City & Country: Making a splash
By Au Foong Yee and Allison Lee (TheEdge)
Until recent years, Kuwait Finance House (KFH) was but another foreign name that showed interest in Malaysian real estate before it moved into a mega retail and residential project – Pavilion Kuala Lumpur – in the heart of the city.KFH has established itself as a key real estate player in Malaysia through participation in various Islamic financing schemes and real estate funds, which have crossed the US$2 billion (about RM6.4 billion) mark.
KFH’s appetite for prime Malaysian real estate has not gone unnoticed. Property developers and investors alike were delighted as prices were chased to new highs.
Just before 2007 bowed out, KFH entered into a partnership with Glomac Bhd, paying a then record RM1,120 psf for Glomac Tower coming up in the KLCC area. In January this year, YNH Property Bhd announced it accepted KFH’s offer for 50% of its 45-storey yet-to-be constructed Menara YNH at an even higher RM1,226 psf. Menara YNH is another high-profile project taking shape on Jalan Sultan Ismail.
While KFH continues to keep some of the real estate projects it is involved in, others like Pavilion Residences units, a component of Pavilion Kuala Lumpur, have been put back on the market and sold mostly to foreigners from all over the world for a tidy profit.
The Kuwait government is a major shareholder in KFH, Kuwait’s second-largest bank and one of the world’s largest Islamic financial institutions.
The group has established a strong presence in the Middle East as one of the pioneers in Islamic banking and finance since 1977.
The group entered the local market through wholly-owned subsidiary Kuwait Finance House (Malaysia) Bhd (KFHMB) in 2005. Though it deliberately kept a low profile, it soon hogged the headlines with its property financing facilities, and its involvement in a wide array of segments ranging from aviation to waste management. Its staff strength now stands at 300, and growing.
In an interview with City & Country, KFHMB managing director Datuk K Salman Younis describes himself as someone who has come from “10,000 miles” to set up the country’s first foreign Islamic bank. What drives KFH in Malaysia? Is it in for the long haul or is it merely chasing up property values for a quick exit?
KFH’s enthusiasm in Malaysian real estate has not waned, despite the challenges ahead. “We are definitely excited. There’s a lot happening in Malaysia and we see abundant opportunities with (the rollout of) Ninth Malaysia Plan… Many countries are affected by the slowdown in the US stemming from the subprime issue. Malaysia has not been badly affected and should continue to do well,” says Salman, adding that he is encouraged by the government’s initiatives, the country’s strong commodity prices and attractive real estate values.
To put KFH’s activities into perspective, real estate constitutes less than 25% of its portfolio in the region but already, this translates into US$2 billion to US$2.5 billion worth of ongoing projects in Malaysia alone. Among the latest in the Malaysian list is KFHMB’s US$330 million funding for the Cultural Cluster in Johor’s Iskandar Development Region (IDR) – the single largest foreign real estate development in the country. (The cluster comprises a logistics village, creative park and a heritage district.)
KFH operates like a kind of big brother financier-investor in real estate. Only this is no ordinary player, given its extremely strong financials and track record. Real estate investment opportunities are identified and seized through participation in various Islamic financing schemes and funds. In a market that is still moving up, the vote of confidence from KFH naturally sends a strong signal that we have not seen the market peak.
This is how Salman sizes up the local property market: The number of foreigners buying properties is growing. The cost of land and construction materials is rising. Then there is also the trend of high net-worth individuals buying up-market residences within the city centre. These individuals, he says, are keen to invest in real estate located near wealth management centres.
“The first wave of these investors would target the financial centres, while the second wave would move on to neighbouring countries. This is happening in Singapore as these individuals have accounts with private banks there. You might see the second wave hitting Malaysia in a year or two,” he says, adding that there has been growing awareness of Malaysian properties among the Gulf Cooperation Council members.
Salman says KFH prefers residential properties over commercial ones because in KL, a tract can fetch higher returns from residential project. But is there an oversupply of high-end condos in the KLCC vicinity? While Salman concedes that growing supply would put pressure on yields, he also sees sufficient demand that will absorb the new units. “Prices will go up because of the rising cost of raw materials. Demand will exceed supply. Land is scarce and, at the rate development is going on in KLCC, there will be no site left in 12 to 18 months. In July 2006, when we sold the residences in Pavilion Kuala Lumpur, the average price psf was RM930. Now, the secondary prices are RM1,600 to RM1,700 psf. Any property in KLCC will see prices double in two years,” he says.
As for property hot spots, Salman says areas such as KLCC, Damansara Heights, Mont’Kiara and Sri Hartamas will see high-end projects continuing to do well. With progress on its IDR project “going full steam ahead”, KFHMB is also keen on the other development corridors.
The market can also expect to see KFH in Penang and Sabah. “We are already involved in three projects in Penang and you can expect some really good projects coming up there in the future… KFHMB is also looking at two to three projects in Sabah and these will be mixed developments. Anyone who is involved in real estate in the country cannot ignore Sabah,” he says. KFH also has two new projects within the KLCC neighbourhood – one with YNH Property and the other with a non-listed company, details of which he declined to elaborate.
Meanwhile, KFMB (the Group and the bank) registered a profit before zakat and taxation of RM9.5 million and RM6.5 million respectively for the FY2006. And for the nine months ended Sept 30, 2007, a profit before zakat and taxation of RM32.8 million and RM28.3 million respectively was achieved.
The bank registered a growth of RM1.33 billion or 162% in its gross financing, advances and other receivables to RM2.15 billion as at Sept 30, 2007 (the 4Q results have not been released) compared to RM818 million recorded as at Dec 31, 2006.
Late last year, ratings agency RAM Ratings had reaffirmed KFHMB’s long and short-term financial institution ratings at AA2 (stable outlook) and P1, respectively. The ratings reflected the firm backing of its parent company KFH in terms of its main business model and international franchise, besides funding and business support.
Going forward, Salman says 2008 will be a “challenging year” for KFHMB as it strives to sustain its success. “Our approach is very dynamic. Our strategy changes, every day, every week and every month because in a competitive environment, you have to be in a changing mode all the time to make success sustainable.”
