Artist impression of Tun Razak Exchange in Kuala Lumpur.
1MDB will spare no effort in building the state-of-the-art Tun Razak Exchange.
UNLIKE other ground-breaking ceremonies where VIPs often sweat it out in the blazing sun with a shovel in their hand to mark the occasion, the one for Kuala Lumpur's newest and arguably swankiest financial district was done in style and comfort.
In one late July afternoon near Jalan Tun Razak, the VVIP who got the project officially off was Prime Minister Datuk Seri Najib Tun Razak. What he did was just touch a LED sphere that rose right before him in a makeshift air-conditioned hall and within seconds, images of a huge excavator loading gravel onto a lorry appeared on two large screens. That was it. No heat, no sweat, just a simple ceremony to mark the momentous occasion, and powered by technology.
And it will be smart technology, a digital backbone, eco-friendly elements and a garden city that will be the hallmarks of a futuristic city for modern living and working. When the cement and paint dries, the Tun Razak Exchange (TRX) will mould and alter the increasingly towering skyline of Kuala Lumpur.
Shahrol: ‘We have locked in a strategic investor for phase one.’
Named after the prime minister's father (Tun Razak), TRX will house 26 buildings over a 70-acre site on the fringes of the Kuala Lumpur city centre. It is designed to house hundreds of multinational companies, financial institutions, government agencies, hotels and support services. The project has an eye-popping gross development value of RM26bil.
Though a lot of planning has gone into the design of the new district, the question is will it be enough to thrust KL into one of the top 20 livable cities in the world? Will it be a financial hub that can attract the big deals and talent that seems to gravitate to Singapore and Hong Kong? Would its emergence create a glut in the real estate sector?
And what will it take to turn this whole dream into reality?
The detractors are already in full voice. They are so sure this new futuristic city will become another “white elephant.” But its master developer, 1Malaysia Development Bhd (1MDB), is convinced otherwise. It's sure that TRX will not just change how real estate is developed in the city and inevitably raise the standards of future developments, but it will become an oasis for global companies to reside and an area for talent creation. Encapsulating all of that, it will be a place where enough and sustainable economic activity will be created.
“People are willing to bear the high cost of living in London because it has everything, from being a financial hub to the connectivity, shopping, gourmet, the art galleries... we want to strive for that.
“We are like a part of this one big jigsaw puzzle and TRX can only address the overall vision of the Government when the other pieces are also moving. The reality is that it requires a lot of effort,” 1MDB chief executive officer Datuk Shahrol Halmi says.
He adds that “we are also not limiting ourselves to financial services. We are open to others so long it contributes to the vibrancy and diversity of the district.”
Big bucks from Abu Dhabi investor
To make sure this new district had all the trappings of a futuristic and livable city, the team visited places such as Rappongi in Japan, Hong Kong, Marina Bay in Singapore and Canary Whaft in London to extract the best of what those places have to offer.
Now that the design is in order, the question is who will fund this venture? Shahrol says “we have locked in a strategic investor for phase one and its infrastructure.”
But he is tight-lipped about the name of the investor. Those in the know say it is the Abu Dhabi government via Mubadala Development Company that is the key strategic investor. It is no coincidence that Mubadala had in October 2010 forged a collaboration with 1MDB with a view to explore joint key strategic projects in the Kuala Lumpur International Financial District or KLIFD, now known as TRX. Shahrol admits KLIFD was a “mouthful” to pronounce and tricky to remember, hence the name change.
The Abu Dhabi investor will bring RM3.5bil worth of FDI for the first phase of the TRX development, which will encompass three buildings on top of a mall plus the infrastructure. The first phase should be completed in 2016 and TRX is 15 year project.
The story does not end there.
There is interest to fund the entire infrastructure cost of TRX and both parties are locked in talks. If all parties are agreeable, the Abu Dhabi investors will bring in an additional RM2bil to fund the infrastructure work, which will bring the total FDI from them to RM5.5bil. And that puts TRX in a good spot, says an observer.
