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Privatisations to exacerbate commercial glut?
• Avoid property investment companies. The spate of land privatisation deals in the Klang Valley, especially in Kuala Lumpur is likely to worsen the glut of commercial space. This is bad news for property investment companies such as KLCC Property and reaffirms our underperform call on the stock. We are less perturbed by the impact on the residential sector as demand will continue to dictate supply. Our take on land privatisations would be more positive should they be led primarily by the private sector as demand and supply of commercial space would be more balanced and driven by the profit motive. We continue to rate the property sector an OVERWEIGHT but now prefer township developers as the privatisations may extend the glut to the condo market. SP Setia remains our core holding for the property sector.
• A flurry of land privatisations. We believe the flurry of land privatisation projects in the Klang Valley by the government is aimed at accelerating the development of strategic landbank and boosting economic growth. While the immediate impact will be positive as it will fire up the property sector, open up idle land for development and bring in revenue for the government, the longer-term repercussions may be more negative. The Klang Valley is already beginning to feel the effects of oversupply of office space and hotel rooms. As most of the land privatisations involve commercial land in Kuala Lumpur, new supply will exert more downward pressure on occupancies and rates unless demand picks up substantially.
• Huge projects in the pipeline. Besides the mammoth 3,000-acre joint development of Sungai Buloh by the government and EPF, other huge projects announced include the 400-acre urban redevelopment of the Sungei Besi Royal Malaysian Air Force base, the 85-acre Kuala Lumpur International Financial District at Dataran Perdana and the 62-acre Naza KL Metropolis Development at Jalan Duta. Numerous other land privatisations will soon to be awarded, including the 204 acres in Jalan Cochrane, 20-30 acres in Ampang Hilir and land at Jalan Peel and Jalan Lidcol too. These projects are massive and will certainly add substantial commercial space.
• Good news for market, but… Although the announcement of land privatisation exercises is positive for the share prices of property and construction firms as the spillover possibilities will excite investors, there could be a price to pay in the longer term, especially if the new supply competes with the private sector and is not matched by genuine demand. Our take would be more positive should the privatisations be driven by the private sector, particularly by companies with the balance sheets to take on big projects and the track records of adding value and tapping into niche markets. So far, several of the privatisations have reportedly gone to unlisted companies or government entities, which may be counting on other government agencies to fill up the space.
Privatisations galore
We believe the flurry of land privatisation projects in the Klang Valley by the government is aimed at accelerating the development of strategic landbank and boosting economic growth. While the immediate impact will be positive as it will fire up the property sector, open up idle land for development and bring in revenue for the government, the longer-term repercussions may be more negative. The Klang Valley is already beginning to feel the effects of oversupply of office space and hotel rooms.
Most of the land privatisations involve commercial land in Kuala Lumpur and the obvious choice for developers would be to build mixed developments encompassing office space, retail space, hotels and condos.
While we are less concerned about the demand-supply equilibrium for retail space and residential properties in the Klang Valley in general, the sudden development of large malls and condos in selected locations may also result in short-term supply pressure in those areas. So far, there have been announcements or indications of more than half a dozen land privatisation projects. Some of them will be carried out on an open tender basis while others will take the traditional route of negotiations. There will also be transfers between government companies. Regardless of the method of transfer or sale, the end result will be an increase in supply of various types of properties.
The biggest privatisation so far is the 3,000 acres in Sungai Buloh, Selangor, adjacent to established townships such as Kota Damansara and Tropicana. As the land is massive and is much sought after, the project will be jointly developed by the government and the Employees Provident Fund (EPF) as master planners. The spate of recent land privatisations by the government to a private developer was kicked off by the farming out of the Jalan Duta land in Kuala Lumpur to Naza TTDI late last year.
While the RM230psf pricing of the land appears fair, the privatisation was undertaken without open tender. Two recently reported new projects – the Sungei Besi military airport and Dataran Perdana land – are to be developed by consortiums that include the government agency, 1Malaysia Development Bhd (1MDB).
Jalan Duta land
The privatisation of pockets of strategic commercial land bank kicked off with Naza TTDI’s 62.5 acres in Jalan Duta. In return for the prime land, Naza TTDI will build Matrade Centre, Malaysia’s largest exhibition and convention centre at a cost of RM628m. Matrade Centre sits on 13.1 acres of land adjacent to Naza’s plot and will have 1 million sq ft of gross built-up floor area. It will house an auditorium that can accommodate 1,230 people, a multi-purpose hall, 12 exhibition halls, meeting rooms and display areas. Construction should start in 2Q10 and is targeted to complete by 2014.
