Friday, November 28, 2008

Look deeper into IOI cancelling its Menara Citibank purchase …

At the last minute, IOI Corporation decided not to complete the RM587m acquisition of the Menara Citibank office tower in Kuala Lumpur. IOI forfeited its RM73m deposit - 12% of the purchase price. Here are 3 potential reasons:

1) It is an IOI problem. IOI cannot afford the deal because crude palm oil prices have collapsed. But a quick check with my analyst friends finds most of them forecasting about RM2bn pa of operating cashflows with CPO around RM2,000/ton. So, it doesn’t look like IOI itself has issues;

2) Which takes us to … IOI thinks the Malaysian economy will get a lot worse. And it thinks property prices will fall by at least another 20%. (Otherwise, why would it forgo the 12% deposit?);

3) Or, IOI thinks Citi is in serious trouble and will be forced to do a fire-sale later.

Any thoughts? Comments welcome.


Anonymous said...

My takes'

Under (1) the cashflow of IOI Corp under the current spot price of cruel palm oil does indicate that the buy is within her mean. But buying a building, especially at a high premium which most of the analysts dislike, is only part of the story.

There r other factors like rental return, interest payment & maintenance cost etc to be considered.

For a forseeable time lapse from now the interest payment must be a key factor.

The interest rate might remain low due to the current economic pressure. This can possibly hold for 2 yrs. After that yr guess is as good as mine.

The biggest headache could be the rental returns. With the current economic projection many tenants r looking for downsizing, both manpower & office space wise. Thus U r looking at lower rental rate, & lower rent due to smaller office space occupied by key tenants.

And the biggest tenant in Menara citi is citibank. And downsize Citibank will!

Moreover how to attract new tenants to take up the empty space at the curent economic scenario is also a trying factors.

The agreed price tag for menara citi was probably done during the 'good time' when both rental return & economic outlook were sided on the higher end, as indicated by the 'over-price' that most analysts pointed to.

So the return CANNOT be justified now. IOI corp has to pay the 'tuition fee' for her investment into office building.

(2) is a distinct possibility, especially with the lackadaisical approach of the BN govt to the current economic turmoil. All the other govts of the world that worth their stay of power r taking drastic actions, with some even acting think-out-of-the-box like the UK. Desperate time calls for desperate & non-conventional approaches.

(3) citi in trouble is a forgone conclusion. But fire-sale it might not as menara citi is a tripartite ownership. Citi might want to dispose off her building share to repatriate the fund but the other two partners might not want to sell if the price is not good.

Overall this fiasco points to a very grim economic outlook for Malaysia.


Anonymous said...

I would like to think #3 rather than #2 especially with the bailout, etc.
Honestly it is difficult to see a property price drop of more than 12% in Malaysia especially in KL or Penang where real estate is pretty limited...

What are you thoughts on this?

Anonymous said...

I would like to think item#3 is more valid, especially with the US bailout of Citi group.
It is difficult to see real estate prices going down more than 20% especially in KL or Penang where land is scarce.

What are your opinions?

Anonymous said...

Is the NPV of the reduction in rental revenue, increased costs, etc going to be more than RM 50 million ?

WY said...

73million forfeit is certainly a big amount! I would think it's certainly 2) and 3). The property boom is certainly as good as over.