City&Country: My Space-- To be acquired or not to be acquired

September was an extraordinary month. Private owners objected to the removal of so-called heritage buildings in the heart of Kuala Lumpur to make way for the mass rapid transit (MRT) project, Sime Darby Bhd announced the purchase of 30% equity interest in Eastern & Oriental Bhd (E&O) and Permodalan Nasional Bhd (PNB) announced its proposed buyout of S P Setia Bhd. Reporters had a field day writing these stories and everyone put in their two cents’ worth.

With regard to the acquisition of land for the MRT, an understanding of the basic fundamentals will allow us to find a balance between what the MRT contractors want to do and market perception of what they are doing.

The land acquisition situation is similar to that of Indah Water, where everybody wants their wastewater to be flushed away but do not want a wastewater treatment plant next to their building or home. This is known as the not-in-my-backyard syndrome, common not only in Malaysia, but all over the world.

The Land Acquisition Act 1960 has a focused objective. Article 3, part 2 says:
“The State Authority may acquire any land that is needed for:
•    Any public purpose;
•    By any person or corporation for any purpose that in the opinion of the State Authority is beneficial to the economic development of Malaysia or any part thereof or to the public generally or to any class of the public; or
•    For the purpose of mining or for residential, agricultural, commercial, industrial or recreational purposes or any combination of such purposes.”

This covers a range of activities for which the state authority or its agents may acquire land owned by private individuals.

The original mandate of the Land Acquisition Act stipulated by the British, which is still valid in the UK, provides the condition that private land can only be acquired for public purposes.

Malaysia’s version of the Act has been amended to allow the acquisition of private land for the development of economic housing, commercial, agricultural and residential properties, and for recreational purposes. This could be construed as taking over valuable city land and using it for commercial or residential enterprise, thereby making extraordinary profits for the acquirer at the expense of the original owner.

In Hong Kong and Singapore, the acquisition is justified by providing adequate compensation to the original owner and by charging him a fee for infrastructure improvements. In Hong Kong, the vendor may even participate in the project by investing the proceeds of the acquisition in it.

I believe that some of these solutions have been introduced to the MRT negotiations for the acquisition of real estate. The moment a section 4 notice of intention to acquire under the Act is given, the value of the land is frozen, followed by the issue of a section 8 notice of acquisition, by which point government valuers would have assessed the site’s market value based on recent transactions.

The land officer chairs the first meeting between the acquirer and land owner in a quasi-judicial capacity. He would usually confirm the government valuer’s figure, which is based on real estate transaction data taken from similar locations over the past 12 months. Failing that, the land officer may have to identify a similar situation in other parts of the city. Although some of the owners might not agree to the acquisition as they are not willing sellers, the Land Acquisition Act assumes that the property is being acquired from a willing seller for the purposes of determining the market value of the property.

Where there is land acquisition, especially in commercial or prime residential locations, there is usually an element of loss for those whose land has been acquired and who are unable to replace it with another tract of suitable value in the vicinity. This depends heavily on how soon the compensation is paid. Despite the loss, the acquirer usually cites the greater good of the nation to justify the transaction.

In reality, there is no equitable answer to satisfy all parties, but everybody agrees that Kuala Lumpur requires a well-connected MRT.

As for the recent acquisitions in property companies by Sime Darby and PNB, the question is, were they the right thing to do? Sime Darby and PNB are cash-rich government-linked companies with the latter being a pension fund similar to the Employees Provident Fund (EPF), except that it only covers its unit holders. The acquisitions in E&O and S P Setia have raised interesting side issues that will not go away.

For example, since there was no single major shareholder in E&O, Sime Darby’s acquisition of a strategic 30% equity interest from three parties could be seen as putting funds together to buy into a company that operates in parts of Malaysia where Sime Darby is not represented. The purchase of a company with substantial interests in Penang and Johor, where Sime Darby has no adequate representation, is useful.

Furthermore, E&O’s ability to build an excellent team of managers and a marketing strategy has allowed it to leapfrog other property companies in terms of perception. This put it on the Top 10 list of The Edge Top Property Developers Awards from 2007 to 2009. E&O has tapped into consumer preferences, which is moving away from the standard 20ft x 60ft terraced house that has been the staple of township property developers for the last 50 years. The consumer now wants better designed but affordable real estate.

With banks coming up with unique lending practices, there is no doubt that people are prepared to commit to a lifetime of investment for a well-designed and finished property, which they feel will appreciate in value.

Therefore, the success of Malaysian real estate development depends on the vision of the leaders of the companies that are running the projects.

PNB’s purchase of S P Setia is a straightforward acquisition of a property company that has created winning townships in a very short time frame and has a core of investors who will buy anything it builds. It has been ranked the best developer in The Edge Top Property Developers Awards six times since the inception of the awards.

S P Setia is represented by the affable Tan Sri Liew Kee Sin, who runs his company by hiring good talent and empowering them to obtain the best practices of developers around the world. Similar to Sunway Group’s Tan Sri Jeffrey Cheah, Liew has won accolades for turning a tract of land he purchased in Shah Alam into his most successful project. He persuaded people from Kuala Lumpur to live in the wilds of Setia Alam by connecting it to the major expressways and adding some pressure to demand by locating an exclusive private college and a badminton academy in the area, and by adopting an eco theme.

Liew commands a loyal army of lieutenants with an aura of invincibility. PNB has probably bought the best and most-focused property and project management team in Malaysia. If it takes a leaf out of the EPF’s book and refrains from tampering with S P Setia’s management and allows it to continue its work, it could be a true 1Malaysia success story.

Kumar Tharmalingam is an independent director on the board of Sime Darby Property and CEO of Malaysia Property Inc, a government initiative to bring foreign direct investment to Malaysian real estate

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 880, Oct 17-23, 2011