HLIB Research PP 9484/12/2012 (031413) Greater KL’s Catalytic Developments

MARKET VIEW 14 December 2016

Game changer or spoiler? Highlights . Boosting Greater KL. Greater KL is the most populated region in Jeremy Goh, CFA with 7m people (26% of the nation). Since 2010, 9 [email protected] projects under the Economic Transformation Program (ETP) have (603) 2168 1138 kick started in Greater KL. Its public transport system is being improved via the BRT, LRT ext, MRT 1&2 and HSR. Road Jason Tan, CFA connectivity will also be enhanced through new highways such as [email protected] DASH, SUKE and DUKE3. (603) 2176 2751 . Rise of catalytic developments. As a result of Greater KL’s rejuvenation, several large scale catalytic developments have Lee Meng Horng emerged. These include the (TRX), Warisan [email protected] Merdeka, City Centre (BBCC), , (603) 2168 1121 Kwasa Damansara and City Centre (CCC). Collectively, these 6 catalytic developments have a GDV of at least RM275bn over 3,355 acres of land. Catalytic developments . Backed by the government. All the catalytic developments have Development Acres GDV (RM bn) government participation as the master developer, be it directly Tun Razak Exchange 70 40 (e.g. MoF) or indirectly via its related entities (e.g. EPF and PNB). Warisan Merdeka 19 5 As such, we reckon that much effort will be accorded to ensure its Bukit Bintang City Centre 19 9 success. Tax incentives will be given for developments such as TRX and Bandar Malaysia. Take up rates will also be supported by Bandar Malaysia 486 160 the relocation of government offices there (e.g. EPF relocating its Kwasa Damansara 2,620 50 HQ to Kwasa Damansara and PNB to Warisan Merdeka). Cyberjaya City Centre 141 11 . The age of TOD. These catalytic developments will be integrated Total 3,355 275 to a public transport network, giving them an advantage as Transit Source: HLIB estimates Oriented Developments (TOD). The case of KL Sentral as a TOD is anecdotal evidence on the importance of public transport Potential construction winners connectivity towards a development’s success. We believe the Stock Rating Price Target appeal of TODs will be even more prevalent once the MRT1 is IJM BUY 3.37 3.92 WCT HOLD 1.80 1.99 completed in July 2017. Pesona BUY 0.585 0.81 Mitrajaya BUY 1.23 1.95 . Positive for construction. Assuming 50% of GDV constitutes Sector SunCon BUY 1.70 1.93 Impact construction cost, these catalytic developments would present Pintaras Not Rated 3.50 n.a. contractors with RM137bn worth of jobs to undertake over the next Econpile Not Rated 1.85 n.a. 20 years. Potential beneficiaries are (i) WCT and Gadang for their Ikhmas Not Rated 0.58 n.a. track record in earthworks, (ii) IJM, Pesona, Mitrajaya and SunCon for urban high rise buildings and (iii) pilling contractors such as Potential property and REIT losers Pintaras, Econpile and Ikhmas Jaya. Stock Rating Price Target MQREIT BUY 1.30 1.34 . Negative for property… KL city is experiencing a potential excess KLCCSS BUY 7.81 8.35 supply situation within the condo and office segments. Traditional UOA Dev Not Rated 2.30 n.a. developments will have to compete with the catalytic ones which have an edge as TODs and government backing. Nonetheless, most developers under our coverage have a diversified product mix spread across several states. For risk of concentrated exposure, we highlight UOA within the office segment. . …and REITs as well. KL city’s retail space per capita (17sq ft) is already above Bangkok (9 sq ft) and Singapore (12 sq ft). Additional malls under the catalytic developments will further increase this, capping upside to rental reversion. Despite this, established malls in prime locations such as Pavilion (PREIT) and Suria KLCC (KLCCSS) should continue stay relevant. On offices, the influx of new space will place downward pressure on occupancy and rent. MQREIT has 80% of its revenue from office and KLCCSS at 44%.

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Prelude

Enter Greater KL. Valley is an area centred in (KL) along with its adjourning cities and towns in . Rebranded in recent times as Greater KL, the Greater KL is the most area covers 2,793 sq km and is governed by 10 local authorities. It is Malaysia’s most populated region in M’sia populated region with 7.2m people or 26% of the national population. Greater KL’s population is projected to hit 10m by the turn of the decade.

Figure #1 Area coverage of Greater KL

PEMANDU

Key area under ETP. In Sept 2010, Malaysia’s Economic Transformation Programme Several ETP projects have (ETP) was launched with the aim to elevate it to a “developed nation” status by 2020 been implemented in Greater with GNI per capita of US$15k. Greater KL has been identified as one of the ETP’s KL National Key Economic Areas (NKEA) which targets to achieve the top-20 ranking in city economic growth while also being the global top-20 most liveable cities by 2020. A total of 9 Entry Point Projects (EPPs) have been identified for Greater KL.

Figure #2 Entry Point Projects (EPP) for Greater KL

Entry Point Project (EPP) 2020 GNI (m) Jobs Status Attracting 100 of the world's most dynamic firms 41,441 234,001 Operational Attracting internal and external talent 118,212 560 Operational Connecting KL to Singapore via HSR 6,224 28,700 WIP

Building an integrated urban MRT system 24,630 20,000 WIP

Revitalising Klang and Gombak rivers 4,281 17,041 WIP Greening Greater KL 992 2,817 Operational Creating iconic places and attractions 460 13,500 WIP Creating a comprehensive pedestrian network 6 279 Operational

Efficient solid waste management system 157 NA WIP

PEMANDU

Enhancing connectivity. Greater KL’s public transport landscape is currently Transportation upgrade via undergoing a massive upgrade. This began with the completion of the Sunway BRT in June 2015, followed by the Ampang and Kelana LRT extensions totalling 35km in June BRT, LRT ext, MRT1&2, HSR, 2016. Phase 1 of the MRT1 (Sg Buloh-) is set to be finished by Dec 2016 and DASH, SUKE and DUKE3 fully operational by July 2017. For the MRT2 (Sg Buloh-Serdang-), major contracts have been awarded and work has begun. Lastly, implementation of the High Speed Rail would greatly enhance connectivity between KL and Singapore. In terms of road networks, major highways such as DASH (Damansara-), SUKE (Sg Besi-Ulu Kelang) and DUKE3 (-Pantai) are being implemented.

