KL financial district: Will it live up to the hype?

An artist's impression of the Tun Razak Exchange, set to be Malaysia's first central business district. -- PHOTO: COURTESY OF TUN RAZAK EXCHANGE

KUALA LUMPUR - Imbi Market is where the locals go to enjoy a hearty breakfast in Kuala Lumpur, but its days in Jalan Melati are numbered.

The fate of the market seems to be intertwined with the city's development. Previously known as Pasar Bukit Bintang, or Star Hill Market, it was located where the popular Lot 10 shopping mall now stands.

Soon its hawkers, who operate little stalls on wheels under the cover of large red umbrellas, will have to move again, this time to make way for the massive Tun Razak Exchange (TRX) project.

The 28ha development, formerly known as the KL International Financial District, is set to be the country's first central business district.

The government has long argued that the country needs a financial district that is comparable to Singapore's Raffles Place or London's Canary Wharf.

An international financial centre, it said, would help maintain its pole position as leader in the region's Islamic finance.

The TRX's location - just a stone's throw away from the Bukit Bintang shopping enclave - is the advantage it has over other ongoing commercial property developments in the city.

"You can't deny that the TRX is located in what could be the last piece of prized land in Kuala Lumpur, and what most property players would like to get their hands on," said Mr Ho Chin Soon, director of property valuer company Ho Chin Soon Research.

The TRX - which will have 28 office towers and RM26 billion (S$10 billion) in gross development value - is likely to contribute eight million sq ft of office space to be built over 15 years.

For comparison, Singapore's Marina Bay Financial Centre said on its website that the project stands on a 3.55ha site that will offer nearly three million sq feet of office space, along with two residential towers and retail space.

Malaysian Prime Minister Najib Razak is offering potential tenants and developers generous tax exemptions to encourage companies and financial institutions to set up shop in the TRX.

Still, there are concerns among property analysts on whether the iconic project will live up to the hype and expectations.

Others say the TRX will only add to a glut of office space.

The office occupancy rate in Kuala Lumpur is currently about 80 per cent, compared with more than 90 per cent a decade ago, because there are more commercial properties today. In the first quarter alone, three new office buildings added more than one million sq ft of commercial space.

Kuala Lumpur currently has some 47 million sq ft of commercial space up for sale or rent.

Still, some fund managers say it will not be difficult to fill the additional space as long as the government does the right thing.

"If the government is relying only on companies that are already operating in KL to relocate to the TRX, then it will only cause some other office towers to be empty, which effectively is a zero-sum game for the commercial property market," said Mr Scott Lim, chief executive of MIDF Amanah, a local fund management company.

"For the TRX to avoid becoming a white elephant, the government and financial services regulators must liberalise the sector and allow more foreign players to operate here. If there are enough new foreign companies, the TRX may just succeed as a compelling business address."

Malaysia's banking sector is heavily protected for national interest, but it is slowly opening up to more foreign institutions, as it plays catch-up with its neighbours in attracting investments.

The country has given out new operating licences to BNP Paribas, Sumitomo Mitsui and Mizuho Corp in the past two years. Plans to bring in a mega-Islamic bank are also in the pipeline.

TRX's trump card will be Islamic finance, in which Malaysia is a leading player in the region.

There are, however, still some issues that the masterminds of the TRX need to iron out first, including how the massive project is going to be financed.

The government has already picked state-owned 1Malaysia Development (1MDB) and a foreign partner, which some news reports say is Abu Dhabi-based Mubadala Development, to be the master developers. Mubadala was one of the key investors for the Iskandar project in Johor before pulling out in March, without reasons given.

When Mr Najib unveiled the TRX project two weeks ago, he said a "strategic investor", whose identity will be announced next month, has pledged RM3.5 billion to construct the first phase.

1MDB is in talks with the same strategic investor to pump in another RM2 billion to fund the entire infrastructure development cost of the TRX, The Star reported last Thursday. 1MDB did not respond to queries from The Straits Times.

Nevertheless, the devil is still in the details, say economists.

"They may have locked in interests from foreign investors in building the TRX, but getting a diversified group of financial institutions and related businesses to come in after that requires a different and more comprehensive strategy," Mr Suhaimi Ilias, chief economist of Maybank Investment Bank, said.

"What niche value proposition can the TRX offer that Singapore, Dubai and Hong Kong have not tapped? That, I think, we still do not know."