The Jalan Duta land is near the upscale residential areas of Kenny Hills, Taman Duta, Mont’ Kiara and Damansara Heights as well as various government buildings along Jalan Duta and the future Istana Negara. It is also has excellent accessibility via several highways including Jalan Duta-Sungai Buluh Expressway, Jalan Kuching and Duke Highway. The land represents one of the largest tracts of contiguous land in that prime area. Press reports indicate that the project has an estimated gross development value of RM15bn and will include a hotel, shopping mall and office tower to complement Matrade Centre. There is also speculation that the office building will have 100 storeys, making it the tallest building in Malaysia.
RRIM land in Sg. Buloh
In March, the government announced its plan to develop the 3,000-acre land in Sg. Buloh into a residential and commercial hub. The land currently belongs to the Rubber Research Institute of Malaysia (RRIM). EPF and the government will form a JV to develop the land which is made up of nine parcels. Details of the project are unavailable as the masterplan has yet to be drawn up. EPF may gradually launch the parcels of land over a period of as long as 8-10 years and is likely to take a JV stake in each parcel, pledging the land as equity while other developers contribute their share of capital. The 3,000-acre land is largely a rubber estate for which land cost/value typically ranges between RM15 and RM20 psf.
Although the project is likely to follow a township concept, there are likely to be commercial components to cater to the office and retail needs of residents. Given the size of the project, which is slightly smaller than SP Setia’s 3,930-acre Bandar Setia Alam in Shah Alam, we believe the development period could be longer than the estimated 8-10 years. SP Setia’s township has enjoyed tremendous success and record sales but is estimated to take 15 years to complete. Unless EPF ropes in other aggressive developers to accelerate development of the project, it could very well take longer than 15 years to complete the project.
Sungei Besi land
Two weeks back, the press reported that the government will transfer ownership of its land in Sungai Besi, currently used as the base for the Royal Malaysian Air Force, to 1MDB for development into a multi-billion ringgit commercial project. 1MDB will develop the land via a JV with Qatar Investment Authority (QIA). The development will be environmentally friendly, systematic, liveable and people-centric. The project can be considered an urban renewal project and should include open public spaces, public parks and a library. It was also reported that 1MDB may further tap the expertise of
another of its foreign partners, Abu Dhabi's Mubadala Development Co, but has yet to identify developers to participate in the project.
The Sungei Besi land measures around 400 acres and is widely considered one of the most prime large tracts of land in Kuala Lumpur. It is located between the current National Palace, Taman Seputeh and Taman Desa. Accessibility is very good as it is linked by highways on three sides of the land. Despite its size, we believe the project is likely to be developed into high-rise high density development, particularly since a portion of the land could be kept for public spaces and parks. The Sungei Besi land is located not far away from the highly successful Bandar MidValley project, which
measures 50 acres and includes two massive shopping complexes, two hotels and several office towers. The Sungei Besi land project could be many times the size of Bandar MidValley.
Kuala Lumpur International Financial District
It was reported in the press recently that the Abu Dhabi government would invest US$2bn via Mubadala Development Company to develop the Kuala Lumpur International Financial District (KLIFD) on 85 acres of land popularly known as Dataran Perdana in Kuala Lumpur. A JV company with 1MDB will be established to undertake a mixed developed that will include commercial, retail and residential properties. The project is flanked by the Royal Selangor Golf Club to its right and Times Square further to its left.
Commercial space glut?
As we stated in the sector update released on 5 May, we are increasingly concerned about the commercial space market in the Klang Valley, particularly the office space and hotel subsectors. We are not perturbed by potential supply in the retail space market as successful major malls such as Suria KLCC, Megamall, Sunway Pyramid, 1Utama and Sungai Wang have their own specific niches that can easily be defended.
Recall that overall occupancy rates for office space in the Klang Valley softened in 2009 for the second year in a row. Office space occupancy in Kuala Lumpur and Selangor slipped as new supply totalling 4.2m sq ft outpaced demand growth of 2.5m sq ft. Overall occupancy for the Klang Valley slipped 0.9% pts to 83.7% in 2009, after falling 1% pt to 84.6% in 2008. In line with the fall in occupancy rates, rental rates also came under pressure. Newly completed office buildings are taking longer to fill and building owners have had to lower rates to attract tenants. In fact, occupancy rates in the Klang Valley are among the lowest in the country, better than only Johor and Penang.