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Figure #3 Public transport lines in Greater KL

SPAD

Rise of catalytic developments. As a result of the various EPPs and enhanced public transport network, we note the emergence of several large catalytic developments in Catalytic developments: Greater KL. These include the Tun Razak Exchange (TRX), Warisan Merdeka, Bukit TRX, Warisan Merdeka, Bintang City Centre (BBCC), Bandar Malaysia, Kwasa Damansara and Cyberjaya City BBCC, Bdr M’sia, Kwasa Centre (CCC). Collectively these 6 developments have a GDV of at least RM275bn D’sara and CCC over 3,355 acres of land. All of them have some degree of government participation as master developer, be it directly or indirectly via its related entities. As such, we reckon that much effort (e.g. tax incentives) will be accorded to ensure its success. Another common characteristic is that these developments will be integrated to a public transport network (e.g. MRT), making them Transit Oriented Developments (TOD). In this report, we explore the significance of these catalytic developments and its potential impact to 3 key sectors – construction, property and REITs.

Figure #4 Greater KL’s catalytic developments Development Master Developer Acres GDV (RM bn) Tun Razak Exchange MoF via TRX City 70 40

Warisan Merdeka PNB 19 5

Bukit Bintang City Centre Eco World (40% ), UDA (40% ), EPF (20% ) 19 9

Bandar Malaysia IWH-CREC (60% ), MoF (40% ) 486 160 Kwasa Damansara EPF via Kwasa Land 2,620 50 Cyberjaya City Centre MRCB (70% ), MoF via Cyberview (30% ) 141 11

3,355 275

Media sources, development websites

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Highlights

Tun Razak Exchange

KL’s next financial district. Launched by the Prime Minister in July 2012, the Tun Razak Exchange (TRX) sits on a 70-acre land plot located at KL’s southern gateway. KL’s next financial district is The development aspires to be KL’s financial and business district with GDV of an ext of the Golden Triangle RM40bn over a period of 15-20 years. Essentially, TRX can be viewed as an extension of KL’s Golden Triangle with direct connectivity via the largest MRT interchange station (Line 1 and 2) and major highways such as SMART, MRR2, Jln Tun Razak, Jln Bukit Bintang and Jln Sultan Ismail. TRX has been identified as a strategic priority for Malaysia and a special task force has been assembled to facilitate its execution.

Figure #5 Location of TRX

TRX

Shareholding reshuffling. Previously, the master developer for TRX was 1MDB Real TRX no longer 1MDB, Estate (1MDB-RE), a subsidiary of 1Malaysia Development Bhd (1MDB) which in turn, directly under MoF is wholly owned by the Ministry of Finance (MoF). However, following a minor shareholding reshuffling, 1MDB-RE was renamed to TRX City and is now directly owned by the MoF with no ties to 1MDB. We view this change positively given the ongoing controversies surrounding its previous direct parent-co, 1MDB.

Offerings on the plate. The TRX masterplan consist of 26 buildings with over 21m sq 26 buildings with GFA of 21m ft of GFA spread across office (10m sq ft), residential (3.8k units), hotel (2m sq ft), sq ft retail, F&B and cultural offerings. An allocation of 24% (16.8 acres) of the site will be dedicated for parks and open spaces. Phase 1 which will be completed in 2018 comprises (i) 4 office towers, (ii) retail mall, (iii) 2 hotels and (iv) 6 residential towers.

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Figure #6 TRX masterplan

The Star

Attractive tax incentives. To attract investors into TRX, the government has granted Tax incentives for TRX tax incentives for qualifying TRX marquee status companies operating in the financial marquee status companies subsectors of banking (retail, merchant and Islamic), insurance, Takaful and capital markets. These incentives include (i) industrial building allowances on purchase or and qualifying developers construction of property in TRX for use of their business at 10% p.a., (ii) accelerated capital allowances of 100% over 2 years for renovation costs, (iii) deductions for relocation costs, (iv) 150% deductions on rental of TRX premises for 10 years and (v) stamp duty exemption (including on loan and services agreement). Besides, qualifying developers will receive a 70% tax exemption on income derived from sale or rental of properties in TRX for a period of 5 years.

Several commitments made. Since the TRX’s inception in mid-2012, there have been 5 notable investment commitments made with known land transaction values ranging Land transactions ranged between RM2,774 to RM4,683 psf. These include from RM2,700-4,700 psf

. Lendlease: Australian based Lendlease will jointly develop the Lifestyle Quarters with TRX City on a 60:40 basis. The RM8bn GDV quarters will span 16.8 acres, featuring a mall, hotel and 3 residential towers. . Mulia Group: The Indonesian property developer purchased a 3.4 acre land for RM665m (RM4,490 psf) to undertake the Signature Tower (GDV: RM3.5bn) with a height that approximates that of the Petronas Twin Towers. . Affin Bank: The bank acquired 1.25 acres of TRX land for RM255m (RM4,683 psf) to house its new 35-storey headquarter with GFA of 823k sq ft.

