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Monday, February 26, 2007

Property Talk - Out of the zone

For a moment, i thought i was in the twilight zone. Or at the very least, like Rip Van Winkle, had woken up 15 years in the future.

What brought me to this conclusion was a real estate transaction reported just before Chinese New Year that blue-chip builder SP Setia had sold 38 acres of commercial land in Bukit Indah within johor's emerging iskandar Development Region for RM65psf.

A currently Greenfield site in johor for RM65psf. or over RM2.8 million an acre? What was even more eye opening was the fact that accompanying the report was a quote by Citigroup that it had previously tagged land in the area at RM20psf.

These values have all the oomph of forward thinking. i was tempted to say "wishful thinking", but that would have implied they were plumped up, and that can't be right since the deal has been inked-with one of the country's most respected corporate citizens no less.

Still, i couldn't get my head around the benchmark price. Benchmark? it's more like one of those flags you plant on a mountain after conquering it.

Good on SP Setia....good on the fact that it managed to find Raion Capital, a special purpose vehicle, to pick up the site for RM106.97 million cash. And good for Raion for being able to lease to Aeon Co, operator of the jusco brand, a three storey shopping mall it will build there. The arrangement struck by these players must be at the core of the RM65psf value. Because real estate valuation comparative methods aren't.

One of the most recent deals of a similar nature i could find was back in March 2004, when another public-listed developer, Plenitude, sold also to Aeon 30.03 acres in its Desa Tebrau township fronting the JB-Kota Tinggi Highway for RM39.241 million, ot RM30psf.

That plenitude's site is closer to JB city and surrounded by a more established catchment population-presumably an essential retail requirement-makes the 200 per cent contrast seem that much more glaring. It's even more so when Raion's deal is put next to the humble price of RM4.60psf SP Setia paid to Prolink Development for the whole Bukit indah site back in 1999. And to think, Citigroup said it's now worth RM20psf.

How times have changed.
More than show that wealth can grow in just a few short years when you buy into the right location, the latesttransaction reveals the power of vision. in this case, the iskandar Development Region plan by the federal government which is being implemented by Khazanah Nasional seems to have fuelled such positive optimism that mountains have been conquered.

Wondering how the sums could work out for Raion, i punched out the reported numbers: On top of the land cost, it will build the shopping mall with 600,000sqft of nett area for RM180 million, bringing the whole caboodle to RM287 million, or a shade under RM480psf based on the nett built-up size.

To make investment sense, i figured a special purpose vehicle such as Raion would want an average of 10 per cent returns from Aeon over its 15-year lease tenure. Which means its RM480psf investment would need to generate around RM4psf in rent every month. Certainly, that's no small change for Aeon, especially since it said it is prepared to sink in another RM35 to RM40 million of its own money into the project.

Although records point out that Raion is a RM2 public limited company incorporated just a week before the transaction with SP Setia was done, assuming the deals it entered into were done at armslength, it would be among the first to ride on the wave of investments that is the product of a parallel dimension rather than of real-time transactions.

Whether that dimension is vision linked or financially created will soon be revealed when Raion's financial advisor announces more details on the acquisition in the near future.

Until then, i can imagine fund managers and investors alike are keeping their eyes on the companies with prime tracts of land in land in south johor, in the hope they too will see their asset values blossom.

Like what Rod Serling, creator of the Twilight Zone said, "You're travelling through another dimension-a dimension not only of sight and sound but of mind. A journey into a wondrous land whose boundaries are that of imagination. That's a signpost up ahead: Your next stop-the Twilight Zone!"

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