As for hotels, the average occupancy rate in the Klang Valley pulled back 2.5% pts to 63.2% in 2009, continuing 2008’s 5.9% pt collapse to 65.7%. The occupancy rate in Kuala Lumpur fell from 68.8% to 65.9% while in Selangor, it dropped from 57.2% to 57.2%. Although the total supply of rooms in the Klang Valley dipped 0.8% to 43,789, demand was even weaker, falling 3.4%. This is unexpected given the 7% rise in tourist arrivals to 23.6m in 2009, the highest ever. One reason could be that Klang Valley hotels cater largely to business travellers rather than tourists.
The prospects for office space and hotels are not promising due to the substantial amount of supply coming onstream. In Kuala Lumpur, the future supply to existing stock ratio for office space is 30%, higher than the national average of 25%. It is even worse for hotels at 66%, more than double the national average of 31%. These figures do not even take into consideration the additional supply from the various land privatisation exercises, which are concentrated mostly in Kuala Lumpur. Their development is likely to put even more pressure on occupancy rates which are already heading south (see Figure 11).
Valuation and recommendation
Although the announcement of land privatisation exercises is positive for the share prices of property and construction companies as it may fire up investors, the longer-term impact may be less positive, especially if the new supply competes with the private sector and is not matched by genuine demand. Our take would be more positive should the privatisations be driven by the private sector, particularly by companies with the balance sheets to take on big projects and the track records of adding value and tapping into niche markets. So far, several of the privatisations have reportedly gone to unlisted companies or government entities, which may be counting on other government agencies to fill up the space.
The Klang Valley is already feeling the effects of oversupply in the office and hotel segments and the spate of land privatisation deals in the Klang Valley and Kuala Lumpur in particular is likely to worsen the glut. This is bad news for property investment companies such as KLCC Property and reaffirms our underperform call on the stock. For investors who want exposure to high-yielding property investment companies, we prefer Malaysian REITs for their significantly higher yields. Axis REIT (AXRB MK; NR) remains our favourite REIT for its aggressive yet prudent management.
We continue to rate the property sector an OVERWEIGHT but now prefer township developers as the privatisations may extend the glut to the condo market. There is already a glut of condos in the KLCC area due to massive building. New supply from other newly opened strategic locations will add to that supply. While we continue to like E&O for its prime landbank in Kuala Lumpur and Penang, it will face increasing competition from new condo projects on privatised land. SP Setia remains our core holding for the property sector. We make no changes to our earnings forecasts, target prices and recommendations for all the property stocks under our coverage.
Privatisations to exacerbate commercial glut?
• Avoid property investment companies. The spate of land privatisation deals in the Klang Valley, especially in Kuala Lumpur is likely to worsen the glut of commercial space. This is bad news for property investment companies such as KLCC Property and reaffirms our underperform call on the stock. We are less perturbed by the impact on the residential sector as demand will continue to dictate supply. Our take on land privatisations would be more positive should they be led primarily by the private sector as demand and supply of commercial space would be more balanced and driven by the profit motive. We continue to rate the property sector an OVERWEIGHT but now prefer township developers as the privatisations may extend the glut to the condo market. SP Setia remains our core holding for the property sector.
• A flurry of land privatisations. We believe the flurry of land privatisation projects in the Klang Valley by the government is aimed at accelerating the development of strategic landbank and boosting economic growth. While the immediate impact will be positive as it will fire up the property sector, open up idle land for development and bring in revenue for the government, the longer-term repercussions may be more negative. The Klang Valley is already beginning to feel the effects of oversupply of office space and hotel rooms. As most of the land privatisations involve commercial land in Kuala Lumpur, new supply will exert more downward pressure on occupancies and rates unless demand picks up substantially.
• Huge projects in the pipeline. Besides the mammoth 3,000-acre joint development of Sungai Buloh by the government and EPF, other huge projects announced include the 400-acre urban redevelopment of the Sungei Besi Royal Malaysian Air Force base, the 85-acre Kuala Lumpur International Financial District at Dataran Perdana and the 62-acre Naza KL Metropolis Development at Jalan Duta. Numerous other land privatisations will soon to be awarded, including the 204 acres in Jalan Cochrane, 20-30 acres in Ampang Hilir and land at Jalan Peel and Jalan Lidcol too. These projects are massive and will certainly add substantial commercial space.
• Good news for market, but… Although the announcement of land privatisation exercises is positive for the share prices of property and construction firms as the spillover possibilities will excite investors, there could be a price to pay in the longer term, especially if the new supply competes with the private sector and is not matched by genuine demand. Our take would be more positive should the privatisations be driven by the private sector, particularly by companies with the balance sheets to take on big projects and the track records of adding value and tapping into niche markets. So far, several of the privatisations have reportedly gone to unlisted companies or government entities, which may be counting on other government agencies to fill up the space.