. WCT Holdings: WCT (HOLD, TP: RM1.99) acquired several plots of TRX land

totalling 1.65 acres for RM223m (RM3,011 psf) which will be paid for via contract works. It intends to develop a service residence (GDV: RM1.1bn).

. Lembaga Tabung Haji: The pilgrimage fund (LTH) purchased 1.6 acres of TRX land for RM189m (RM2,774 psf). Earlier plans to sell the land have been aborted by LTH which now says it will be developing residential apartments

(GDV: RM828m).

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Figure #7 Land transactions at TRX Acquirer Acres Price RM psf Plot Ratio Est GDV

Lendlease 16.80 n.a. n.a. n.a. 8,000

Mulia Group 3.40 665 4,490 18.5 3,500 Affin Bank 1.25 255 4,683 15.2 n.a. WCT Holdings 1.70 223 3,011 10.8 1,100 Lembaga Tabung Haji 1.56 189 2,774 10.5 828

Average (ex. Lendlease) 3,740

TRX, Media sources

Works ongoing, WCT the biggest beneficiary. Construction works at TRX are currently ongoing with WCT emerging as the biggest beneficiary from its job flows thus WCT has won 3 TRX far. Since 2013, WCT has managed to secure 3 contracts at TRX totalling RM994m contracts worth RM1bn involving earthworks, infrastructure and roads. According to an article by The Edge last month, foundation works on the Signature Tower were completed in May and the superstructure is now underway. AWC (not rated) was awarded an RM18m contract to install and maintain the tower’s cold water and plumbing.

Figure #8 TRX site progress as at 30 June 2016

TRX

More incoming job flows. An article by The Edge in Oct stated that the entire Underground infra works for underground infrastructure works for TRX would amount to RM1bn. The job is said to TRX worth RM1bn also involve the KL City Council but TRX City has decided to kick start its own portion first by calling for RM350-400m worth of tenders. Work scope on the underground infrastructure is regarded to be complex as a portion of it will run below the SMART Tunnel and the MRT interchange station also needs to be accounted for. The deadline st for bids was closed on 1 July which required bidders to have (i) at least 10 years of experience, (ii) CIDB G7 license, (iii) track record in rock excavation, tunnel concrete structures, underpass and elevated structures, (iv) main contractor role for at least a

RM200m job and (v) foreign equity (if any) to be capped at 49% for JV. Track record wise, Gamuda (BUY, TP: RM5.65) stands out as a contender for the job given its tunnelling experience beneath KL for SMART and MRT1. Other contractors with experience for heavy infrastructure include IJM (BUY, TP: RM3.92), SunCon (BUY, TP: RM1.93) and WCT.

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Warisan Merdeka

Sky-scraping new heights. Warisan Merdeka is a mixed development undertaken by Pemodalan Nasional Bhd (PNB) which will house the iconic Merdeka PNB118 tower. PNB118 will be the tallest Upon completion, Merdeka PNB118 will be the tallest building in Malaysia at 630m or building in M’sia, 5th globally 178m higher than the Petronas Twin Towers. It will also be the 2nd tallest tower in Asia th and 5 in the list of “mega-tall” buildings globally.

Connected by 3 rail lines. The development is located on a 19 acre land plot adjacent to the historic Stadium Merdeka and Stadium Negara. Connectivity wise, Warisan Connected vi MRT, LRT and Merdeka will have its own dedicated MRT station (dubbed the “Merdeka station”) as monorail part of the MRT1. The Merdeka station will also serve as an interchange for the LRT

Ampang line and Monorail.

Figure #9 Location of Warisan Merdeka

KiniBiz ,

Phase 1: Tower and mall. Phase 1 of Warisan Merdeka will have a GDV of RM5bn comprising Merdeka PNB118 tower and a shopping mall. The 118-storey tower will be Phase 1 comprising tower allocated as follows: (i) 82 floors (1.7m sq ft) of office space in which companies under and mall has GDV of RM5bn the PNB Group will take up 60 floors, (ii) 18 floors (435k sq ft) for a 6-star hotel with 236 rooms and (iii) 18 floors for an observation deck, sky lobby and to accommodate

M&E facilities. As for the proposed mall, it will have a GFA of 900k sq ft with over 200 stores and a 12-screen cinema.

Figure #10 Floor allocation for Merdeka PNB118

M&E Deck & Sky 16 Lobby 2

Hotel Office - PNB 18 Group 60

Office - Others 22

Malay Mail

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Contracts dished out. The foundation works (RM74m) for Merdeka PNB118 was completed by Pintaras Jaya (not-rated) in 3Q15. Last Oct, the main tower contract was Main contract for PNB118 awarded to the Samsung-UEM JV for RM2.1bn. Other job flows related to the tower awarded to Samsung-UEM include (i) 2 contracts worth RM72m for plumbing and solid waste handling system awarded to AWC, (ii) structural steel works (RM328m) secured by Eversendai (HOLD, TP: RM0.54) and (iii) Finnish company, KONE to supply 105 units of elevators and escalators. Looking ahead, our channel checks reveal that other potential contracts from Warisan Merdeka would include the mall, access roads and infrastructure works.

Bukit Bintang City Centre

Pudu Jail’s transformation. The Pudu Jail was constructed in 1895 on a former Chinese burial ground where it served as a prison for over a century until 1996. By Dec 2012, all buildings within the Pudu Jail were demolished to pave way for a Pudu Jail site redeveloped redevelopment plan to be led by UDA Holdings (not rated). The Pudu Jail site is by EcoWorld, UDA and EPF regarded as one of the last huge land parcels remaining in the heart of KL. Early last year, a JV was established between UDA (40%), Eco World (40%) and the Employees Provident Fund (20%) to jointly develop the said land in what is now known as Bukit Bintang City Centre (BBCC). As the landowner, UDA will charge the JV a development fee totalling RM1bn.

