City & Country: ‘There will be a second wave of investors’
City & Country: Your view of the property market and going forward, are you excited?
Datuk K Salman Younis: We are definitely excited. There is a lot happening in Malaysia and we see a lot of opportunities with the Ninth Malaysia Plan (9MP). We are involved in a number of projects under the 9MP and hope to be involved in more. We are currently selling projects in all of the initiatives announced… the Iskandar Development Region (IDR) and the Sabah and Sarawak initiatives. A lot of the economies are being affected by the slowdown in the US due to the subprime crisis. Most markets are soft and the general feeling is that if the banks declare the full extent of losses by mid-year, the situation should start improving from September.Malaysia, by and large, has not been affected badly and there are many reasons for this – the 9MP, various government initiatives and strong prices for its commodities on the market, among others. The sectors facing a slowdown are the high-tech ones, which are not a major component of the Malaysian economy.Malaysia should continue to do okay. The country has not been affected by the US crisis also because the prices of real estate here are still low compared to the region, making it an attractive buy. We see more and more foreigners coming to buy real estate.
Apart from Malaysia, we are in other parts of the region like Singapore and are looking at Indonesia, Vietnam, India, China and Australia. All these are vibrant economies and have not been adversely affected by the US subprime crisis. We will continue to pursue the segments not affected by the crisis. Even countries facing a slowdown offer an opportunity to cherry-pick good assets.
Last year was a challenging one and 2008 will definitely be more challenging. We started the year with a strong pipeline of transactions across the various businesses we have. Our advantage, compared to some of the other banks, is that we are operating on a regional basis. If one or two markets are slow, we balance things by picking one or two transactions or investment opportunities in other countries.
On KFH and real estate
Is real estate a core business segment for KFH?
When people talk about KFH, they often think we only do real estate, which is not right. Real estate is less than 25% of our business portfolio in the region. Our real estate investments are always in the limelight because of two things. First, the strategic locations we pick. Second, most of the real estate projects we enter into are with top developers – listed companies – and the minute we sign with them, they have to announce it, as per Securities Commission requirements.Our activities are diversified. We do commercial and investment banking. In commercial banking, we do middle markets, small and medium enterprises (SMEs) and now, we are gearing up to roll out a retail franchise in the country. We have also introduced our asset management business and we are managing a number of funds, and plan to bring in a number of investments from the region and the Gulf Cooperation Council (GCC) to invest in various sectors within the region.
We are involved in lots of segments – healthcare, shipping, aviation and private equity funds. We have invested in several companies – three in Singapore and one each in Malaysia, China and India – and are looking for more direct investment opportunities.
What is real estate’s contribution to KFH’s profits?
We don’t like to talk about returns. We don’t take 100% of our real estate projects in our books as we sometimes enter through funds. We have projects where we may put in one-third of the money and the rest is from investors we bring in. Our investment in The Oval was one-third and we brought two investors from the GCC, who took two-thirds. That’s one thing we are trying to do… building a bridge to channel investments from the GCC to Malaysia.Tell us more about your real estate-related financing transactions.
Financing transactions based on syariah structures is the biggest segment of our portfolio. We are doing innovative structures based on the principles of musyarakah and mudarabah and were the first Islamic bank to bring some of these into the country. The business community sees these structures as fair forms of banking because they are largely based on partnerships. Mudarabah is basically a concept where one party provides the finance and the other brings its expertise. How it works in real estate is that KFH will identify a developer to do the construction and the developer is paid on a progress basis.KFH can either sell the units or appoint the developer to do so. Profits will be distributed on a predetermined percentage. The losses, if any, will be absorbed by the financier, provided there is no negligence on the part of the developer. Part of the financing includes the cost of the land. Basically, KFH is buying the project en bloc and appointing the developer as the construction agent.
The competitive advantage of this form of banking over the other methods is that the developer feels comfortable. Previously, he had to raise finances from different sources. Not only having to give the land as collateral, he also had to give his corporate and personal guarantee. Now, he has a financier who is willing to take the risk. The profits may be smaller and the risks higher, but he knows that as long as he performs, there will be profit.
What is the total gross development value (GDV) of projects in Malaysia that KFH is involved in?
Around US$2 billion (RM6.4 billion) to US$2.5 billion (RM7.9 billion), not including the projects we have sold. The Pavilion Residences and The Oval are among those we have sold. The group is currently involved in five projects. We are selling products in Sunway South Quay – the villas are open for sale. One building has been sold to the Koreans en bloc.What other projects are you looking at right now?
We have two around the KLCC area. We signed a memorandum of understanding (MoU) with YNH Property Bhd. The other we are finalising with a non-listed company, so it probably won’t be announced. We have entered into a MoU with them for a certain price and are completing our due diligence. This project is at the foundation stage.We are already involved in three projects in Penang. You can expect some really good projects coming up in Penang. We are also looking at the East Coast. I visited Terrenganu two months ago and met the state officials.