Privatisations galore
We believe the flurry of land privatisation projects in the Klang Valley by the government is aimed at accelerating the development of strategic landbank and boosting economic growth. While the immediate impact will be positive as it will fire up the property sector, open up idle land for development and bring in revenue for the government, the longer-term repercussions may be more negative. The Klang Valley is already beginning to feel the effects of oversupply of office space and hotel rooms.
Most of the land privatisations involve commercial land in Kuala Lumpur and the obvious choice for developers would be to build mixed developments encompassing office space, retail space, hotels and condos.
While we are less concerned about the demand-supply equilibrium for retail space and residential properties in the Klang Valley in general, the sudden development of large malls and condos in selected locations may also result in short-term supply pressure in those areas. So far, there have been announcements or indications of more than half a dozen land privatisation projects. Some of them will be carried out on an open tender basis while others will take the traditional route of negotiations. There will also be transfers between government companies. Regardless of the method of transfer or sale, the end result will be an increase in supply of various types of properties.
The biggest privatisation so far is the 3,000 acres in Sungai Buloh, Selangor, adjacent to established townships such as Kota Damansara and Tropicana. As the land is massive and is much sought after, the project will be jointly developed by the government and the Employees Provident Fund (EPF) as master planners. The spate of recent land privatisations by the government to a private developer was kicked off by the farming out of the Jalan Duta land in Kuala Lumpur to Naza TTDI late last year.
While the RM230psf pricing of the land appears fair, the privatisation was undertaken without open tender. Two recently reported new projects – the Sungei Besi military airport and Dataran Perdana land – are to be developed by consortiums that include the government agency, 1Malaysia Development Bhd (1MDB).
Jalan Duta land
The privatisation of pockets of strategic commercial land bank kicked off with Naza TTDI’s 62.5 acres in Jalan Duta. In return for the prime land, Naza TTDI will build Matrade Centre, Malaysia’s largest exhibition and convention centre at a cost of RM628m. Matrade Centre sits on 13.1 acres of land adjacent to Naza’s plot and will have 1 million sq ft of gross built-up floor area. It will house an auditorium that can accommodate 1,230 people, a multi-purpose hall, 12 exhibition halls, meeting rooms and display areas. Construction should start in 2Q10 and is targeted to complete by 2014.
The Jalan Duta land is near the upscale residential areas of Kenny Hills, Taman Duta, Mont’ Kiara and Damansara Heights as well as various government buildings along Jalan Duta and the future Istana Negara. It is also has excellent accessibility via several highways including Jalan Duta-Sungai Buluh Expressway, Jalan Kuching and Duke Highway. The land represents one of the largest tracts of contiguous land in that prime area. Press reports indicate that the project has an estimated gross development value of RM15bn and will include a hotel, shopping mall and office tower to complement Matrade Centre. There is also speculation that the office building will have 100 storeys, making it the tallest building in Malaysia.
RRIM land in Sg. Buloh
In March, the government announced its plan to develop the 3,000-acre land in Sg. Buloh into a residential and commercial hub. The land currently belongs to the Rubber Research Institute of Malaysia (RRIM). EPF and the government will form a JV to develop the land which is made up of nine parcels. Details of the project are unavailable as the masterplan has yet to be drawn up. EPF may gradually launch the parcels of land over a period of as long as 8-10 years and is likely to take a JV stake in each parcel, pledging the land as equity while other developers contribute their share of capital. The 3,000-acre land is largely a rubber estate for which land cost/value typically ranges between RM15 and RM20 psf.
Although the project is likely to follow a township concept, there are likely to be commercial components to cater to the office and retail needs of residents. Given the size of the project, which is slightly smaller than SP Setia’s 3,930-acre Bandar Setia Alam in Shah Alam, we believe the development period could be longer than the estimated 8-10 years. SP Setia’s township has enjoyed tremendous success and record sales but is estimated to take 15 years to complete. Unless EPF ropes in other aggressive developers to accelerate development of the project, it could very well take longer than 15 years to complete the project.
Sungei Besi land
Two weeks back, the press reported that the government will transfer ownership of its land in Sungai Besi, currently used as the base for the Royal Malaysian Air Force, to 1MDB for development into a multi-billion ringgit commercial project. 1MDB will develop the land via a JV with Qatar Investment Authority (QIA). The development will be environmentally friendly, systematic, liveable and people-centric. The project can be considered an urban renewal project and should include open public spaces, public parks and a library. It was also reported that 1MDB may further tap the expertise of
another of its foreign partners, Abu Dhabi's Mubadala Development Co, but has yet to identify developers to participate in the project.
