Banking through malls

The malls in Bandar Utama and Mid Valley were among the first to make a difference in the retail property market, mainly because of their size.

The two were shining examples that malls do provide a steady and growing source of recurring income for their owners. Mid Valley Mega Mall was touted as South-East Asia’s largest at one time.

But probably the two best-known malls in the Klang Valley are Suria KLCC, which is ultimately owned by Petroliam Nasional Bhd or Petronas, and Tan Sri Desmond Lim’s KL Pavilion.

According to a retail source, Suria KLCC’s average rental per square foot (psf) is between RM45 and RM55. KL Pavilion’s is at a 20% discount to that. Lim is now planning to replicate Pavilion’s success in Pusat Bandar Damansara and Bukit Jalil.

Along comes WCT Holdings Bhd, a contractor best known for delivering jobs ahead of time and within cost. It is also probably the only construction company which has built three F1 circuits, in Sepang, Bahrain and Abu Dhabi.

But in order to have a steady flow of recurring income, WCT, under the leadership of Peter Taing Kim Hwa, 62, is also shaping up to be another major mall owner and operator.

Interestingly, it is seeking to build one in Old Klang Road, which will be fairly close to Lim’s Bukit Jalil Pavilion. Whether WCT’s aspiration will piggyback on Lim’s expected success – or rival it – will be another story.

Industry observers say from what is seen of WCT’s PJ Paradigm, that mall caters to the medium-income group while KL Pavilion is a destination for the upper-middle and higher-income group.

“That is the differentiating point under WCT,” says a property consultant.

Founded by four childhood friends from Puchong some 30 years ago, WCT’s transformation from a pure sub-contractor to a mall owner and operator was not by design. It is primarily to beef up its earnings stream in order to overcome the volatility in the construction and property development sector. It currently has a market capitalisation of RM1.68bil.

In a rare interview with StarBizWeek, WCT managing director and founder Taing said the company would like to “establish recurring income” in the mall segment despite the number of malls in the country. He is unperturbed by the oversupply of mall space.

“It’s the survival of the fittest,” says Taing.

He said there has been competition since the day they went into business. WCT survived three financial crises in 1986, 1997/98 and 2008. “We became resilient. It’s about being conservative and not over-leveraging.

“We believe we have the capability and resources to compete and achieve our long-term plans,” says Taing.

Its paradigm shift came after it built The Curve and Tesco Mutiara Damansara. WCT currently has three malls - Bukit Tinggi AEON, PJ Paradigm Mall and Gateway@klia2. It is planning another two, one in Johor Baru and another in Old Klang Road, KL.

By September next year, when JB Paradigm opens, WCT will own and operate 3.3 million sq ft of space spread over four malls.

It will increase this to five million sq ft when it completes KL Paradigm in Old Klang Road, which would catapult it into the big league.

In comparison, CapitaMalls Malaysia Trust has a net lettable area (NLA) of 2.5 million sq ft; Pavillion Real Estate Investment Trust (REIT) operates 1.3 million sq ft and IGB REIT owns 2.6 million sq ft.

Target audience

JB Paradigm Mall is targeted at locals and Singaporeans. The six-storey mall with an NLA of 1.3 million sq ft – one of the largest in JB - is located on 13 acres and fronts Skudai Highway. The mixed-use project comprises residentials and a hotel with a development cost of RM1bil.

“The total gross development value (GDV) is about RM1.5bil,” Taing says. WCT will be having a signing ceremony of its anchor tenants on Aug 13. The JB mall has already secured four anchors.

“We are looking at about RM100mil of annual gross revenue from this mall based on a rental rate of RM6-RM7 per sq ft,” he says.

KL Paradigm Mall, with 1.75 million sq ft, will also be keenly watched. It is pending approvals because WCT has upped its GDV by RM2bil to RM8bil. The mixed development, which comprises a hotel, offices and high-rise residentials, will be sited on 60 acres. The mall will occupy 22.84 acres.

Its PJ Paradigm is a 70:30 joint-venture with the Employees Provident Fund and is 93% occupied. It will be launching a hotel and high-rise residentials there.

For the first quarter ended March 31, the group’s property development and investment segments registered an operational profit of RM32mil.

At the group level, net profit was RM33mil, 17.5% lower than RM40mil last year.

Taing says the eventual goal is to inject all its malls into a REIT on a staggered basis starting 2016, beginning with PJ Paradigm and its Bukit Tinggi mall, with a combined NLA of 1.7 million sq ft.

Other malls will come later. “With the listing of the REIT, we will be able to reduce our gearing level,” he says.

WCT had a net gearing of 0.7 times as at March 31. The firm’s total borrowings was at RM2.4bil, while cash and cash equivalents stood at RM770mil.

The company will also grow its construction business and would like to maintain a 50:50 revenue contribution between construction and property development/investment.

WCT’s orderbook currently stands at RM3.6bil, of which RM2.6bil is from external jobs and RM1bil from inhouse projects. Of the RM2.6bil, about RM1.1bil is from the Middle East, while the remaining is local business. Its construction tender book - both local and foreign tenders - is at RM5bil.

Taing says WCT owns 945 acres of land located mainly in the Klang Valley, Johor and Sabah.

According to Alliance DBS Research, WCT’s property sales and margins are under pressure and the firm thinks WCT might revise its sales target, given the softer property market.

The group’s sales target for 2015 was RM650mil, with sales of RM200mil in the first-half of 2015.

WCT’s total launches for 2015 was valued at RM705mil, with about 70% comprising high-rise apartments. As of March 31, WCT had unbilled sales of RM600mil.

Taing says most of its launches are in the Klang Valley. On his market outlook, Taing says the company’s profitability would be under pressure this year, but he hopes to secure more construction jobs.

“The economy is cyclical. Maybe we will have better sunshine tomorrow. Again, this is all about sustaining your business. The company’s strength would be put to test. I am sure WCT will be able to weather the storm,” he says.

Analysts, however, feel that for WCT’s REIT to garner interest, it has to offer yields of at least 6% because it is the average offered by others.

“The catalyst for WCT’s REIT would be in what segment its malls would be catering to and its ability to ensure high occupancy levels,” says an analyst.

The upside for WCT’s plans is that pure mall operators enjoy higher yields and rental revisions of up to 7% per year compared to offices and industrial properties that are seeing only up to 3% rental revisions.

Overall, Malaysian property REITs offer an average of 7% returns to investors, making them a good defensive play for investors.

This is a selling point for WCT’s REITS if it enters the market as planned next year. - By The Star