Any more en-bloc sales to come?
Yes, we are looking at various opportunities and if we get a suitable deal at the right price, we will be very willing to enter into an agreement. The first criterion for us t when choosing a project is the location. As it is often said, the three important things in real estate are location, location and location. The second criterion would be the sale/purchase price. We compare the prices with market rates and if we do en-bloc purchases, what the profit margin will be. We have to keep a safety margin in the price to factor in the possibility of a downturn.Which does KFH prefer? Residential or commercial developments? Why?
Residential developments because Malaysia is a market where, on the same plot of land, you make more money if you constructed residences rather than commercial units.There is an opportunity now for those starting commercial projects because you can still make good money as there is a shortage of Grade A office space. However, based on the number of offices coming up, there will be an oversupply in three years and rents may drop.
Property hot spots
Where are the property hot spots?
Real-estate prime areas are KLCC, Damansara Heights, Mont’Kiara and Sri Hartamas. Foreigners who cannot afford to buy in the Golden Triangle should go to Mont’Kiara as it’s the next best place in terms of location and abundance of international schools. These are the areas where the high-end market will continue to do well.With the new initiative to develop the Sabah corridor, things are picking up there. They don’t have enough hotel rooms there. I was there with my daughter recently and was shocked to discover that Karambunai needs advance bookings of up to six months. Once the airport expansion is completed and they can handle bigger aircraft, you will see more and more people coming.
So, you are interested in Sabah?
KFH is 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. We are in touch with the Sabah authorities and will be there to support when the opportunities arise.
Sarawak has its own appeal as it is part of East Malaysia and is also blessed with natural resources. The potential is there to exploit its natural resources.Residential supply in KLCC – values and yields
Do you see an oversupply in the residential property market? Take the KL city centre. There is going to be over 2,000 units coming onstream by year-end. What will happen to values and yields?There will definitely be an oversupply but it will come in three years. Right now, all the supply has been sold. What will happen once all the units are completed is that it will bring down yields because people will go on to better projects with better rents.
One thing that may change the market is something Malaysia has yet to experience in a big way. It is happening in Dubai. You will see that every tower being built is branded after famous people. There is the Schumacher Tower. They are bringing in the likes of Armani and Ivanka Trump to do the branding. To enhance the value of future projects, you may see this branding concept coming.
Dubai can do it, but can Malaysia?
Well, no one has tried.Is KFH going to do it?
I don’t know. Wait and see.Back to incoming supply at KLCC, who is going to stay there when the units are completed? Will there be a spate of quick exits?
It will put pressure on pricing, but whenever you have units, people will come in and buy. Even if prices come down to RM1,600 to RM1,700 psf, you will still make money.We have a lot of developers and consultants saying a lot of foreigners are coming into the market, but there remains a fair bit of sceptism on the ground that this will actually translate to transactions. What are your comments?
In the Pavilion Residences, we have buyers from 22 countries and we still see interest coming from overseas. Although we had sold all units by September 2006, the enquiries are still coming.Do you see a price upside in the market?
Prices will go up because of the rising cost of raw materials. Real estate markets in the world show that prices will never go down in the medium to long term (two to three years). Demand will exceed supply. Land is scarce. KLCC, at the rate it is going, in 12 to 18 months, there will be no site left (to develop). Taking into account these factors, you will always see prices going up. When we sold the residences in Pavilion in July 2006, the average price was RM930 psf. Now, on the secondary market, prices are hitting RM1,600 to RM1,700 psf. Any property in KLCC will see prices double in two years. ONE KL (a new high-end condo coming up in the KLCC area) is another good example. They launched at RM950 to RM1,000 psf and now, it has crossed RM2,000 psf. This year alone, we are projecting construction cost to go up by 30% to 40% and prices will go up as well. In the next two to 2½ years, prices will go up 70% to 80% minimum.What kind of price levels does the residential market in KLCC hope to breach next?
It depends on what developers are offering the public. It depends on the quality and location. In future, you can see prices hitting RM2,500 psf, but this depends on quality, concept and facilities.Attracting foreigners
Although people say Malaysian properties are affordable, compared to our neighbours’, no one is rushing to buy properties here. Why is that so? What do we lack?
Singapore has emerged as a wealth management centre, so it attracts a lot of ultra high net worth individuals from the GCC, the region, Europe and the Americas. Switzerland is the world’s biggest wealth management centre and the ultra high net worth individuals who have accounts in Switzerland banks also own residences in the country. For them, it is normal to have a residence wherever their money resides. The same thing is happening to Singapore.However, this is the first wave (of investors) and there will be a second wave. The first wave will come buy properties, then it reaches a stage where it gets too expensive and these people start looking at neighbouring countries. In Europe, those who bought properties in Switzerland also bought properties close by in France and England. There will always be a second wave of people who come and buy high-end properties. They will furnish the homes nicely and they won’t rent out. That is why they prefer condos. They have apartments everywhere and they stay for one or two months a year.
