1MDB’s KL property push raises concern

1Malaysia Development Bhd’s push into the property sector is raising concerns about the company’s rising debt and a possible commercial property glut in KL.

The company is involved in the 70-acre RM26bn Tun Razak Exchange (or TRX – previously known as the KL International Financial District) – 25 buildings and a new stock exchange – 20m square feet of floor area. It is supposed to serve as a financial services regional hub.

The government wants to remove subsidies on a host of goods, but in the case of TRX, it wants to give a host of “incentives” (notice how they are not referred to as subsidies when offered to corporations but by the euphemism of ‘incentives’) for the TRX project. These include:

• exemption of stamp duty on loan/service agreements
• a 100 per cent 10-year exemption from income tax.
• a 70 per cent five-year income tax exemption for real estate developers operating at the exchange

Ah, subsidies by any other name… and no doubt, other property developers and owners are not jumping with joy for they could well lose business and tenants.

The Edge weekly (6 August) reported that 1MDB’s total loans and borrowings rose to RM6.8bn (31 March 2011) from RM4.4bn a year earlier. 1MDB then piled on further debt of RM11bn to finance its investment in the energy sector including buying up Ananda Krishnan’s Tanjung assets for a hefty RM8.5bn. (It is now eyeing the energy assets of Genting, Sime Darby and Bukhary’s Malakoff, reports The Edge).

When it was first set up, 1MDB’s initial capital of RM5bn was raised from 30-year bonds. About RM3.5bn of this was invested in PetroSaudi. It later sold this for RM4.2bn and invested in Murabaha notes.

The Edge also reported the firm had pumped in RM194m into properties (70 acres for TRX and 484 acres of the Sungai Besi air force base in KL) but these are now revalued at RM826m! How did this happen?

The Sungai Besi land will be turned into ‘Bandar Malaysia’ – mixed development of 62m square feet including 17000 homes of which 4000 will be ‘affordable’ (and the remainder of 13000 ‘unaffordable’?).

Both TRX and Bandar Malaysia will require RM5.4bn funding for the first phase. Now where is 1MDB going to raise the money from? The government or state-managed funds?

The following week, The Edge (13 August) carried another report saying that property players are concerned about the oversupply of office space in KL.

Let’s see, what do we have now in the pipeline:

• TRX (by 1MDB)
• Bandar Malaysia (1MDB)
• KL Metropolis (Naza TTDI) – 1m sq feet (first phase)
• KL Eco City (S P Setia) – 5.6m sq feet
• the ridiculous 100-storey Warisan Merdeka tower (PNB) – 3m square feet

Current supply of office space in Klang Valley: 5m-7m sq feet per year.

At present, the occupancy rate for Grade A offices in KL is around 87 per cent.

Compare this to the time when KLCC was being built in 1997 – the occupancy rate in the city back then was a high 98 per cent. It plunged to 82 per cent soon after the towers were completed.

Are we heading for a commercial property glut in the coming years? You tell me.

(Thanks to The Edge for the statistics/data in this report).