“It is that kind of momentum that can push this huge project through but we also need more strategic investors as this is a huge development,” he adds.
Shahrol did say 1MDB plans to lock in another strategic investor soon but did not elaborate.
Contrary to market belief that the biggest investors will be the Middle Eastern firms, Shahrol says “no, we are also looking beyond the Middle East.''
“We have enquires from all over the world, from investors, potential tenants, service providers and even technology firms (that want to be part of the development),'' he says.
Special advisor to the Japanese Cabinet Tadashi Maeda, who was at the launch on July 30, says he had written to the Malaysian government to express the interest of investors from his country to get involved in the development of TRX.
“The Japanese are definitely interested as they feel they have the technology to aid TRX,” says Shahrol.
“It is not a Middle Eastern and Japan play. There have been enquiries are from all over and there may be some government to government arrangements. Even some of the local players are keen to be party to this development,” says someone familiar with the mammoth project.
TRX will be developed in plots and indications are that it will be spread over four phases. But that will depend on how 1MDB wants its dream realised.
“We expect to have strategic investors where they will develop (some buildings) with us and there will be plot by plot joint ventures and also outright sale of land,” he says.
To Shahrol, it is about getting the momentum moving and then it can shift its focus and pitch towards its next priority. Local players will be part of the development including local construction companies, but a key component will be about raising the standards and quality to that of a world-class development in order to attract tenants.
“TRX can only address the overall vision of the Government when the other pieces are also moving. If there is no support, then it will be less than optimal,” he says,
But he is not about to let anything stop TRX from being a reality and he has a checklist of what needs to be done to make sure there is total cooperation and coordination in delivery.
Incentive competition
The concept of working with key strategic investors is similar to that deployed by Iskandar Malaysia and other corridors throughout the country. All dangle incentives to get the FDIs and it is no different for TRX. In fact, a task force has been set up to ensure no stone is left unturned in the planning and development of TRX.
That has raised concerns in the market place if the other corridor developments have a fleeting chance of getting more FDIs if TRX is going to be a magnet of interest from investors.
“The perception is that we are the favoured one, but Iskandar already has its own incentives, and so does the Northern, Southern and Eastern corridors. And when these projects were mooted, they had their own strengths.''
He says Iskandar's strength is that it is near Singapore, the Northern corridor's strength encompasses agriculture, while the Eastern corridor is more into oil and gas and support services.
“Why should Petronas suddenly scale back from the Eastern corridor (just because TRX has emerged) when they (are so entrenched in) Kertih, or why should Sime Darby scale back from the Northern corridor?
“Investors have their own reasons as to why they are investing in the corridors. They have their own sectors and strengths and each of the corridors have their own attraction and appeal,” he adds.
But Shahrol adds: “I cannot speak for the government (where the incentives are concerned) but as the owner and master developer, we would want (all the incentives) for TRX. Of course, there is a whole process of getting the incentives where many agencies such as the Finance Ministry, Securities Commission and Bank Negara are involved. It is really up to the policy-makers and they know how to balance and finalise the details.”
TRX is seen as an enabler and catalyst of the Government's Vision 2020 and the ETP initiative. It is supposed to spur new areas of growth, facilitate economic transformation and promote regional as well a global prosperity. The idea is also to create enough economic activities to create and aggregate talent and move towards a sustainable model for green initiatives. TRX is supposed to pioneer all of that, hence some of the incentives.
The incentives on offer include 100% income tax exemption for 10 years, stamp duty exemption on loan/service agreements, incentives for industrial building allowance and accelerated capital allowance and income tax exemption of 70% for five years for eligible property developers.
While 1MDB, which is wholly-owned by the Government, will spearhead the development of TRX, the Government will not fund the project and Shahrol makes it clear that “they did not write me a cheque, we had to pay RM230mil for the land.”
