Kg Baru equities can offer stable returns

Equities invested in an SPV in the property market will face limited risks


THE government’s proposal to up its offer to acquire Kampung Baru (Kg Baru) land by RM150 to RM1,000 per sq ft via shares in a special purpose vehicle (SPV) of the development project planned can offer landowners stable returns in the long run.

A property valuer — who spoke on the condition of anonymity — said equities invested in an SPV in the property market will face limited risks compared to investment in the share market which is subjected to severe price fluctuations.

“The only risk here is, if the development goes unfinished. But still, the asset is there and that has value. It is not like in the case of settlers at the Federal Land Development Authority (Felda) whose shares in FGV Holdings Bhd are traded on the stock market,” the source told The Malaysian Reserve.

Felda settlers have long dealt with low to zero dividends from FGV after a mishmash of weak crude palm oil prices and mismanagement which dragged the company’s shares from an institutional price offer of RM4.55 in 2012 to a historic low of 64 sen at the end of last year.

The New Straits Times last Friday reported that while Kg Baru landowners are pleased with the higher offer, they want authorities to provide more details on the renewed offer, particularly on the distribution of shares.

During the announcement of the new deal last week, government authorities said that details of the shares structure will be further refined before contracts are finalised and signed. Institute for Democracy and Economic Affairs senior fellow Dr Carmelo Ferlito reasoned that the use of equity instead of cash would allow the government to save cash, while also attract landowners with the prospect of higher future returns.

To this, Ferlito said landowners can be incentivised in two ways, namely by showing a clearer picture of their future after the land is sold and by creating longterm profit prospects.

He, however, said the offer of shares option should not be made compulsory to give landowners the free will to choose their preferred manner of compensation.

“Somehow, the government is trying to deal with market forces; if landowners do not want to sell at the proposed offer, the only way the government has to secure the land without violating property rights, is to increase the offer price,” Ferlito said.

The total government estimation of the increased buyout cost is RM6.7 billion, while the gross development value of the area is around RM30 billion.

“I think that to estimate a potential return now, however, is premature. It is even not so clear what the government is going to build on the Kg Baru land,” he said.