It is reported that Iskandar Investment Bhd (IIB) is offering buyers and developers in Medini the option to convert properties under the Private Lease Scheme (PLS) to freehold status, with premiums of RM8 per GFA for undeveloped land and RM10k per unit for completed properties. Sunway benefits significantly from this development as its Medini (691 acres, 60%-owned via a JV with Khazanah) is currently under PLS, with effective remaining landbank and GDV of 130 acres and RM6.2bn. The conversion enhances land value and GDV, demonstrated by the 25% price differential between Sunway’s freehold Maple Residence (RM550 psf) and PLS Sunway Aviana (RM440 psf). Maintain forecasts and our BUY recommendation with with an unchanged TP of RM5.75 based on SOP valuation.

NEWSBREAK

According to The Edge, Iskandar Investment Bhd (IIB), landownder of the 2,230-acre Medini Iskandar Malaysia in Johor is said to be issuing offer letters to buyers in Medini with an option to convert their properties, which are currently under a private lease scheme (PLS) to freehold at a premium. As for Medini developers, they will have the option to acquire from IIB a freehold interest in their land bank, specifically for undeveloped land. The option to convert to freehold comes with a premium of about RM8 per gross floor area for undeveloped land and RM10k per unit for completed units.

HLIB’S VIEW

Sunway Medini land overview. Sunway holds 1,770-acre of landbank in Sunway City Iskandar Puteri (SCIP), divided into two key areas:

1. Medini Iskandar (691 acres):

Sunway owns a 60% stake in Medini through a JV with Khazanah Nasional Berhad. The land is currently under a PLS. To date, 30% of the Medini land has been developed. The remaining effective landbank and GDV stands at 130 acres and RM6.2bn.

2. Pendas (1,079 acres):

Fully owned by Sunway with freehold status.

What is PLS? The PLS is a property ownership structure where the landowner (lessor) leases land to a developer for a fixed tenure. In the case of Sunway Medini, the land is owned by IIB and leased to Sunway for an initial tenure of 99 years, with an option to extend for an additional 30 years. Sunway, as the developer, is the first lessee under the PLS. Once Sunway develops and sells properties, the homebuyer becomes the second lessee.

Drawbacks of PLS. The PLS in Medini was initially introduced to restrict foreigners from owning properties in perpetuity. However, several drawbacks of this scheme have since emerged:

1. Lack of legislative framework:

As the PLS structure is the first of its kind in Malaysia, there is no established legal framework specifically governing it. This is in contrast with the more conventional freehold and leasehold land statuses, which are backed by well-defined national and state land laws. The absence of clear legislation creates uncertainties for both developers and property buyers.

2. Challenges in bank financing:

Homebuyers often face difficulties in obtaining bank financing due to the lack of clarity and regulation around the PLS structure. Banks are hesitant to finance PLS properties, perceiving them as higher risk compared to properties with leasehold or freehold status.

3. Perceived market uncertainty:

The lack of a well-developed governance framework can deter potential buyers, due to concerns over the long-term security of ownership and the conditions for lease renewal.

Premium to convert to freehold. As mentioned earlier, the option to convert land in Medini to freehold status comes with a premium of approximately RM8 per GFA. This premium is directly linked to the built-up area of the property to be developed on the land. To illustrate the impact, consider Sunway’s recent launches within SCIP:

1. Sunway Maple Residence (Pendas):

- launched in Sep 2024 on the freehold side of SCIP.

- selling price: RM550 psf for Phase 1.

2. Sunway Aviana (Medini):

- launched in May 2024 on the PLS (leasehold) side of SCIP.

- selling price: RM440 psf for Phase 3.

The significant price differential of around RM110 psf (25% higher) can be largely attributed to the land status difference. Note that Phase 1 of Sunway Maple was sold out within two hours of launch, while subsequent units from the project were sold at a higher price. Thus, the price differential should be even higher. This demonstrates the value that freehold status brings to property pricing and market perception. For properties on the Medini side, converting to freehold status could easily result in an uplift in selling prices or GDV of more than 25%, which more than compensate the RM8 per GFA conversion premium.

Positive development. The long-awaited discussion on converting PLS to freehold in Medini, which began in 2020, has now reached a pivotal moment. The timing is ideal, aligning with the recent formalisation of the JS-SEZ. As SCIP is located within the SEZ, the area’s appeal to buyers is set to increase significantly. Key advantages include:

1. MM2H SEZ relaxed requirements:

The SEZ-specific MM2H category offers the most relaxed requirements for applicants. Crucially, it mandates that properties must be purchased directly from developers, driving demand in the primary market and boosting sales for developers like Sunway.

2. No minimum price threshold in Medini:

Medini Iskandar stands out for having no minimum price threshold for foreign property buyers. This is a significant advantage compared to other parts of Johor, where foreigners face a minimum threshold of RM1m for high-rise properties and RM2m for landed properties.

This marks a major positive development for Sunway, as it not only significantly enhances the land value and GDV but also provides a catalyst to accelerate development in SCIP.

Forecast. Unchanged.

Maintain BUY with an unchanged TP of RM5.75 based on SOP-derived valuation. With the group’s widening exposure in the Malaysian economy, the stock provides a good proxy to the domestic economy which is currently entering a new phase of growth. Moreover, in an environment of heightened geopolitical uncertainty and potential policy risks—particularly with the upcoming changes under the Trump administration— Sunway’s predominantly domestic-focused business model stands out in its investment appeal given that it is less exposed to this risk.

Source: Hong Leong Investment Bank Research - 20 Jan 2025