You might see the same thing here in a year or two. The cost of living is very high in Singapore. Malaysia’s is one-third Singapore’s. So, you will see people buying properties in Malaysia because they want to be close to their money.
Is Malaysia attracting these kinds of investors at this point in time?
To a certain extent, yes, but it will take two to three years to attract such investors. The country needs to have facilities in place. With all the new condos coming up in KLCC, there needs to be more 24-hour food courts to cater for these people and this is something we are going to do in the Pavilion. Investors require a vibrant nightlife.What is the feeling among your fellow Middle Easterners about Malaysia?
They are getting more and more interested in the country. Just late February, we participated in a Dubai property fair displaying properties in the region and there was a lot of interest. We are showing these people the prime properties within the region, so they recognise Malaysia as the preferred destination to buy properties from. People from the GCC are impressed with the level of education and healthcare facilities here. This is a new discovery for them and they are looking to put their children in schools here and come for medical treatment here. Once this picks up, you will see these people buying more and more properties here. They prefer to have two or three children studying here and will buy a house for them.They also feel comfortable living in a Muslim country where they know they can get halal food in hotels and restaurants. For them, KFH is a familiar face. We are from the GCC and for the past 50 years, have done all sorts of projects, including financing, power plants, petrolchemical plants, refinery and all sorts of construction and infrastructure projects.
KFH in IDR
How are the plans in IDR coming along?
Things are coming along smoothly. We have signed all the agreements with Khazanah Nasional Bhd and recently signed a MoU with E&O Property Development Bhd (E&O Prop) for the residential component. We chose E&O Prop because we liked their concept in Sri Tanjung Pinang, Penang, and felt that it suits the type of residences we envisage. We are currently in negotiations with logistics warehousing and IT components for the land that we purchased in IDR as it is divided into three lots.What market is KFH targeting in the IDR?
The market is going to be Malaysia, Singapore and the region. Some companies in the region are already looking to establish regional hubs in the IDR. It has massive potential for the country as there will be a lot of spillover effects from it.The government needs to be congratulated for its visionary approach.
There is mixed feedback from the ground on the IDR. Some feel the government is not doing enough to push it. Your comments?
The IDR was one of the first initiatives to be rolled out and we have already made a large commitment (US$330 million) to it. We don’t have an issue as everything is in place. We see a lot of work going on in the IDR in terms of infrastructure. It is a greenfield site, full of trees and open fields, so they have to extend the roads. Work is going on at full speed and if you don’t go to the site and see for yourself, you might say nothing is happening, but you have to appreciate the fact that things are starting from scratch.Also, the whole concept of the IDR involves a lot of work by the various authorities. There’s a lot of work going on behind the scenes, which will be announced once (they are) finalised. We are grateful to the government and Khazanah. They have put the best people on the project to negotiate and everything was handled immaculately and professionally. The execution was seamless.
Did it take KFH a long time to decide on its involvement in the IDR?
We knew about the IDR a year before we signed up. But once we were invited to come and join, we gave our approval to Khazanah within six weeks of receiving the information package.On himself
How long have you been in Malaysia?
March 28 will be my third anniversary in the country. I came here to set up the bank and didn’t know anyone here. I was coming to a new country whose regulations and regulators I didn’t know. Today, I know all kinds of people everywhere. It has been rewarding and meaningful.On KFH and its strategies
Does KFH have plans to buy into listed companies?
We don’t have any plans to purchase or invest in listed companies because we don’t want to be seen as competition. .When KFH first entered Malaysia, did you have any inkling that the company would grow to its present size?
We entered the market cautiously. We didn’t do what our consultants told us. They recommended us a model and we did just the opposite. That is why we have been very successful. We felt that the Malaysian market needed to be approached carefully as it was very competitive. There are nine local banks, a number of investment banks and financial boutiques. It is overcrowded. It is not easy to break into a market like this.
There was also a shortage of human capital, especially for Islamic finance. We were coming from 10,000 miles away, people did not know us and we were often mistaken for KFC! (laughs)With the grace of God, we have been successful beyond our expectations. However, it was not by accident and it was a focused approach. We were very lucky that we managed to put in place a good team of professionals at all levels. We also had support from the Malaysian government, the Ministry of Finance, the regulators and Bank Negara Malaysia. The market also welcomed us.
You don’t see advertisements of KFH because we don’t advertise. Once you do, you will catch the eye of the retail customers and we don’t have any products for them and didn’t want them asking ‘why did you advertise then?’
We took a strategy to market our products and services, go after projects, think out of the box, deliver solutions to customers rather than products and let the customer go talk about us. That is what happened.
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.
