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A Ministry Of Real Estate And The Putrajaya REIT

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THE 2016 Budget has been tabled in Parliament and will no doubt be furiously debated in the upcoming Parliament sessions.

We are all aware of the problems Malaysia is currently facing caused by the drop in government revenue, a weakened ringgit and increasingly expensive cost of raising capital, which has led to belt tightening measures in the 2016 Budget where allocations for various ministries have been cut.

Having been a practitioner in the private sector all my life, especially being part of the real estate sector over the last 25 years, I would like to suggest some low hanging fruit strategies that could address some of our budgetary shortfalls.

A new ministry for real estate?

At last count we have 25 ministries in the Government. I would like to suggest a 26th. I know it may sound excessive but let’s explore together the real estate that the Government of Malaysia owns and how we may capitalise on its value better.

We have always heard that we are great at building things and poor at maintaining them. That for the large part is true. The recent refurbishment of the Bukit Jalil Stadium for a whopping RM1bil begs the questions what did we actually spend since 1998 in maintaining it for it to fall into such a state of disrepair.

The Government has realised a need for asset management of their vast real estate holdings and is taking a cue from other Commonwealth countries by introducing the Total Asset Management Manual in 2009 (TAMM 2009). I am not clear as to how far this has been implemented – I for one haven’t heard much about it to date.

However, there appears to be a crying need for a coordinated effort to bring all of the Government’s real estate assets under the management of one Ministry – hence my suggestion of a 26th Ministry – The Ministry of Real Estate.

The Government has a huge balance sheet of real estate spanning purpose built office space, schools, hospitals, universities, student accommodation, markets, airports, ports, road and rail infrastructure, including rail stations, LRT and MRT lines and stations, power generation plants, military bases and quarters, golf courses and plantations, to name a few. The property assets of the Government is the largest and the richest in terms of value. It could very well run into trillions of ringgit.

Unfortunately, its current management appears to be uncoordinated, especially from a property management perspective. A dedicated ministry with a focus to manage the huge asset base will for once lift the bar and create a portfolio of government assets that will be well professionally maintained and managed with the correct long-term strategies in place.

Could a REIT structure work for the Government?

The Government’s NAPIC report in 2010 quoted that out of a total of 177,345,000 sq ft of purpose built office space in Kuala Lumpur, Putrajaya, Selangor, Johor and Penang a quarter belonged to the Government. In 2014, the total office space in Malaysia had risen to 210,388,000 million sq ft. If the proportion is assumed to be the same the Government would own 25% of that – 52,600,000 million sq ft.

That’s a lot of office space. If we take a commercial rate of RM4 per sq ft, it would translate to a rent of RM2.5bil a year of imputed rent a year.

If all these assets were managed on the lines of a private ReIT using professional asset managers and a transparent structure, there is a very good chance that these office buildings could be securitised and listed as a REIT returning RM30bil to RM35bil to the Government coffers. They will still have to allocate a rent of RM1.9bil a year but they will then not have the worry of maintaining the buildings as ReITs take very good care of their assets.

But that is the tip of the iceberg. The assets under the Government’s care is huge and it needs a dedicated ministry to ensure all these assets are allocated the appropriate budget to ensure their proper maintenance. The assets will have to be segregated into different asset classes and managed by dedicated teams.

Malaysia has a very sophisticated and professional real estate industry and we are not short of the talent to manage these large and diverse portfolios. It will also create those high-paying jobs, we so need to achieve our status as a developed nation by 2020.

The Putrajaya REIT?

Putrajaya was a bold development by the Government in the 1990s, creating a new administrative capital followed on from Australia’s Canberra and Brazil’s Brasilia.

The Asian Financial Crisis of 1997 / 1998 had somewhat slowed the development of Putrajaya. In 1999, 300 staff members of the Prime Minister’s office moved to Putrajaya and the remaining government servants moved in 2005. On Feb 1, 2001, Tun Dr Mahathir declared Putrajaya as a Federal Territory with the ceremony of handing over Putrajaya township from the Selangor state authorities.

In 2002, a rail link called KLIA Transit was opened, linking Putrajaya to both Kuala Lumpur and KL International Airport in Sepang. However, construction of the Putrajaya Monorail which was intended to be the city’s metro system was suspended due to costs. One of the monorail suspension bridges in Putrajaya remains unused.

However, the real estate in Putrajaya is well planned and executed and the new administrative capital will
in time become a much sought-after address.

Putrajaya has been largely built by Putrajaya Holdings Sdn Bhd (PJH). PJH’s strong track record as the master developer of the Federal Government administrative capital in Putrajaya and the strength of its Government- linked major shareholders namely KLCC Holdings Sdn Bhd and Khazanah Nasional Bhd has led to its strong preliminary rating of AAAIS with a stable outlook.

For Putrajaya alone,  the Government pays close to RM1.3bil a year under a 25-year private finance initiative agreement on a Build, Operate and Transfer initiative with the Government.

My thesis is that Putrajaya is a perfect vehicle to REIT. If not after 25 years the Government will inherit 25-year-old buildings with the need of a massive update in its M&E and interior fittings. Then we
are back to a maintenance issue and more expense and the argument of who does what.

The first duty of the Ministry of Real Estate will be, upon the 25th year anniversary of Putrajaya, to set up Malaysia’s first Government-sponsored Islamic Office REIT, which can grow with further injections of Government assets.

The results will be the more efficient use of space, sustainable energy initiatives, better maintained buildings with lower overall cost and the Government will recoup its investment in Putrajaya. The plus side will be that Malaysians will be able to have ownership of their flagship capital.

A win-win situation for all!

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