Bandar Malaysia deal will be on gross basis

WHILE Tun Razak Exchange Square along Jalan Tun Razak is being sold on a net basis with 1MDB providing the infrastructure, the Bandar Malaysia deal with be done on a gross basis, says CH Williams Talhar & Wong.

On the difference between buying land on a gross or net basis, consider the following.

In 2013, a developer purchased 3.2 acres in Jalan Ampang, forking out RM3,300 per sq ft.

This developer will have to set aside a certain percentage for infrastructure like entrance and exits, or roads leading into the development.

The RM3,300 per sq ft it paid includes the provision of these infrastructure. Assuming that 10% of the land will be used for this amenities, the Singapore developer effectively paid RM3,667 per sq ft on a net basis. If the amenities take up 15%, it effectively paid RM3,882 per sq ft.

Sources say the value of the Bandar Malaysia land can be derived by the interested parties based on certain factors. While size and location of the land are two of them, there are a host of factors to be considered.

The land value does not come into consideration until 1MDB RE Sdn Bhd has provided enough information as to what can be done on the land, its plot ratio and this plot ratio will differ on different parts of the 486 acres.

Once the developer/s know what they can do with it, they will have to estimate the gross development value (GDV) based on the framework or components involved, sources say.

From the GDV, the developer will then deduct the cost of construction (gross development cost) of whatever they are going to build.

The tricky part is what the developer wants to build – or has to build – and what the market can absorb are different things. A developer must build only what the market can absorb.

This can be clearly observed in the office space market in the Klang Valley. Developers were given the green light by the respective authorities to build office blocks and the result is that, there is today an over supply of office space.

At the end of the day, it boils down to demand and supply.

It is unlikely that the Bandar Malaysia land has been converted since interested parties are to plan for the land’s content and components.

This means the interested parties will have to deduct expenses to convert the land in order to build whatever they need/want to build. This will be contributions to the authorities. It will also have to deduct the profit it would like to have.

The next step is to present value the net of the GDV - which is derived after deducting the cost and developer’s profit - over the likely development period. The balance will be the land value.

If the developer is given a high plot ratio, this is a positive point but this may not necessarily mean a higher value if there is no demand. To simplify plot ratio, a property jargon, a plot ratio of 1:10 means the developer will be able to build up to 10 times the size of its land area.

A land parcel may have a higher plot ratio than another, although both pieces of land may be in the same area. An example of this will be Tun Razak Exchange Square. Australian group Lend Lease is developing 17 acres there but its plot ratio is lower than the piece purchased by Tabung Haji.

There is no similar land size of 486 acres that has been transacted in the area. However, a figure of RM600 per sq ft was quoted by another financial paper earlier this month. The same publication said that 1MDB could “tender equity in the Bandar Malaysia land in order to pare down its debts while extracting maximum value from its assets.”

“With the intense lobbying underway from international parties interested to participate in the RM40bil Kuala Lumpur-Singapore high speed rail (HSR) project, competing bids for a stake in Bandar Malaysia could value the entire piece of land in Sungai Besi at around RM12.9bil, or about RM600 psf,” the publication said.

However, another source says RM500 to RM600 may be a possibility as the land, yet to be converted, is to be done on a gross basis.

Says another source: “1MDB RE should close the deal if anyone comes with RM600 per sq ft offer.”