Embracing change

Change can be difficult after 45 years of doing the same thing. However, in under six months, the staff, customers and vendors of the Selangor State Development Corporation, better known as PKNS, are starting to feel a gradual change in the state development arm’s corporate culture and in the way it does business.

General manager Othman Omar, appointed by the PKR-led state government which came into power in the last general election, came to work in the first week of February and got down to “do what he had to do” straightaway.

 “We have to improve our cost effectiveness and delivery system to remain competitive. About 45 years ago, we were the only developer and whatever we built was taken up immediately but today, we have to be more innovative in our delivery system and position our products in order to compete with other developers,” Othman tells City & Country.

“We have to make sure we are up to the mark in terms of quality. Besides being customer-centric, we need to be more aggressive in our sales and marketing. We have to set benchmarks which we have never had before simply because we never had to compete so much before,” he adds.

PKNS has therefore embarked on an internal transformation plan to get its staff to embrace shared values and a new corporate culture that is focused on the customer. “We don’t want to be just another government agency. Instead of waiting for people to come to us for whatever it is, we are now going out to them. So this needs a change in mindset from within the organisation,” declares Othman.

PKNS celebrated its 45th year on Aug 1. There are about 800 staff at its headquarters, not including its many subsidiaries such as Worldwide Holdings and De Palma Management Service Sdn Bhd, so cultivating change is definitely no easy task. “Nothing good comes easy, nothing worthwhile comes without criticism and comments. I have a mission to deliver and there is no time to look back and complain or nag. I just have to be positive and move forward,” says Othman.

Key performance indicators have been set for various departments, including two new departments — business development (BD) and marketing.

The BD department, for instance, has set a target to bring in RM2 billion worth of new projects in two years and Othman is happy to note that it has already identified 10 potential projects with an estimated total gross development value of RM10 billion that can either be done via reverse privatisation with state agencies or joint ventures.

To improve the quality and marketability of its products, architects and consultants now have to pitch their designs and proposals to PKNS, something not done previously. A rating system has also been introduced for consultants to ensure quality of work.

“Some architects and consultants have been working for us for years and they may be complacent after a while so they need to buck up,” Othman says.

Contracts are given via an open tender system. There are no more direct or negotiated contracts to ensure cost effectiveness. All these translate to improved cash flow and more attractively priced products for PKNS’ customers, he adds.

PKNS is looking at more competitive branding and marketing strategies for its properties, especially those in new township developments and for some new high-end premium products that have yet to be launched.

Spearheading growth
Despite the ongoing internal changes, PKNS’ role of spearheading socio-economic growth through township development has not wavered, says Othman. “We continue to open up areas and lay the infrastructure such as roads and water supply to prepare the area for development into townships with vibrant communities. We inject a lot of money, or capital expenditure, to put the initial infrastructure in place. So we are more than just a property developer; we create the catalyst for development,” he declares.

Petaling Jaya, Shah Alam and Kota Damansara are among the townships that were pioneered by PKNS. The 4,000-acre Kota Damansara, for example, was previously rubber plantations in an area called Bandar Baru Sungai Buloh. “We built Kota Damansara by ourselves for the first 10 years and only after we built the roads and infrastructure and changed the name to Kota Damansara did other developers join us in developing parcels of land there.”

PKNS has pioneered 11 townships since it was established but its newer ones are located outside the Klang Valley, like in Bernam Jaya in Hulu Selangor, Antara Gapi in Serendah and Kota Puteri in Ijok. Its latest development is an industrial hub called Selangor Science Park 2 (SSP2) adjacent to Cyberjaya.

Challenges
Landbanks at its more strategically located townships like Shah Alam, Bangi and Kota Damansara are already 95% developed, with only pockets left.

This poses a huge challenge for PKNS — to build and sell property outside the Klang Valley, what more during the current soft market conditions.

The initial high capital expenditure for infrastructure development is also poses a problem. For example, PKNS has already spent RM500 million on infrastructure costs at SSP2, an industrial hub with commercial and residential components.

Another difficult task for the state development arm is balancing its economic and social responsibilities. “Although our focus is on building communities, we also have to strike a smart balance between undertaking heavily subsidised social projects and profit-driven ones,” says Othman.

“It is not a sin to make profits. When we do so, we plough it back into our projects which are social in nature. When we build low-cost houses, we subsidise as much as RM20,000 to RM30,000 per unit. And once we build them, we have to maintain them. We could charge RM5 per unit per month whereas the actual cost is RM50 per unit per month. And of course, some of them don’t even pay the RM5. So when there are repairs or upgrading to be done, we subsidise the cost as well. There are so many ways in which we subsidise, and after building about 60,000 low-cost houses and 50,000 medium-cost houses, can you calculate how much is actually subsidised in our social projects?

“So when people look at us building premium homes, they have to understand that we have to sell premium homes to make profits so that these profits can be used to subsidise the socially driven projects.

“We cannot afford to keep building social projects without making profits or we may end up borrowing millions from the state government and we can’t be asking the government for money every time, can we?” asks Othman.

PKNS has developed over RM45 billion worth of properties to date. It recorded revenue of some RM825 million last year and hopes to surpass that this year.

Riding out the soft market
The state development arm’s immediate goal, however, is to ride out the current soft market and come out stronger when the market picks up. It is re-evaluating the timing of its new launches, especially those outside the Klang Valley that need new marketing strategies. Says Othman: “We must make sure we don’t lose money. We have had a history of profitability since our inception 45 years ago, so we are not about to make losses. Certainly, we want to improve our liquidity.”