Figure #11 Masterplan of BBCC

BBCC

The masterplan. The mixed development (GDV: RM8.7bn) sits on a 19.4 acre site at the intersection of Jln Pudu and Jln Hang Tuah. To be developed in 2 phases over 8- 10 years, BBCC will comprise 3 residential blocks, 2 office blocks including a signature RM9bn GDV over 19.4 acres tower, 4-star hotel, mall, entertainment hub, lifestyle street and parks. BBCC’s transit hub will house the existing Hang Tuah monorail and LRT as well as providing linkage to the upcoming Merdeka MRT station.

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Plans for Phase 1. For the office portion of Phase 1, The Stride will consist of a 45- storey tower with 347 strata units and build-ups ranging from 917-1,152 sq ft. As for the residential component, there will be 2 blocks of 47 and 33-storeys totalling 680 units Phase 1 consist strata office with sizes from 450-850 sq ft. The residential units are said to be priced around and condos, show units open RM1,600 psf. Launches were initially scheduled for Oct 2016 but our channel checks indicate that an official one has not happened. Our site check reveals that BBCC’s show units are currently opened for viewing.

Figure #12 GDV breakdown for BBCC (RM bn)

Phase 1 - office and residential 2.0

Phase 2 4.7 Mall 1.6 Entertainment hub 0.4

The Star, HLIB estimates

Japanese roped in. In March 2016, the BBCC JV consortium inked an agreement with Japan based Mitsui Fudosan Asia and Zepp Hall Network. Mitsui will be undertaking its largest retail investment outside Japan by jointly building BBCC’s mall with the JV consortium, each holding a 50% stake. Work on the RM1.6bn mall is expected to start Japanese names such as in 2017. The 1.4m sq ft mall with 300 stores will bring in popular Japanese brands and Mitsui and Sony to is expected to open in 2021. On the other hand, BBCC’s RM400m entertainment hub participate will house a concert hall which will be run by Sony’s Zepp Hall via a 20-year lease.

Bandar Malaysia

Redevelopment of Sg Besi Airport. Sg Besi Airport served as KL’s main airport from 1952 to 1965 and was subsequently used by the Royal Malaysian Air Force (RMAF). The RMAF base is being relocated to Sendayan, Negeri Sembilan to pave way for a Sg Besi Airport to be redevelopment in what would be known as Bandar Malaysia. The redevelopment redeveloped into Bdr M’sia covers 16 adjacent land plots totalling 486 acres located along Jln Sg Besi and 7km from KL city centre.

New master developer enters. Initially, 1MDB was supposed to be the master developer for Bandar Malaysia. However, following 1MDB’s restructuring plan, an agreement was inked in Dec 2015 to sell the land to an SPV comprising MoF (40%) and IWH-CREC Consortium (60%). The consortium is in turn, 60% held by Iskandar 1MDB out, now developed by Waterfront Holdings (IWH) and 40% by construction giant, China Railway Engineering IWH-CREC and MoF Corp (CREC). To dwell further, the shareholders of IWH are state owned Kumpulan Prasarana Rakyat Johor (40%) and Credence Resources (60%). The latter is a vehicle wholly owned by Tan Sri Lim Kang Hoo who also owns several listed entities such as Iskandar Waterfront City (not-rated) and Ekovest (not-rated). A detailed shareholding structure of Bandar Malaysia is depicted in the following page.

Land valuation. IWH-CREC’s 60% stake in Bandar Malaysia was acquired at a consideration of RM7.4bn or RM5.3bn if liabilities (Sukuk and RMAF base relocation cost) are assumed. Using the former number (i.e. free of encumbrances), this Land sold to new master effectively values the entire Bandar Malaysia land at RM12.4bn or RM583 psf. developer at RM583 psf

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Figure #13 Shareholding structure of Bandar Malaysia

1MDB, HLIB estimates

High Speed Rail connectivity. In July 2016, the governments of Malaysia and Singapore inked a Memorandum of Understanding (MoU) for a 350km High Speed Rail Bdr M’sia will be the HSR (HSR) that would link both countries with end-to-end travel time of 90 minutes. There terminus in KL will be a total of 8 stops at Singapore, Iskandar Puteri, Batu Pahat, Muar, Ayer Keroh,

Seremban, Putrajaya and KL. For the KL stop, Bandar Malaysia has been designated as the terminus for the HSR. Construction of the HSR is expected to start in 2018 and scheduled for completion by 2026.

Figure #14 Proposed KL-Singapore HSR alignment

Channel News Asia

Major transport hub. To turn Bandar Malaysia into a major transport hub, the development will be connected via the ongoing MRT2 with 2 stations, 1 of which will serve as an interchange with the HSR. Although still at the study stage, the proposed Bdr M’sia transport hub will MRT3 circle line is said to connect Bandar Malaysia. Apart from that, Bandar Malaysia be connected via MRT2, will also be connected via the existing KTM and ERL lines. In June 2016, MRCB HSR, KTM and ERL (HOLD, TP: RM1.37) signed a MoU with IWH-CREC to collaborate for the development of Bandar Malaysia’s integrated transport terminal. Some 11-12% (55-60 acres) of Bandar Malaysia’s land has been earmarked for the integrated transport terminal. We reckon that MRCB is well positioned to undertake the job, having undertaken several transport hubs such as KL Sentral, PJ Sentral and Penang Sentral.

