Interesting times for property sector

Two big transactions, land negotiations took place over the past 10 days in KL

Over the past 10 days, two interesting deals were closed, both involving one of Kuala Lumpur’s finest mixed integrated property known as The Intermark located at the Jalan Ampang-Jalan Tun Razak intersection.

The freehold property is sited on about 2ha with office, retail and hotel components. Besides these two deals, there were also a couple of other land negotiations.

This effectively means that although the residential market – both secondary and primary – continues to be weak, developers are purchasing land for development purposes.

Back to the Intermark deals, on April 1 the Retirement Fund Inc, or Kumpulan Wang Amanah Pekerja (KWAP), issued a statement that it had acquired Integra Tower, which is part of The Intermark development, for RM1.065bil, purportedly with an annual yield of 6%. Rahim & Co, which has exclusive rights to sell three of the four components, brokered the deal.

Then, on Thursday (April 9), news broke that the four-star DoubleTree, managed by the Hilton group, was sold to Singapore-based real estate tycoon Asok Kumar Hiranandani of the Royal Group of Companies for RM388mil, or about RM720,000 a room for the 540-room hotel. Summer Realtors was involved for this hotel portion.

The sale of DoubleTree brings to mind another hotel deal in 2006, when construction and property development group Ireka Corp Bhd sold wholly-owned subsidiary Ireka Hotels Sdn Bhd to a Thai group for RM455mil. Ireka Hotels owns the 452-room Westin Hotel. The sale price works out to about RM1mil a room, among the highest until today.

Although that was about a decade ago, the sale of DoubleTree is no less interesting because of the other property components that come with it.

Breaking up of Intermark

A salient feature of this integrated development, besides the quality of its construction, design and specifications, is the different components that make up the whole. Although the vendor, New York-based BlackRock, split up the four components for sale, it was the whole which gave the development its unique features.

It had to break it up into different parts because as a single entity, priced at RM2.2bil or more, it would be too “hefty” for a single buyer, according to sources. Also, a single owner may not have the expertise to manage the different components. An office, mall and a hotel are different animals under a broad field known as property investment and management.

This takes us to The Intermark’s previous owners, the first being Macquarie Global Property Advisors (MGPA), an Australian-based private equity real estate fund advisory company and the current owner New York-based BlackRock, which broke up the asset into four different parcels to facilitate its sale. The Intermark has been in the market for about a year.

One of MGPA’s funds, MGPA Asia Fund II, bought a portfolio of assets in 2007 which comprised Empire Tower, City Square and Crown Princess in one single entity for RM680mil, according to press reports. It subsequently bought Plaza Ampang for an additional RM80mil.

MGPA, according to reports, subsequently invested RM1.3bil in construction and refurbishment and other costs. In other words, MGPA’s investment came up to more than RM2bil.

In 2008, the global financial crisis came. Although Malaysia was not really hit by this crisis, it affected the market, nonetheless.

When the Integra Tower was completed in 2012, signs of an oversupply of office space was in the air. Vista Tower, the second office component – with 555,000 sq ft of space – completed its refurbishment about that time. The entire development was named The Intermark.

In 2013, the world’s largest asset manager BlackRock bought MGPA and among those assets was The Intermark.

There is a difference when a fund owns such a development. Funds have a life span. There will come a time when it will have to divest and return the money to investors. However, breaking up an asset such as this one may be tricky.

Although The Intermark Mall is only about 200,000 sq ft, it is an integral part of the development, with about 25% of it dealing in food and beverage (F&B). The fourth component is the Vista Tower. The mall, although in terms of space is the smallest portion, is the lifeblood of the entire singular whole.

Vista Tower, in time, will be sold, but it is the retail podium that provides life to these three portions because of its F&B and services component.

A source says KWAP, being a new landlord there does not have the expertise to manage the office and the retail component. That may be true.

But let’s go over to CapSquare, developed by Bandar Raya Development Bhd (BRDB).

In 2011, German fund Union Investment bought two towers in CapSquare for RM440mil. It did not buy the retail portion.

There was a time last year when the retail had to be closed and when it reopened, its previous attractive aura was missing.

The retail portion, which supplied valuable colour and culture, was no longer the same.

Mall yield

There are contradicting opinions about the yield of a mall. According to H. C. Chan, adviser to both the Malaysia Shopping Malls Association and the Council of Asian Shopping Centres, the retail portion offers the highest return on investments in a mixed integrated development in the long term. Chan is also CEO (Sunway Shopping Malls & Theme Parks) for the Sunway Group.

However, two other sources say retail rental can be low and its maintenance high. Besides, the space in a mall is not as efficiently used as that in an office or a hotel. In an office/hotel, there is the single lift core and narrow corridors leading to rooms or offices. In a mall, there is the open space which have to be maintained.

While this may be true, Chan contents that “in the long run” the mall gives the overall development life and vigour.

He likens it to the parking space in a mall, which costs a lot to build, but without which, a mall cannot survive.

Vista and The Intermark Mall

Whatever the analysis, Vista Tower and the mall will have to be divested. If the entire Intermark, as a single entity cost RM2.2bil, this means Vista and the mall will be about RM750mil to RM800mil, bearing in mind the sum of the parts will be priced higher than the whole.

From a single landlord, the Intermark will now have three, maybe four landlords, with different perspectives, views and goals. All of them will have to co-exist. Otherwise The Intermark, home to some of the biggest names in the financial world, will not be there. After all, why is the Intermark priced the way it is when it is less than 1km from the Petronas Twin Towers?

Some property consultants say The Intermark is not the same as the Twin Towers in terms of location but then again, The Intermark is not all that far away and as a whole, it is one of Kuala Lumpur’s finest pieces of development.

As the new owner of DoubleTree, Asok Kumar Hiranandani, the chairman of Royal Group of Companies says, DoubleTree is “one of the most interconnected hotels” in the heart of Kuala Lumpur within its unique location.” He is right.

For The Intermark to prosper, the sum of the parts is integral to the whole.

John Saunders, head of APAC for BlackRock Real Estate, says: “We are very pleased with the sale of this property following the extensive refurbishment to re-invigorate the original hotel in the upscale Golden Triangle district in Kuala Lumpur. This is another success of BlackRock as the fund manager in repositioning assets in prime locations and transforming them into high-quality ones, to meet the needs of tenants, as well as investors seeking core assets.”

Private equity MGPA may have different goals. Timing may be a bit off but they have put together a fine development. Hopefully, the new owners will continue to add value to their purchases by working together as they have bought into what was constructed and designed as a single landmark.

And it is a destination that many Malaysians are proud of. - By The Star