There are, however, opportunities in the current market, such as a higher chance of acquiring land at lower prices and more joint-venture openings which PKNS may not come across during better market conditions.

To improve liquidity, it is raising RM700 million in Islamic commercial papers and is looking at REITs to unlock the values of its commercial properties.

According to Othman, since news came out about its interest in REITs, it has received several offers from REIT managers and some of them are almost too attractive to resist.

“We want to take our time and choose the right one,” he says. Othman was the managing director of KSJ World Group of Companies that is involved in, among other businesses, project development and engineering consultancy. He had also served as Propel Bhd’s head of engineering and contracts as well as director of S P Setia Bhd subsidiary KLWK Sdn Bhd.

According to him, PKNS seems to be doing fairly well in the downturn compared with some other developers. This could be because of its competitive pricing, and the fact that its products are usually 80% or almost completed before they are launched.

“This is what we’ve been doing for some time. We build them and not launch them until they are almost completed. When we got the land from the government previously, it was without titles, hence we could not actually sell it, so we built first. But we continued with this practice as we found that many prefer to buy after they’ve seen the houses,” explains Othman.

New business strategies
While previously PKNS tended to privatise land for development to other developers, now it is offering to develop private land, especially in the Klang Valley, via joint ventures. “We feel we have the capacity either through joint ventures with landowners, state agencies or even developers to develop their land. We believe we have the expertise, financial capacity plus good track record and other resources required to go into an effective collaboration with them.

“In other words, we don’t have to specifically look at our own depleting Klang Valley landbank so this is an option we are looking at,” Othman says.

PKNS still has some 12,000 acres in its landbank in Selangor. The more strategically located are in SSP2; Setia Alam (600 acres), Bukit Cerakah (350 acres); Gombak (2,100 acres); Klang (1,500 acres); and some pockets in Bangi, Shah Alam and Kota Damansara.

According to Othman, several landowners — including established developers — have approached PKNS to develop their land in the Klang Valley, in areas such as Subang Jaya, Kajang, Petaling Jaya (PJ) and Damansara.

Negotiations are ongoing with a few private landowners and even other state agencies (reversed privatisation) that own land in prime areas for mixed developments in PJ, Ampang and other parts of the Klang Valley. “We are not at liberty to disclose at the moment because we are still in negotiations and in the process of inviting local and foreign investors to participate in these mixed developments,” says Othman.     

“We feel if the terms are right, joint ventures can be synergistic. Before, when PKNS went into joint ventures, the state was sometimes taken for a ride, so to speak. The terms were very loose, so we need stringent terms that favour both parties.”

Redeveloping PKNS flats
Besides joint and reversed privatisation ventures, the state development arm is also focusing on the urban redevelopment of some of the old PKNS flats located in strategic locations in the Klang Valley.
“Some of them were constructed over 30 years ago and are in very strategic locations, so we are looking at how to redevelop them.”

Among these are some 144 low-cost apartments with some shophouses on 6.4-acre site on Jalan Jelatek in Ampang, near the Jelatek LRT station, and 663 apartments on a 12-acre site near Jalan Enggang in Keramat, about 1.5km from the Jelatek site. These run-down flats have turned into urban slums, with the one on Jalan Enggang, nicknamed Colombia, as it is said to be a hotspot for drug activities.    

“We will demolish the old apartments and come up with new higher value developments to take advantage of their locations, especially the smaller site near the LRT,” says Othman.

The proposed redevelopment plans for these sites have been submitted to the local councils while negotiations over compensation with tenants and property owners are ongoing.

Earlier plans were to tear down the old flats and build new ones in their place but these have changed since to take advantage of the strategic location of the Jalan Jelatek site to build higher-end developments instead of affordable homes.

“I had to convince people that we should not lose money, considering the prime land. We can make money here to help other families. We were about to lose RM10 million based on the original plans for the Jelatek site,” says Othman.

“With the change in plans, the profits can now be used to redevelop the Jalan Enggang site to build 2,000 affordable homes there which we would otherwise not have the funds to do,” he adds.

Othman stresses again that being socially responsible does not mean losing money. “We are aware of the many stakeholders, the board, rakyat, state, home buyers… so we have to take into account everyone’s interest — what’s good for the people. It is easy to say in principle but ultimately, it is in striking a balance.”

A mixed development comprising offices, retail, hotel and serviced apartments is now the plan for the Jelatek site. Commercial developments are nothing new to PKNS, having developed SACC Mall in Shah Alam and Menara PKNS in PJ, among others.  

“We are currently evaluating offers to partner us in the Jelatek project,” Othman says. Meanwhile, the Colombia site will be redeveloped into an affordable residential development.

Although PKNS hopes to start the Jalan Enggang redevelopment project by year-end, it depends on negotiations with property owners and tenants.  

Another prime site slated for redevelopment is PKNS’ own headquarters in PJ; about seven acres of the original nine-acre site has been sold, but PKNS hopes to partner the party that bought the land to redevelop the entire nine acres.

“We want to maximise the green areas and build upwards. The proposed plans have been sent to MBPJ, whose main concern is the traffic impact,” says Othman. Included in the proposed plans are residential and office towers, and a green office building to house PKNS’ new headquarters.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 766, Aug 3-9, 2009.