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Tax incentives granted. The Government has granted several tax incentives to the master developer and is mulling several proposals for other investors as listed below.

Figure #15 Tax incentives for Bandar Malaysia

The Edge

Largest underground city. While there are no conclusive figure, media reports have cited Bandar Malaysia’s GDV to range between RM150-200bn over a development Mammoth GDV of RM150- horizon of 20-25 years and average gross plot ratio of 4.05x. There will be 7 districts 200bn, largest underground which are (i) Wellness City for residential with a 40 acre green lung, (ii) GLEW – Gastronomy, Leisure, Entertainment and Wellness, (iii) an affordable living enclave city in the world with 5k homes, (iv) Creative Hub for cultural and tourism, (v) Retail Lifestyle Centre, (vi) Global Business District which will be the international finance centre and (vii) Transport Hub. What differentiates Bandar Malaysia is that, beneath all these districts lies an underground city that will be completely sheltered from tropical weather conditions. Modelled after Montreal, Canada’s underground city, Bandar Malaysia’s version will be the largest in the world upon completion. A sunken plaza will be the centre of this underground city, with pedestrian walkways beneath to link up the various districts. In terms of committed investments, CREC will be spending RM8bn to set up its regional office in Bandar Malaysia.

Figure #16 Layout of Bandar Malaysia

The Star

Funding established. In June 2016, the master developer JV set up the Bandar

Malaysia Fund and signed a MoU with several foreign and local banks to provide Funding from foreign and funding for the development. The foreign banks involved are Bank of China, ICBC and HSBC while the local participants include CIMB (HOLD, TP: RM4.52), Maybank (BUY, local banks TP: RM8.51), RHB (BUY, TP: RM5.29) and Affin (HOLD TP: RM2.12).

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Kwasa Damansara

From rubber estate to township. In Aug 2011, an S&P agreement was inked between Kwasa Land with the MoF and Malaysian Rubber Board (MRB) for the former EPF to lead redevelopment to purchase 2,620 acres of rubber estate land in Sg Buloh owned by MRB. The transfer of MRB land into Kwasa of ownership was concluded in Oct 2012. Kwasa Land is a wholly owned subsidiary of D’sara the Employees Provident Fund (EPF) and has been tasked as the master developer for the said land which is today known as Kwasa Damansara. Following the sale of 290 acres to MRT Corp for the MRT depot to be constructed, the land size of Kwasa Damansara was reduced slightly to 2,330 acres.

Strategically nested. Kwasa Damansara is perhaps the last remaining sizable land plot in the Klang Valey that has been officially earmarked for township development. It is strategically nested amongst the matured suburbia of , , Last remaining sizable land , Shah Alam, Damansara and Sg Buloh which has a total population of plot in 1.8m. In terms of road connectivity, Kwasa Damansara is accessible via the existing NKVE and proposed DASH. It will be served by 2 stations from the soon to be completed MRT1. In addition, the Subang Airport is located adjacent to Kwasa Damansara’s south-west fringe.

Figure #17 Location of Kwasa Damansara

Kwasa Land

Sizable township in the making. Kwasa Damansara has a GDV of RM50bn over a development period of 20 years. It aims to have over 150k people live and work in the RM50bn GDV over 2,330 township. The 2,330 acre township will allocate its land utilisation in the following acres manner - 42% residential, 11% commercial, 7% mixed use, 11% green and open area, 23% infrastructure and 6% community facilities. A total of 28k homes and residences are targeted for in Kwasa Damansara. For the commercial segment, some 50m sq ft of space will be created.

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Figure #18 Land use distribution in Kwasa Damansara (acres)

Community facilities 140

Infrastructure 536 Residential 979

Green and open space 256

Mixed use Commercial 163 256

Kwasa Land

Role of Kwasa Land. As master developer, Kwasa Land will be responsible for (i) the masterplan, (ii) creating development parcels, (iii) providing the main infrastructure, (iv) Kwasa Land will develop via providing land for public amenities, (v) building affordable homes and (vi) preparing JVs, catalytic projects and urban design guidelines. Kwasa Land will undertake a 3-pronged strategy as the land sale strategic enabler of Kwasa Damansara which involves (i) JV with other property developers, (ii) spearheading catalytic projects and (iii) direct sale of land parcels.

Town centre led by MRCB and... In Aug 2014, a shareholder’s agreement was inked between MRCB and Kwasa Land to form an SPV with the former holding a 70% stake and the latter 30%. The SPV will be tasked to develop Kwasa Damansara’s town Town centre will have centre on a 64 acre land plot known as MX-1 with GDV of RM8bn and average plot RM8bn GDV over 64 acres ratio of 3.5x. Based on MRCB’s subscription price of RM817m for its 70% stake in the SPV, the implied land cost for MX-1 works out to be RM418 psf. The town centre will be accessible have a total GFA of 9.8m of which 60% will be commercial and 40% residential. It will be connected to the MRT1 via the Kwasa Damansara station.

…EPF to develop adjourning land. EPF will directly undertake the development of a 29.8 acre land (dubbed C8) known as Kwasa Utama located beside the Kwasa EPF to directly develop the Damansara town centre. The development with RM5bn GDV will feature EPF’s new Kwasa Utama part, HQ to headquarters, offices, auditorium, banquet hall, F&B outlets, mall, hotel and media hub. relocate there In Oct 2015, MRCB entered into a RM3.1bn management contract with EPF (via wholly owned Kwasa Utama SB), whereby the former was appointed as the management contractor to construct Kwasa Utama over the period from 2016 to 2027.

