The Malaysian Reserve, 15th May 2015:

Many LTH depositors opposed the purchase in the TRX because it was seen as a bad deal for the pilgrimage fund

by OUR REPORTER

THE Tun Razak Exchange (TRX) project was at the centre of a storm last week after news that the Pilgrimage Fund Board (LTH) and Retirement Fund Inc (KWAP) had bought land within the development by 1MDB Real Estate Sdn Bhd (1MDBRE).

Many LTH depositors opposed the purchase in the TRX because it was seen as a bad deal for the pilgrimage fund.

In reaction to public outcry which sprung overnight, the LTH board immediately announced that it was backing out of plans to build a 40-storey apartment complex in TRX and selling off the land it has purchased.

KWAP also announced that it has made no commitment to buy into the development. On the other hand, Indonesian developer the Mulia Group announced that it had signed a deal to buy a 74-storey Signature Tower within TRX. The tower had been one of the projects offered to LTH but it decided to pass.

TheMalaysian Reserve caught up with 1MDB RE CEO Datuk Azmar Talib and asked him some direct questions.

Q: TRX has seen quite a couple of weeks recently. Let’s talk first about the Mulia deal, and what this means for TRX.

A: TRX plans to be an international financial hub. It is intended for the Signature Tower to house top-tier local and international financial services players, so the early development of the Signature Tower is crucial. Its location is at the centre of the district and its position as the most prominent building will also help enhance TRX’s brand.

The sale of development rights for the Signature Tower is part of our overall strategy for the commercialisation of TRX. Our agreement with Mulia Group involves sale of a 3.4-acre (1.4ha) plot meant for the development of the Signature Tower. The funds from the sale will be used for our infrastructure work. The Mulia Group is one of the biggest commercial property developers in Indonesia, and has been looking around the region for expansion, and TRX is the best opportunity for them to raise their profile.

Q: What happened to the China EximBank (Export-Import Bank of Malaysia Bhd)agreement that was signed in 2014?

A: The agreement between China EximBank and 1MDB is an initiative to promote investment cooperation between China and Malaysia. One of the potential project is the investment into the Signature Tower. We had talks on how to proceed but did not reach a conclusion. The larger a greement is still relevant for other opportunities

Q: How do you respond to the accusations that 1MDB RE will greatly profit from cheap land purchases that will be sold for market prices at the expense of the government and the rakyat?

A: We want to clarify that the total land cost for TRX is not just the land acquisition cost but more significantly, there are costs to settle both legal and physical encumbrances on the land, and get the land ready for development. This means that as the master developer, we are investing close to RM3.8 billion to provide world-class infrastructure for TRX. We have also planned for a large public park at the centre of TRX. This cost of developing the infrastructure is factored into the selling price of the land-a fact that is transparent to all prospective investors or buyers, and is one of the reasons why they want to invest in TRX.

Q: There has been tremendous backlash by the public on the LTH deal and KWAP’s intention to purchase land at the TRX. What is your response?

A: I will concede that we are taken aback by the public’s negative reaction towards the deals. These are purely commercial deals – for example, we started talking to LTH in 2013, and they later participated in a bid via our Investment Memorandum (IM) process. This is not a bailout as claimed by various parties. As the master developer, we are to realise the objectives of TRX through various monetisation means. The sale of land is one such example- we also undertake joint-venture developments and sale or lease of buildings.

Q: With the negative sentiment around the LTH deal, why didn’t you abort it?

A: It is an arm’s length commercial transaction. People would argue that in this situation, we could just tear up the agreement and find some sort of compromise, but we believe that the deal is a win-win for both parties.

Q: Why did 1MDB RE ask for 100% of the payment upfront for the LTH deal?

A: We had several parties who wanted to purchase the same plot at higher price, but we chose to work with LTH. This is one way for us to get more local and Bumiputera participation for TRX. We also recognise the value of having LTH as one of our investors.

One ofTRX’s selling points is Islamic finance – to have LTH on board, a globally recognised Islamic fund, is a boost for us. The eventual sale price is almost 20% lower than the valuation we got from an independent valuer. The payment structure was the only concession to TRX in this transaction.

Q: Will you continue to woo government-linked companies (GLCs) or government funds to participate in TRX?

A: TRX has always been open to any interested parties, whether foreign or local, from the very beginning. The government has stated that it would like to see more local and Bumiputera players involved in TRX, and we have approached government-linked institutions with prime pieces of land in the development.

The residential plot for LTH, for example, is a good piece overlooking the park and integrated with the retail mall. The plot that we are talking to with KWAP is one of the best commercial locations within the financial district – directly adjacent to the Mass Rapid Transit station, next to the retail mall and the Signature Tower.

With the Lend Lease agreement, we were criticised for not giving the opportunity to locals. With the LTH deal, it was reported that we were depending on government funds for a “bailout “. It is a conundrum. It would be a loss for the country if we end up working only with foreign investors.

Q: Why not try the local players, the private sector and not just GLCs?

A: Under our IM process, there were two clear categories, one specifically for local investors only, and the other is open for both local and international. We are talking to private local institutions, both to develop plots and as tenants.

Q: What happens now to your deal with KWAP?

A: As stated in KWAP’s media statement, nothing is finalised yet. We signed a non-binding Head of Terms with them last year. Generally speaking though, given the current sentiment, it will be challenging for us to encourage some local parties to get involved. This is not a good thing.

Q: Do you feel that all this publicity will drive foreign investors away?

A No it will not. TRX is a very attractive proposition. We are fortunate to have foreign and local parties that are still interested despite the sentiment. They are evaluating the potential from a purely commercial perspective, and they remain objective to what kind of returns TRX can bring.

Q: Do you feel that TRXhas been treated unfairly by the public thus far?

A: We are under no illusions that getting buy in from the people of Malaysia on the benefits and visions of TRX will be a walk in the park. Again, TRX is not a development that can be realised overnight. We are making good progress and we have a deadline of 2018 to deliver the first phase. All we ask is that we are given a fair chance to show that we can deliver on the TRX promise. After all, we are in good company as the KLCC and KL Sentral projects also met with skepticism in the beginning.