The Sungei Besi land measures around 400 acres and is widely considered one of the most prime large tracts of land in Kuala Lumpur. It is located between the current National Palace, Taman Seputeh and Taman Desa. Accessibility is very good as it is linked by highways on three sides of the land. Despite its size, we believe the project is likely to be developed into high-rise high density development, particularly since a portion of the land could be kept for public spaces and parks. The Sungei Besi land is located not far away from the highly successful Bandar MidValley project, which
measures 50 acres and includes two massive shopping complexes, two hotels and several office towers. The Sungei Besi land project could be many times the size of Bandar MidValley.
Kuala Lumpur International Financial District
It was reported in the press recently that the Abu Dhabi government would invest US$2bn via Mubadala Development Company to develop the Kuala Lumpur International Financial District (KLIFD) on 85 acres of land popularly known as Dataran Perdana in Kuala Lumpur. A JV company with 1MDB will be established to undertake a mixed developed that will include commercial, retail and residential properties. The project is flanked by the Royal Selangor Golf Club to its right and Times Square further to its left.
Commercial space glut?
As we stated in the sector update released on 5 May, we are increasingly concerned about the commercial space market in the Klang Valley, particularly the office space and hotel subsectors. We are not perturbed by potential supply in the retail space market as successful major malls such as Suria KLCC, Megamall, Sunway Pyramid, 1Utama and Sungai Wang have their own specific niches that can easily be defended.
Recall that overall occupancy rates for office space in the Klang Valley softened in 2009 for the second year in a row. Office space occupancy in Kuala Lumpur and Selangor slipped as new supply totalling 4.2m sq ft outpaced demand growth of 2.5m sq ft. Overall occupancy for the Klang Valley slipped 0.9% pts to 83.7% in 2009, after falling 1% pt to 84.6% in 2008. In line with the fall in occupancy rates, rental rates also came under pressure. Newly completed office buildings are taking longer to fill and building owners have had to lower rates to attract tenants. In fact, occupancy rates in the Klang Valley are among the lowest in the country, better than only Johor and Penang.
As for hotels, the average occupancy rate in the Klang Valley pulled back 2.5% pts to 63.2% in 2009, continuing 2008’s 5.9% pt collapse to 65.7%. The occupancy rate in Kuala Lumpur fell from 68.8% to 65.9% while in Selangor, it dropped from 57.2% to 57.2%. Although the total supply of rooms in the Klang Valley dipped 0.8% to 43,789, demand was even weaker, falling 3.4%. This is unexpected given the 7% rise in tourist arrivals to 23.6m in 2009, the highest ever. One reason could be that Klang Valley hotels cater largely to business travellers rather than tourists.
The prospects for office space and hotels are not promising due to the substantial amount of supply coming onstream. In Kuala Lumpur, the future supply to existing stock ratio for office space is 30%, higher than the national average of 25%. It is even worse for hotels at 66%, more than double the national average of 31%. These figures do not even take into consideration the additional supply from the various land privatisation exercises, which are concentrated mostly in Kuala Lumpur. Their development is likely to put even more pressure on occupancy rates which are already heading south (see Figure 11).
Valuation and recommendation
Although the announcement of land privatisation exercises is positive for the share prices of property and construction companies as it may fire up investors, the longer-term impact may be less positive, especially if the new supply competes with the private sector and is not matched by genuine demand. Our take would be more positive should the privatisations be driven by the private sector, particularly by companies with the balance sheets to take on big projects and the track records of adding value and tapping into niche markets. So far, several of the privatisations have reportedly gone to unlisted companies or government entities, which may be counting on other government agencies to fill up the space.
The Klang Valley is already feeling the effects of oversupply in the office and hotel segments and the spate of land privatisation deals in the Klang Valley and Kuala Lumpur in particular is likely to worsen the glut. This is bad news for property investment companies such as KLCC Property and reaffirms our underperform call on the stock. For investors who want exposure to high-yielding property investment companies, we prefer Malaysian REITs for their significantly higher yields. Axis REIT (AXRB MK; NR) remains our favourite REIT for its aggressive yet prudent management.
We continue to rate the property sector an OVERWEIGHT but now prefer township developers as the privatisations may extend the glut to the condo market. There is already a glut of condos in the KLCC area due to massive building. New supply from other newly opened strategic locations will add to that supply. While we continue to like E&O for its prime landbank in Kuala Lumpur and Penang, it will face increasing competition from new condo projects on privatised land. SP Setia remains our core holding for the property sector. We make no changes to our earnings forecasts, target prices and recommendations for all the property stocks under our coverage.
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