Figure #19 GFA breakdown of Kwasa Utama

Kwasa Land, MRCB

Developers hopping on. Developers interested to participate in Kwasa Damansara are first required to be prequalified by Kwasa Land. Based on its website, 8 Request for Proposals (RFP) have been concluded involving direct land sales, JV development So far, 8 developers have and Development Rights Agreement (DRA). The transacted prices range thus far are hoped into Kwasa D’sara (i) RM70-80 psf for land sales, (ii) RM418 psf for JV development (i.e. MX-1) and (iii) RM159-264 psf for DRA. These are listed in the following table.

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Figure #20 Land transactions at Kwasa Damansara (RM m)

Site Developer Development Type Acres Price RM psf GDV

Lot 73535 Pink Corner n.a. Land sale 4.3 13 70 n.a.

Lot 73971 TRC Land n.a. Land sale 1.7 6 82 n.a.

MX-1 MRCB Town centre JV 64.0 817 418 8,000 R3-2 Impiana Land Linari D'sara - condo (436 units) DRA 8.8 65 170 397 R2-1 Naza TTDI Gated & guarded residential (278 units) DRA 12.7 88 159 400 R3-4 AZRB Condo (188 units) DRA 3.9 45 264 257 R3-3 Getrahome Condo (260 units) DRA 6.5 44 153 215 R3-1 Gadang Residential neighbourhood DRA 24.1 165 157 n.a. Kwasa Land news release, HLIB estimates

Figure #21 Land transactions at Kwasa Damansara

Kwasa Land

Contracts are flowing. Thus far, 2 common infrastructure packages have been awarded by Kwasa Land to WCT (RM127m) and TSR Capital (non-rated) (RM269m). The more sizable one would be the appointment of MRCB as the Project Delivery MRCB appointed as PDP for Partner (PDP) for the Kwasa Damansara common infrastructure works at a common infra works development cost of RM2.2bn. The fees payable to MRCB is 5%, which works out to RM112m. The works include roads, drainage, waterworks, telecommunications, sewerage and M&E. As PDP, MRCB will be required to manage the approval process from relevant authorities, manage design consultants and work contractors, provide project management services as well as testing and commissioning.

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Cyberjaya City Centre

Origins of Cyberjaya. Spearheaded by Cyberview (now wholly owned by MoF), Cyberjaya was launched in 1997 to become Malaysia’s ICT hub. Today, the city is Transition from ICT to tech home to over 800 firms including 40 MNCs. Its day time population is estimated to be hub 100k and this is expected to increase to 210k by 2020 given its development pipeline. Cyberjaya also has a large student population, driven by 4 universities and 2 colleges. Since 2014, efforts have been made by the government to reposition Cyberjaya as a global technology hub. To achieve this, the 141 acre Cyberjaya City Centre (CCC) development was mooted as one of the key projects during Budget 2016.

MRCB to spearhead CCC. In Oct 2015, MRCB entered into an agreement with

Cyberview to set up a JV whereby the former will hold a 70% stake and the latter 30%. The purpose of the JV is to (i) develop a 53.4 acre land within CCC and (ii) have first MRCB to lead CCC right of refusal over another 59.9 acre adjourning land. The JV will purchase the 53.4 development with Cyberview acre land from Cyberview for RM349m or RM150 psf.

CCC’s connectivity. CCC is located within Cyberjaya, broadly bounded by Persiaran APEC to its west and Jln Perseketuan to its east. The distance from CCC to KL city centre is 35km. Within a short distance from CCC are LimKokWing University, Garden Connected by 5 highways, Residence, SkyPark Development, Cyberjaya CBD and Hospital Putrajaya. In terms of ERL, monorail and upcoming roads, CCC is connected via LDP, SKVE, Maju Expressway, Putrajaya Cyberjaya MRT2 Expressway and ELITE. Also located beside CCC is Putrajaya Sentral, a public transport hub with ERL and monorail links. There are plans to build an 800m travellator to connect CCC and Putrajaya Sentral. The upcoming MRT2 will also have a dedicated station at CCC.

Figure #22 Location of CCC

Cyberview

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4 development zones. It was stated in Budget 2016 that CCC will have a GDV of RM11bn and media reports mentioned that Phase 1 (RM5.4bn) will take 7 years to RM11bn GDV, RM5bn for complete. The developments in CCC will have an average plot ratio of 3.46x and GFA Phase 1 totalling 17m sq ft which will largely be centred on office, retail and hotel. There will be 4 development zones in CCC which are (i) Enterprise: business park and SoHo, (ii) Gateway: mixed use commercial blocks, service apartments and an ICT university, (iii) Vibrant: shopping mall, amphitheatre and business class hotel and (iv) Tech: studio office, idea incubator and showroom. Initial works on CCC has begun with the foundation works (RM33m) for the exhibition centre and hotel being awarded to Ikhmas

Jaya (not-rated) in April 2016.

Figure #23 GFA breakdown of CCC (mil sq ft)

University 0.3 Office Medical 4.6 0.2

Conventional 0.7 Residential 0.8

SoHo 1.1 Hotel 4.7

Retail

4.6

Cyberview

Figure #24 Development zones in CCC

Cyberview

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Implications

Construction: Boost for the builders

Call in the contractors. Implementation of the 6 catalytic developments will have a straightforward positive implication for contractors via job flows. Based on available data acquired from media reports, we estimate the Gross Development Cost (GDC) of RM137bn worth of jobs for these catalytic developments to constitute 68% of its GDV on average. Our property contractors analyst estimates that the bulk of a project’s GDC comprises construction cost or roughly 50% of GDV. With at least RM275bn in GDV stemming from the 6 catalytic developments, this will present contractors with RM137bn in potential jobs over the next 20 years. Furthermore, as these developments are government backed, payment risk will also be less of an issue vis-à-vis a typical private sector developments.

