Tower REIT steps outside the box for value creation

This article first appeared in The Edge Malaysia Weekly, on May 6, 2019 - May 12, 2019.

Photo by Sam Fong/The Edge

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THE glut of office space in Kuala Lumpur has prompted Tower Real Estate Investment Trust to reinvent itself by offering co-working and co-living spaces in one of its properties. On April 25, it announced the makeover of one of two commercial properties in its portfolio — the 32-storey Menara HLA in Jalan Kia Peng, KL. It now envisions a building that combines traditional tenants and small companies on flexible leases with co-living spaces, food and beverage (F&B) outlets, a gym, an auditorium and customisable event spaces.

“Increasingly, as the millennials join the workforce, you are seeing a change in space utilisation. The traditional model of leasing is changing. This is evident from the rise in co-working spaces as a lot of companies nowadays want flexible spaces and leases. They don’t want to be burdened with capital expenditure,” says Eusoffe Chua, CEO of Tower REIT, which is controlled by Hong Leong Group.

“In the past, landlords had a hands-off attitude. This means you lease the space from me, we negotiate the rates and I leave you to quiet enjoyment.

“The advent of the internet has also made people more mobile. Many companies are now moving towards more flexible working hours and becoming more space-efficient. In fact, the per square foot of space per employee is shrinking and we are seeing that more employees are being squeezed into a fixed area.”

But pure co-working spaces have their own set of challenges.

“Companies that are in there will only continue to stay if they are successful. And if another co-working space opens next door and offers a cheaper rate, ironically, the very flexibility that allows them to move in easily also allows them to move out the same way. It is a double-edge sword,” says Chua, who took the helm at Tower REIT in September 2017.

So, how do you make them stay? To find out, the 41-year-old spoke to various start-ups and visited different parts of Southeast Asia. “We learnt that a building’s ecosystem is what keeps companies there. They want to be in a place where the chances of success are the highest. For example, if I were an entrepreneur trying to grow my company, I would move to a space that offered programmes, mentorship, networking opportunities, market access and legal advice … the whole suite of services that would make my company successful,” he explains.

Tower REIT wants a place that will appeal to companies in technology — the fastest-growing industry in the world. “We want to focus on this sunrise industry. At present, there is no single location where all the tech companies can gather in the Klang Valley. They are now scattered across Cyberjaya, Bangsar South, KL Sentral, KLCC and Petaling Jaya. The HLX (Malaysia’s first innovation exchange) will be a one-stop facility that converges the corporate and tech start-up communities under one roof,” says Chua.

The makeover of Menara HLA, which is currently 40% occupied, to include the HLX, involves redeveloping 250,000 sq ft or 63% of the building’s total 400,000 sq ft of net lettable area in two phases. The first phase will be ready by the end of the year while the second phase, which will see facilities like a gym, will be completed by December 2020.

“Basically, we are changing the playbook. With the HLX, we want to build a vertical Silicon Valley that will be a playground for all tech companies,” says Chua.

Backing up Tower REIT is Hong Leong Group, which has expertise in the banking, property and manufacturing sectors. It is also partnering Malaysia Digital Economy Corp to help bring know-how and networking opportunities into the exchange. On talent development, there will be an HLX Academy where Tower REIT is partnering technical experts like CXS Analytics Sdn Bhd, BAC Education Group and Twistcode to lead certification and talent upskilling programmes.

“We are partnering AltSpace by Lyfz Co-Living to operate the co-living spaces (at the HLX). We will be announcing our co-working partner shortly,” says Chua.

He believes that with the HLX, Menara HLA can command higher rental rates apart from luring new tenants.

“If we are able to meet their needs strategically and the price is something they can afford, I think companies will be willing to pay for the value they will receive,” he says.

At the same time, Tower REIT will earn income from the renting out of event spaces, such as the auditorium.

Plans are also afoot to upgrade Plaza Zurich, formerly known as HP Towers, in Damansara Heights, KL, as part of Tower REIT’s asset enhancement initiative. This involves the refurbishment of the office lobby of the building, which has an occupancy rate of close to 70%, boosting the F&B space and improving the connection to the nearby MRT station. The work is slated for completion by the first quarter of 2020.

On how much Tower REIT was spending to enhance its two commercial properties, Chua would only say that it was “significant” and would involve borrowings. As at March 31, the REIT was in a positive net cash position with cash and bank balances of RM476,850 and borrowings of RM100,000.

Menara HLA and Plaza Zurich were valued at RM562 million in total as at March 31.

Tower REIT had a market capitalisation of RM248.24 million  based on its closing price of 88.5 sen last Thursday.

“We are looking to maximise value for our unit-holders, both organically and acquisitively. While we are trying to grow our top line, we are also looking at using technology to drive our costs down. [For example] we have implemented an energy-efficient system in Plaza Zurich to drive down one of the biggest costs for any building, that of electricity,” says Chua, adding that the REIT is also evaluating “a lot of acquisitions right now”.

“We are not going to be a pure office REIT. I can’t say right now exactly which areas we are going into but we are evaluating a wide range of options. We are looking at a more holistic approach, so that when we diversify, those assets must also add value to the ecosystem of assets that we have right now. It makes sense for us to look at assets that will house the economy of the future.

“But we are not in a rush to acquire any asset this year. No, we want to do it intelligently. It needs to make sense to the unit-holders.”

Tower REIT’s net realised income for the quarter ended March 31 came in at RM4.95 million, which was up 54.6% year on year mainly due to assessment received and reinstatement of compensation received from tenants of Menara HLA. However, revenue for the quarter fell 3.8% year on year to RM6.5 million.

 

 

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