Land prices, new projects and debts vs GDV

Reported in a local English daily. How much is a piece of land measuring around 144,000sf? It is said to be worth between RM360 million to RM400 million. Yes, this is ONLY the land price. Construction is a totally different thing altogether. Of course, this piece of land is very close to Petronas Twin Towers. This piece of land can thus only be acquired by developers with very deep pockets or KWAP (Retirement Fund Inc). The actual site is where Lai Meng school is situated in Jalan Ampang. Magna Prima, the land owner bought it for RM148.2 million in cash just 5 years ago or around RM1,350 per sf. If they are able to sell even at the lower end, their profit is tremendous. Of course, one additional clause for the land purchase then was that Magna Prima must rebuild a new Lai Meng school in Bukit Jalil.
If you think the land price is so high, well, the plan for Magna Prima previously was to build a 60-storey twin towers on the land with a combined Gross Development Value of RM1.8 billion. They have gotten approval for a plot ratio of 1 to 12 for that piece of land. It meant the total development size can be 12 times the size of that piece of land. In the report, it was said that perhaps the project was way too big for Magna Prima. As at end 2014, Magna Prima has borrowings of over RM500 million and taking up this project is likely to be overly ambitious, unless a bigger partner comes along. Then again, joint ventures are never easy. Thus a more natural choice may be to sell for a big profit and use the proceeds for other investments.
This report in the online newspaper showed that taking up huge projects are not as easy as it seems and unforeseen circumstances would always force developers to rethink their strategy. This is the reason why when we look at the gearing ratio of many developers, even the big names, as soon as they venture out of Malaysia or undertakes a huge local development, their gearing ratio shoots up. Debts have to start before profits would come. Add to this would be the current uncertain property market and negative sentiment as what could be seen in Facebook everyday; complaints, complaints and complaints. Oh yeah, interest in the Malaysian property by foreigners are definitely waning for now. So, any developer trying to build ‘luxury’ must be very well connected or has a very comprehensive marketing plan. I would still look forward to the actual plan for this piece of expensive land. If there are news, will blog about it.
written on 6 Apr 2015
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