Figure #25 GDC to GDV ratio of developments (RM m) Development GDC GDV Ratio

Bukit Bintang City Centre 6,000 8,700 69%

Warisan Merdeka (Phase 1) 3,000 5,000 60% Kwasa Utama (C8), Kwasa Damansara 3,872 5,000 77% 25-storey hotel, TRX 963 1,380 70% 30-storey hotel, TRX 1,100 1,620 68%

Signature Tower, TRX 1,936 2,970 65%

35-storey office, TRX 729 1,100 66%

TRX Mall 2,640 4,740 56% LTH condo development, TRX 651 828 79%

Average GDC/ GDV ratio 68% The Edge, other media sources

Sustaining job flows. Based on our in-house tracking of domestic contract awards to listed contractors, the sum for Jan-Nov has been very strong at RM54bn, surpassing the previous full year high of RM28bn achieved in 2012. As depicted below, the robust Gap in infra jobs to be contract awards were largely driven by heavy infrastructure jobs such as the MRT2 at partially filled by catalytic RM24bn (44%) and several highways at RM16bn (30%). Despite strong job flows, developments contribution from property developments was relatively low at RM7.6bn (14%). We expect this to increase going forward, driven by the catalytic developments within Greater KL. With infrastructure jobs hitting a record high this year, it would only be rational to expect a downward normalisation in the coming years. We reckon that this gap will be partially filled with the pickup in property related jobs from the said catalytic developments.

Figure #26 Breakdown of YTD domestic contract awards (RM m)

Others 6,077 12% Property

7,644 14% MRT 23,717 44%

Highways 16,244 30%

HLIB compilation from Bursa announcements

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Kick starting the contracts. In terms of job flows from these catalytic developments, this should generally begin with site preparation and earthworks. Names such as WCT Job flows to begin with site (HOLD, TP: RM1.99) and Gadang (not-rated) are active players within this segment. preparation and To ensure connectivity of the developments, the construction of access roads will be earthworks… required. For congested city centre developments, these access roads are likely to be elevated flyovers or underground tunnels.

Galore of building jobs. We expect building related jobs to be in the limelight from these catalytic developments. Contractors such as IJM (BUY, TP: RM3.92), Pesona …followed by pilling and Metro (BUY, TP: RM0.81), SunCon (BUY, TP: RM1.93) and Mitrajaya (BUY, TP: RM1.95) all have decent track records in undertaking urban high rise buildings. buildings Nonetheless, it is important to highlight that competition from Chinese contractors for high rise jobs within KL city centre has been intensifying of late. With its track record involving MyTOWN Shopping Centre, Paradigm Mall, The Curve and AEON BBT, we reckon that WCT could be a top contender for some of the proposed malls under these catalytic developments. We also view pilling contractors such as Econpile, Pintaras Jaya, and Ikhmas Jaya (all not-rated) as key beneficiaries given that such works must first be executed before the buildings are constructed.

MRCB the clear winner. From a construction standpoint, MRCB (HOLD, TP: RM1.37) appears to be the obvious winner given its sizable contract flows associated with MRCB has 2 sizable Kwasa Damansara. MRCB has been engaged as the management contractor by EPF contracts associated with for a sum of RM3.1bn. This is to construct the latter’s Kwasa Utama development in Kwasa D’sara Kwasa Damansara. Apart from that, MRCB was also appointed as PDP for the common infrastructure works at Kwasa Damansara whereby it will earn a 5% fee on the development cost of RM2.2bn.

Property: Disruption in KL

Impact largely in KL. As previously mentioned, the 6 catalytic developments commands a GDV of at least RM275bn, a colossal sum by most standards. Of this amount, 78% (RM214bn) will be located within the KL city centre, comprising TRX, Supply side implications Warisan Merdeka, BBCC and Bandar Malaysia, creating much supply side implications centred in KL for that area. On the other hand, we feel that Kwasa Damansara and CCC should have a rather muted impact on KL given the distance. As such, our analysis in this section will largely focus on the potential impact of the 4 KL based catalytic developments.

Figure #27 KL property supply statistics

KL Property Supply Condos Office Malls

(units) (sq ft/ m) (sq ft/ m) Existing stock 161,327 91.0 29.7 Incoming supply 33,388 7.2 4.7 % of existing stock 20.7% 7.9% 15.8% More high rise condos to Planned supply 39,989 8.9 3.7 flood KL % of existing stock 24.8% 9.8% 12.4%

Potential total stock 234,704 107 38 % increase from existing stock 45.5% 17.7% 28.2% NAPIC

Increase in supply growth for condos. Data from the National Property Information Centre (NAPIC) indicates an incoming supply of 33k units (21%) for high rise Office oversupply condition residential. Assuming the completion period to spread across 5 years, this will add in KL to worsen c.6.7k units p.a. or 4.2% which is almost double the CAGR of 2.2% in the past 5 years. This increase will be even higher if planned supply is taken into consideration which will overall add 73k units or 46%. We believe it would be challenging to absorb this incremental supply, especially for the high end segment, in view of the current soft property market condition.

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Oversupply in office space. In terms of offices in KL, the incoming supply would add 7.2m sq ft (8%) of space while planned supply would further increase it by 8.9m sq ft (10%). We reckon that KL is starting to face an oversupply condition. This is evident by the decline in average occupancy rates from its peak of 83% in 2014 to 78% currently (2Q16).

