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Monday, May 14, 2012

UDA’s dilemma on Pudu Jail project

It needs to follow directive but also needs to consider the best deal for the project

KUALA LUMPUR: UDA Holdings Bhd is still evaluating proposals of all parties for the redevelopment of its Pudu Jail land and wants the preferred bid to be the one that is in its best commercial interest.

Even though the board has approved the proposal by Everbright International Construction Engineering Corp last year, the Finance Ministry (MOF) has directed UDA not to consider the company and instructed UDA to prepare a masterplan based on parcelling the land into three.

A special committee formed by UDA's board has included the development model proposed by Everbright in its evaluation to ensure that UDA's long-term commercial interests are protected.

On protecting bumiputra interest, UDA, under the Everbright proposal, will own a significant portion of the assets in the project and will ensure bumiputra contractors will be given the opportunity to participate in all stages from consulting, construction and retail space

Chairman Datuk Nur Jazlan Mohamed said the committee was at the initial stages of developing the masterplan but early indications were that the development model proposed by Everbright gave the best returns to UDA .

“On a commercial basis, Everbright's proposal is the best because it will develop the land as one piece. If the land is cut into three parcels, you know you will lose the value of the land,” he told StarBiz in an interview.

“But we have not come to a conclusion yet.”

MOF has asked UDA to divide the land into three one is for a bumiputra controlled party, another by a bumiputra company in a joint venture with others and the third parcel is open to a non-bumiputra company.

Under Everbright's proposal, the China company will fund the entire development of the land that has been called Bukit Bintang City Centre (BCCC). Its proposal comes with a committed funding of US$1bil and Everbright will take the construction and financing risk, build a contiguous retail space of 2 million sq ft, a car park and a convention centre and hand it over to UDA.

All that time, UDA will retain control of the land and Everbright will, after handing over the assets UDA needs in four years, develop its own properties on the land at its own pace.

Given the amount of commercial space that is planned in Kuala Lumpur, Everbright will have the muscle and foreign connection to handle the flood of floor space that will come on stream in the next few years.

The best option so far for the bumiputra developer will see UDA take on a lot of the risk Everbright is willing to shoulder. UDA. together with the bumiputra developer, must secure the funding for developing the project, which will lower the returns it will obtain.

That means the property will have to be injected into a special purpose vehicle and the ownership of the land will be charged to a bank to get the funding.

The land will have to be charged to the bank in order to raise the funding since UDA does not have the cash to fund the multi-billion ringgit project,

That will translate into lower earnings for UDA compared with the proposal by Everbright.

Furthermore, the floor space it will have to lease out to retailers once the project is completed under the parcelled-out proposal will also be smaller as the land would have been sub-divided among three different developers.

Nur Jazlan said the proposal by Everbright would mean that UDA stands to receive RM300mil to RM400mil a year in income from its property at BCCC, which is essential for a company that has just 400 arces that can be developed.

“The best solution is for UDA to have enough retail space to allow it to earn substantial recurring income to continue to have money to acquire land and grow as a developer.

“What is UDA's long term future and the Puda Jail land provides the only hope for UDA where if developed properly, UDA can get the right quality assets that can give it recurring income.

“That's why the decision on the Puda Jail land is not a normal decision. We need to develop the right quality assets to give us the recurring income for us to have a future,” he said.

Shopping centres need to be of a big size to attract the traffic to be successful. He said the retail space at the Puda Jail land will require a contiguous space in order to compete against the like of Pavilion and Mid Valley Megamall.

If the carved out proposal gives UDA retail space in three separate locations, Nur Jazlan said it would be hard to attract retailers and shoppers to the retail parts of the development.

“If it is not integrated, it will be hard to attract people. We won't achieve the rental yields.”

Nur Jazlan said the Government had not pumped money into UDA after it got listed in the 1990s and he did not think it would do so in the future. UDA has been asking for more land since it has been privatised but has yet to be allocated any.

Nur Jazlan said it was also easier to stratify the assets if the property was built by a single developer.

“It will be a problem if the land was parcelled out as you will be dealing with three different parties,” he said.

Nur Jazlan said it would not be easier to REIT out at a later date if the assets were jumbled up with different developers.

By The Star

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