UK deal stirs talk of bailout by KL-owned entities

The development at London's Battersea power station is owned by conglomerate Sime Darby and property developer SP Setia, which equally control a combined 80 per cent interest in the development, with 20 per cent held by the Employees' Provident Fund,
The development at London's Battersea power station is owned by conglomerate Sime Darby and property developer SP Setia, which equally control a combined 80 per cent interest in the development, with 20 per cent held by the Employees' Provident Fund, Malaysia's largest pension fund.PHOTO: AGENCE FRANCE-PRESSE

Statement issued says Battersea takeover driven entirely by commercial considerations

A surprising proposal by two of Malaysia's largest state-owned investment funds to pay a record £1.6 billion (S$2.9 billion) to take over a development at London's famed Battersea power station is stirring talk of a financial bailout and raising questions over the health of the property sector back home.

Late last week, Permodalan Nasional Berhad (PNB) and the Employees' Provident Fund (EPF), state-owned entities with large stakes in dozens of listed entities in Malaysia, announced plans to acquire the "commercial assets" of the ongoing Battersea development from a troika led by conglomerate Sime Darby and aggressive property developer SP Setia.

The deal has raised eyebrows because of the close corporate ties that the key Malaysian players in the deal share. PNB is the controlling shareholder in both Sime Darby and SP Setia, the two companies which equally control a combined 80 per cent interest in the Battersea development. The remaining 20 per cent in the London development, which is plagued by cost overruns and a sluggish London property market, is held by EPF, the country's largest pension fund, which also has stakes in the two listed companies.

London's Evening Standard newspaper reported that the proposed sale came after the costs of transforming the power station soared from an initial forecast of about £750 million. The paper said the projected profit return on the scheme had already been cut from 20 per cent to 8.2 per cent.

Both PNB and EPF stressed in a joint statement last week that the proposed deal was driven entirely by commercial considerations and undertaken "independently without any government intervention".

But the strong related-party dimension in the transaction has stoked debate among bankers and fund managers on whether the deal smacks of a financial bailout by the state-owned investment funds, which are protecting their investments in the public-listed entities.

There is speculation that large Malaysian developers are finding it increasingly difficult to finance their overseas ventures because of the sluggish conditions at home. "It can be seen as a proactive effort to keep the Battersea project in Malaysian hands and head off any potential fallout from troubled loans," said a chief executive of a foreign bank in Kuala Lumpur.

He noted that it would be in the government's interest to ensure that the economy does not face any serious shocks ahead of a general election that is widely expected to be held in the next three months.

As it is, companies like SP Setia and Sime Darby could come under pressure as strains appear in Malaysia's property sector, which has begun to consolidate over the last one year because of lending limits the country's central bank has imposed on banks for real estate purchases and an oversupply of commercial and residential units.

Mr Sarkunan Subramaniam, managing director of Knight Frank Malaysia, said: "Like in the previous year, the market will remain flattish in 2018... the prolonged challenging conditions will separate the wheat from the chaff."

He added that the tough environment in the coming months will begin to take its toll on developers with weaker balance sheets.

There are also fears that a prolonged slump in the real estate market could put pressure on Malaysian banks with large exposures to developers and speculators.

Proponents of the Battersea deal point out that the development has strong commercial prospects. Tech giant Apple has already signed up to take 500,000 sq ft of office space for its new British headquarters at the Battersea power station, the iconic building that the band Pink Floyd portrayed on the cover of its 1977 album, Animals.

A version of this article appeared in the print edition of The Straits Times on January 23, 2018, with the headline 'UK deal stirs talk of bailout by KL-owned entities'. Print Edition | Subscribe