The age of TOD. Whilst our analysis points towards a challenging high rise residential and office segment, we believe the 4 KL based catalytic projects will have an edge Catalytic developments will over other developments. These catalytic projects are all integrated to a public have an edge as TODs… transport network, giving them an advantage as Transit Oriented Developments (TOD). The case of KL Sentral as a TOD provides anecdotal evidence on the importance of public transport connectivity towards a development’s success. We reckon that the appeal of TODs will become even more prevalent once the MRT1 is completed in mid- 2017.

Figure #28 Public transport connectivity

Catalytic Development KTM LRT Monorail ERL MRT1 MRT2 HSR Tun Razak Exchange   Warisan Merdeka (Phase 1)    Bukit Bintang City Centre   

Bandar Malaysia    

HLIB estimates

Solidified by government backing. Another advantage possessed by these catalytic developments is the government’s participation as master developer, either directly …with govt backing on take (e.g. MoF) or indirectly via its related entities (e.g. EPF and PNB). We believe this up rates and tax incentives would add confidence amongst potential investors towards the developments. In our view, take up rates would be supported by the relocation government-related entities there and potentially the government linked corporations (GLCs) as well. For example

(i) EPF will be relocating its headquarters to Kwasa Utama and (ii) PNB and its owned companies will occupy 60 floors in Merdeka PNB118 tower. In addition, the tax incentives accorded to TRX and Bandar Malaysia provides these developments with an edge to attract investors and buyers alike.

Intensifying the competition but... In conclusion, we reckon that these catalytic developments, particularly the 4 KL city centre ones, have the potential to disrupt the property market in that area. Traditional private sector developments will have to Heightened competition for compete with the catalytic ones on a backdrop of excess supply in the high rise condo traditional developments on and office segments. As previously elaborated, these catalytic developments have an a backdrop of increasing advantage as TODs with government backing and tax incentives for some. supply

...most prepared to weather the storm. While competition amongst developments will likely intensify within KL city centre, none of the developers within our coverage KL developments most have a concentrated focus there. Most developers under our coverage have a impacted but few have a diversified product mix (high rise, landed and commercial) spread across several concentrated exposure there states. Although not within our coverage, we highlight UOA Development (not-rated) as having a relatively significant exposure to the office segment. Given the oversupply concerns within the high rise segment, we continue to like township developers with exposure to affordable housing such as Matrix (BUY, TP: RM2.89).

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REIT: Supply, supply and more supply

Overwhelming retail space. Currently there is total of 65m sq ft worth of retail space within Greater KL, 47% of which is in KL. While the current retail space per capita of 9 Retail space per capita in KL sq ft within Greater KL is higher than the ideal retail space of 5 sq ft per capita, this is is above neighbouring cities at parity with Bangkok and lower than 12 sq ft per capita in Singapore. However, zooming into KL, the retail space per capita is significantly higher at 17.8 sq ft, suggesting that it may be tough for the area to stomach even more retail space supply. We estimate that 2.9m sq ft worth of mall space recently opened this year, with another 7m sq ft coming soon and 8m sq ft beyond 2017. We feel that the malls under the catalytic developments, particularly the 4 KL ones, will only worsen the current supply glut situation. This would dilute footfalls across a larger base of malls and inevitably put pressure on rental reversions. As it is, most REIT managers are guiding for a softer magnitude of rental reversion going forward. In view of the worsening mall oversupply situation, those existing superior assets in the prime areas and township would continue to stay relevant, i.e. PREIT (BUY, TP: RM1.95) and KLCCSS (BUY, TP: RM8.35), given their long established branding and interesting tenant mix. Figure #29 Retail space – total (mil) and per capita

80 20 74.3 17.8 18 70 65.0 64.3 16 60 14 Retail space (LHS) 50 12 Per capita (RHS) 11.7 40 10 29.7 9.0 9.0 8 30

6 20 4 10 2

0 0 Kuala Lumpur Greater KL Singapore Bangkok

HLIB estimates

Pressure on office space. As previously elaborated, the influx of office space under the catalytic developments comes at a time of excess supply with less than optimal occupancy rates in KL. Existing office space could find it challenging to compete against these catalytic developments given their TOD nature, government backing and Influx of office space will selected tax incentives. To highlight the advantage of TODs, KL Sentral enjoys an result to lower occupancy average occupancy rate of 90% as opposed to the KL average of only 78%. We also and rental understand that several corporations are mulling to relocate their headquarters into TRX given the tax incentives accorded. At the end of it all, existing office space will likely see further downside in occupancy and rental rates given the competition from these catalytic developments. Within our coverage, MQREIT (BUY, TP: RM1.34) is heavily exposed to the office segment (80% of revenue) followed by KLCCSS (44%).

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Disclaimer

The information contained in this report is based on data obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as such, no representation, express or implied, is made as to the accuracy, adequacy, completeness or reliability of the info or opinions in the report.

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Equity rating definitions BUY Positive recommendation of stock under coverage. Expected absolute return of more than +10% over 12-months, with low risk of sustained downside. TRADING BUY Positive recommendation of stock not under coverage. Expected absolute return of more than +10% over 6-months. Situational or arbitrage trading opportunity. HOLD Neutral recommendation of stock under coverage. Expected absolute return between -10% and +10% over 12-months, with low risk of sustained downside. TRADING SELL Negative recommendation of stock not under coverage. Expected absolute return of less than -10% over 6-months. Situational or arbitrage trading opportunity. SELL Negative recommendation of stock under coverage. High risk of negative absolute return of more than -10% over 12-months. NOT RATED No research coverage and report is intended purely for informational purposes.

Industry rating definitions OVERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% over 12-months. NEUTRAL The sector, based on weighted market capitalization, is expected to have absolute return between –5% and +5% over 12-months. UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of less than –5% over 12-months.

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