurpose), the company is talking to prospective tenants like advertising agencies and banks. Each floor at BRDB Tower is 20,000 sq ft. Jagan expects full occupancy by next year for offices and retail outlets in BSC. BRDB is also managing the CapSquare retail (188,000 sq ft) and signature office. And in 1Q2009, Troika office suites will be contributing. In Johor, BRDB owns the Jusco Mall in Permas Jaya (172,000 sq ft).

While BRDB strives to maximise returns from its asset portfolio, it’s easier said than done when the benefits aren’t immediately quantifiable. One painful decision was to bring the curtain down on The Actors Studio at BSC. The decision had raised some eyebrows and Jagan clarifies: “Because we wanted a better theatre, we had to look at the structural elements in the building. The total cost would have bloated to a very significant amount. But we’re still committed to the arts and are looking at other options such as in CapSquare.”

Developing properties that appreciate in value
With many high-end developments popping up, how does BRDB differentiate itself? “We think through our projects. We design timeless designs and we work very hard on our layout and finishes. The fact that our properties have appreciated substantially must be indicative that our whole package is done well and consistently,” says Jagan.

On the leveling off on the secondary market prices of some condominiums in the Kuala Lumpur City Centre, he says: “I don’t want to sound arrogant. Troika’s secondary market pricing has not been affected at all… there is no collapse. We are still selling units at RM1,800 to RM2,500 psf, and in August alone, we sold five to six units. One Menerung (in Bangsar) prices have also gone up. Today, our developer’s price for prime units has moved close to RM1,400 psf from RM750 psf at the initial launch.”

Developing Troika has proved to be somewhat challenging. Collaborating with Norman Foster, the project caused some excitement when it was launched in 2005. It was due to be completed in 3½ years but the handover date had to be extended to end of this year. Jagan explains the delay: “We had to build a 50-storey building under a tight deadline, and the contractors were challenged. Many contractors in town saw a high staff turnover. I’d also like to see the Housing Development Act allowing for a longer delivery period than 36 months. Some buildings take longer to build.”

He concedes there are a few buyers who were affected by Troika’s delay because they had bought into the project early. “But we’ve swapped the agreement for a later handover date. We could have rushed the construction and come up with a crap product,” he says.

Going forward, BRDB’s projects will not only be green but certified as such. “We’re all in the age of sustainability — energy and water conservation, proper ventilation and getting lighting right — because energy cost is spiralling. All of BRDB’s future projects will go for Singapore’s Building and Construction Authority’s Green Mark certification,” says Jagan.

Busy again in 2010
While BRDB laid low on new launches this year, it has to get busy again in 2010 to meet its earnings target. The launch of the North Tower and South Tower blocks of strata office suites at CapSquare is scheduled to take place next March and October respectively (collectively 320,000 sq ft). The condominium, Six CapSquare (300,000 sq ft), which was initially planned for launch this year, will be unveiled mid-2010. On market talk that the condo was to be sold to a Middle Eastern investor, Jagan says there is no compelling reason to sell the building enbloc.

The strata office suites launches will be followed by that of condominiums in the Dutamas area, opposite the French International School, in September. The plan is also to launch gated semi-detached homes in Permas Jaya, Johor Baru.

Jagan stresses it’s a sign of BRDB’s confidence in the market that it has close to RM900 million worth of projects (gross development value) coming onstream for 2010. In total for the next five years, BRDB has RM5 billion worth of projects to be launched in the Klang Valley and Johor.

BRDB also owns landbanks in the Subang area, located along Federal Highway, on the lefthand side after Subang Parade. This will be developed from 2012 to 2016 and will include residential and commercial elements.

Proceeding cautiously overseas
While BRDB has been on the lookout for overseas deals with good upside, it is proceeding with caution given the still uncertain global outlook. At this point, Jagan estimates that in two years, overseas projects will contribute not more than 5% of BRDB’s net profit. Jagan says he expects Pakistan’s contribution to remain at the current level (3% of net profits). “It is not an easy market to tackle,” he says.

An exciting project in the pipeline worth RM6.4 billion is in Oman. Approval by the Oman government is expected by end-2010. BRDB had bought a stake in Amouage Hotels and Resorts to develop an integrated tourism resort in Muscat. The resort will be built on 50 acres of land plus another 50 acres of reclaimed land. It is located near the airport and a 10-minute drive to the heart of the city, Jagan says.

“We are looking to build very upscale homes, consisting of villas, a marina, hotels and commercial real estate. It’ll allow us to develop something special and niche, very upscale and more personalised than neighbouring larger developments. It will be a residential area not just for Omanese but also for people from other parts of the Middle East, India and Pakistan,” he says.

Jagan believes the timing of the project is about right: “We’ve come in when the market was at its low. And it has allowed us time to work out the agreement with the Oman government,” he adds.

Commercial market flat, residential recovering
The office market is expected by some quarters to be flat for one to two years as multinationals are not growing so fast. But Jagan asserts that BRDB Towers offers a different proposition. “In a difficult time, do you have the right ingredients to be successful? We have a Grade A building in a wonderful location,” he says.

“I see confidence returning to the mid to high-end residential property market, judging by sales recorded by developers who offered aggressive terms. Under a low interest rate regime, there is the risk of inflation and quality property remains an excellent hedge against inflation,” he adds.
Are there too many high-end condominiums? “There’s always an element of supply running ahead of demand. But the middle class is continuing to grow. I believe the gap will be narrowed. What’s key is location and... developer, developer, developer,” says Jagan.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue776, Oct 12-18, 2009.