STABILITY is the holy grail of investors. So, when Indonesia’s Mulia Group and Australia’s Lendlease, among other local and foreign investors, accepted the previous regime’s invitation to play ball at the Tun Razak Exchange (TRX), they thought the match would go on until the final whistle. They did not expect the match to be cancelled at half time.
This does not mean that TRX will be scrapped. But the rules may be tweaked. The anticipation has become palpable, particularly for investors whose buildings will be completing soon.
The uncertainty comes from three fronts. The change in regime, the country’s debt which is more than RM1 trillion, and the current oversupply of office space.
Mulia Group was incorporated in 1986 during President Suharto’s regime between 1967 and 1998, a reign known for its political and economic upheavals.
“Why would we go to a place where we knew this (change of government post-May 9) is going to happen?” asks a source from Mulia Group.
After 60 years in power, the people decided it was time for a change, exacerbated by other issues. Will the situation reverse in the next general election? That is food for thought.
Lendlease, Australia’s property and infrastructure group, also wants stability but it also values corporate governance, integrity and transparency. Having operated on different continents, it may be more nimble and agile.
Unlike Asian businesses which depend to a larger extent on “relationships” or what the Chinese call “guan xi” – the dynamic social personal relationships upon which many Asian businesses are built on – Lendlease views its 60% joint venture with TRX strictly from a business point of view.
Lendlease was inspired by the underground retail mall, Malaysia’s first, with a 10-acre park above.
Lendlease Development Malaysia Sdn Bhd managing director Stuart Mendel said in October 2017: “TRX will be a destination.”
The park was a catalyst for the group, he said.
“Government and business should be separated,” says an Australian expatriate who is working on a project at TRX, not related to Lendlease’s 17 acres.
“Kuala Lumpur is not a market that you build on speculation. It would be unfortunate if commitments are wound back,” he says.
Mulia bought its parcel in May 2015, its first project here, one month after the team flew over to view the site. It was a visit that was filled with anticipation because it was its first foray into Malaysia. Like some Asian groups, only a single voice is needed to make that decision. And so, that plot of land of 3.4 acres was bought at RM655mil, or RM4,490 per sq ft. The rest of the soldiers just fell in line.
In its first investment in TRX and Malaysia, the previous regime came across as rather accommodating. There were push and pull factors. One of the push factors was to hit the stratosphere.
Because Indonesia sits on the Ring of Fire where volcanic eruptions and earthquakes are frequent, buildings in Jakarta where Mulia is based cannot go beyond a certain height. For many years, the tallest building in Jakarta was Wisma 46, with 46 floors, between 1996 and 2015.
Then came Gama Tower, also known as Cemindo Tower, in 2015 which hit more than 60 storeys.
Says a source: “When we came here, it was on the condition that we would be able to build something we had never done before, and you would have something you had never seen before.”
The footprint of Exchange 106 was tweaked, and the plot ratio raised.
The inspiration and motivation to have something international in flavour and branding that befits an international financial centre was strong. The previous regime under Barisan Nasional also wanted to leave a legacy.
As beautiful and iconic the Petronas Twin Towers may be, they are about 20 years old. So, the rationale was that TRX was a superior site just about 5km away.
But like any large-scale project, there must be a central focal point. Hence, Exchange 106 with 106 storeys. That building will be completed in September, at a time when the Klang Valley has more than 120 million sq ft of existing office space today.
Because of the “guan xi” between one of Malaysia’s top officials in the previous regime and one of Indonesia’s top corporate figures, a lot of leeway was given. While the thrust of the plan remains, there were little tweaks here and there in the development of Exchange 106.
This “guan xi” between the two men also resulted in the assurance that the 2.6 million sq ft of office space would be filled by government-linked companies (GLCs).
Prior to May 9, up to 52% of the tenancies were GLCs. Six per cent went to the private sector. A source tells StarBizWeek that the tenancy contracts have been formalised at about RM15 per sq ft, although the asking rent is RM17 per sq ft.
Because of the previous government’s keenness to develop the financial centre, a lot of tax incentives were given to developers and tenants, which may effectively reduce rental by 20%.
This has irked building owners beyond TRX.
“If you have many children and you only educate one, what will become of the other children?” a real estate person asks.
TRX will have a total of about 30 buildings when the 70-acre project is completed. The project has a 15-year timeline, with a total of 24 million sq ft spread over office, residential, retail and hotel space.
At 34,000 sq ft per floor, Exchange 106’s office space comes without columns. One of the closest comparisons would be The Intermark’s Integra, on Jalan Tun Razak, which come with 25,000-sq-ft floor area. Retirement Fund Inc or KWAP owns Integra.
“The space at Exchange 106 is efficient. Three floors may be equivalent to five in the average office building (depending on the size of the floor area),” says a source.
Functionality aside, it is a trophy building like the Petronas Twin Towers. Trophy refers to buildings that are either iconic in nature or built to the highest quality standards. They are not just grade A but super grade A-office buildings.
They command the highest rents and sale prices and are found in only the most prestigious locations.
“Exchange 106 is the little brother to the Twin Towers,” a source says.
Exchange 106 started leasing last year with an asking rent of RM17 per sq ft. But the contracts with GLCs concluded at about RM15, says a source.
Savills Datuk Christopher Boyd said earlier this year that Exchange 106 started leasing last year at a rental of between RM13 and RM15 per sq ft compared with Menara 3 Petronas’ RM13 per sq ft.
Today, grade A-offices, when stripped of their rent-free periods, renovation and moving-in costs, may be as low as RM6.50 to RM7 per sq ft, says Khong & Jaafar’s group managing director Elvin Fernandez.
Considering the country’s debt position, will GLCs make good the contracts?
They have been “silent” so far. If they are moving, they would be making arrangements about fitting out the place by now, according to a source.
A tour of Exchange 106 is a visit to the world of superlatives. The building has 3,000 car parks and granite walls for its basement parking.
Up to 70% of the building has an all-round, 360-degree view. In a little while, its crown, a satin stainless steel frame and “iron glass”, will be fitted.
A statement from Mulia Group says: “It will create the sparkle and shine effective for daytime as well as an identifiable night-time glow.
“We are committed to completing this. We have already put in so much money. Don’t penalise us because we came in during Datuk Seri Najib Tun Razak’s time,” says a Mulia employee.
TRX faces trying times ahead