The potential glut
Shahrol does not believe there will be an oversupply of commercial buildings once TRX is built. He also does not subscribe to the notion that there will be a flight of quality tenants to TRX.
TRX is three minutes away from the Petronas Twin Towers and the Bukit Bintang tourist belt and a stone's throw away from the central business district in Jalan Sultan Ismail and Jalan Raja Chulan.
TRX, however, will share some of the features of those places but will differentiate itself from comparable business districts within Kuala Lumpur. It will have open spaces and parks to create a garden-like city. Of the 70 acres, 21 acres are for parks and open spaces. As for the buildings, there will be 26, one of which is the signature tower with 200,000 sq m of floor space.
Combined with the other towers, TRX will have nearly 900,000 sq m to offer when fully competed besides service apartments, hotels, conference and retail facilities and a cultural centre.
Hence the concerns.
Shahrol says: “We are not planning to go through the list of who is on that street and try to get them to TRX. We are more interested in who are the new players that we can entice, companies and businesses which will have otherwise set up regional centres in Hong Kong or Singapore.
“Of course, over time there is going to be a flight of quality tenants, but it will be a question of location where it makes business sense for them to move to TRX because of all there businesses there. This flight would also inevitably force the rest of KL to upgrade their services and we will be seen as raising the bar for real estate development for other parts of KL and elsewhere and that will eventually be good for the country,” he says.
He adds that “cannibalisation effect will be mitigated” and that in itself sets new standards in real estate and it is all these factors that can help push KL to be among the top 20 liveable cities.
“It is also a willingness issue on the part of property developments to push for higher standards so that there is no flight of tenants. If you do not adapt and change with the times then tenants will just move to places that offer better value,” adds an observer.
Competing ways
Kuala Lumpur has long fought a losing battle to be recognised as a financial hub in the region. It pales in comparison with financial centres such as Singapore and Hong Kong. But can TRX change the game?
“It would be tough given that some of the big deals are done in Singapore and, the republic and Hong Kong are recognised internationally as financial centres of this region,” says an observer.
But KL has the trump card when it comes to Islamic banking.
It has received global recognition as a hub for Islamic Banking. Islamic finance was worth just US$5bil (RM15.6bil) in 1985 and now it worth US$1 trillion (RM3.12 trillion) and the Malaysia's Islamic finance sector is already worth US$400bil (RM1.25 trillion) and the booming sector is set to triple in value in the coming decade, says a report.
“How do we compete? Well, you start with the first step, figure out what are the things that we need to do, which is infrastructure. And the Government is also looking to ease the way of doing business here. To say all the big deals are done in Singapore is not true. Just look at our recent IPOs, these deals are done here.
“If you actually start doing all of this correctly, providing a good environment, and we have inherent advantages as our cost is still a lot lower, and our talent, what if we create a business here for them?
“We are also not saying that we are going to compete with Singapore but what we are saying is that we want to leverage on our strengths. We have a good reputation and good momentum in Islamic finance and we just want to seize the day. The point is that it is better to do something than not do it at all,” he says.
He adds that TRX will also in no way be duplicating the Labuan Offshore Financial Centre.
“Labuan is an offshore centre and we are nothing like that. But you can compare us with (the central business district along) Jalan Sultan Ismail and Jalan Raja Chulan.”
The challenge
Among the many real estate projects in the city centre, KL Sentral has been pretty lucky in getting investors and tenants because a lot of planning went into the project. It is rare to plan on such a huge canvas; something similar with what TRX will be going through. What could potentially derail such a project of this size is a host of issues.
Shahrol says that in case of a slowdown “it does not make sense to push this through and it would not make logical sense to come up with a building in the middle of a recession.” That slowdown issue has been raised because of the fragile economic situation in Europe and the United States.
Getting to bed with the right partner is also critical, and to this, Shahrol says “the choice of parents is very important and it is a matter of picking the right partner.”
Forget about everything else, the biggest challenge to him is about “sticking with our original vision, where talent aggregates and value is created.”
By The Star
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