S P Setia, Sime Darby Property sells. EPF-PNB buys. RM8.35 billion of Battersea.

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This could be considered a friendly transaction. Malaysian companies to Malaysian funds. S P Setia Bhd and Sime Darby Property Bhd will be selling the phase two commercial assets of the Battersea Power Station to Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB), in a deal worth £1.58bil (RM8.35bil). The transaction is expected to be completed in the first quarter of 2019. The deal was supposed to have been completed in middle of 2018 but has been delayed till current announcement. Article in TheStar here. 

StarBiz had in October reported cost overruns involving phase two of Battersea Power Station, whereby the cost of transforming the brick structure into shops, offices and residential units doubled from £750mil to about £1.5bil. Besides Starbiz, there’s also a report by The Financial Times confirming the increasing costs of labour and materials, and that renovation progress was months behind schedule, which could drive costs higher. It said restoration works for the power station was more challenging than expected, partly due to strict heritage rules and issues caused by asbestos.

The article also says that EPF and PNB will be looking at the rental yield and capital appreciation potential in the Nine Elms area, where Battersea Power Station is located. “The sale will cover office space measuring 510,000 sq ft as well as more than 100 units of retail lots and a 35,000 sq ft food hall in the power station, with construction completion by the end of 2020. “The office spaces are fully leased,” said Maybank IB Research.  According to SP Setia’s filing with Bursa Malaysia, the transaction entails a five-year rental income guarantee, net of operating income, which is equivalent to a 5% yield on the £1.58bil base price to be paid. Article in TheStar here.  

There are some unfriendly comments about this friendly transaction. My view is simple. If EPF and PNB had done sufficient due diligence, then by all means go ahead. The 5% rental yield is definitely an attractive one because with the property prices in many advanced markets, rental yields have been falling. If we were to ask investors in KL today, a 5% rental yield with today’s property price is indeed positive news too. Oh yeah, now Malaysians with savings in EPF or PNB funds can now say they ‘own’ a tiny little piece of London too. Happy following. 

written on 18 Dec 2018

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