Highlights

• Boosting Greater KL. Greater KL is the most populated region in Malaysia with 7m people (26% of the nation). Since 2010, 9 projects under the Economic Transformation Program (ETP) have kick started in Greater KL. Its public transport system is being improved via the BRT, LRT ext, MRT 1&2 and HSR. Road connectivity will also be enhanced through new highways such as DASH, SUKE and DUKE3.

• Rise of catalytic developments. As a result of Greater KL’s rejuvenation, several large scale catalytic developments have emerged. These include the Tun Razak Exchange (TRX), Warisan Merdeka, Bukit Bintang City Centre (BBCC), Bandar Malaysia, Kwasa Damansara and Cyberjaya City Centre (CCC). Collectively, these 6 catalytic developments have a GDV of at least RM275bn over 3,355 acres of land.

• Backed by the government. All the catalytic developments have government participation as the master developer, be it directly (e.g. MoF) or indirectly via its related entities (e.g. EPF and PNB). As such, we reckon that much effort will be accorded to ensure its success. Tax incentives will be given for developments such as TRX and Bandar Malaysia. Take up rates will also be supported by the relocation of government offices there (e.g. EPF relocating its HQ to Kwasa Damansara and PNB to Warisan Merdeka).

• The age of TOD. These catalytic developments will be integrated to a public transport network, giving them an advantage as Transit Oriented Developments (TOD). The case of KL Sentral as a TOD is anecdotal evidence on the importance of public transport connectivity towards a development’s success. We believe the appeal of TODs will be even more prevalent once the MRT1 is completed in July 2017.

Sector Impact

• Positive for construction. Assuming 50% of GDV constitutes construction cost, these catalytic developments would present contractors with RM137bn worth of jobs to undertake over the next 20 years. Potential beneficiaries are (i) WCT and Gadang for their track record in earthworks, (ii) IJM, Pesona, Mitrajaya and SunCon for urban high rise buildings and (iii) pilling contractors such as Pintaras, Econpile and Ikhmas Jaya.

• Negative for property… KL city is experiencing a potential excess supply situation within the condo and office segments. Traditional developments will have to compete with the catalytic ones which have an edge as TODs and government backing. Nonetheless, most developers under our coverage have a diversified product mix spread across several states. For risk of concentrated exposure, we highlight UOA within the office segment.

• …and REITs as well. KL city’s retail space per capita (17sq ft) is already above Bangkok (9 sq ft) and Singapore (12 sq ft). Additional malls under the catalytic developments will further increase this, capping upside to rental reversion. Despite this, established malls in prime locations such as Pavilion (PREIT) and Suria KLCC (KLCCSS) should continue stay relevant. On offices, the influx of new space will place downward pressure on occupancy and rent. MQREIT has 80% of its revenue from office and KLCCSS at 44%.

Source: Hong Leong Investment Bank Research - 14 Dec 2016