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For 28 years, Nestle House has been a familiar fixture in Petaling Jaya. Fronting the Federal Highway and sitting behind PJ Hilton hotel, the appeal of the building has long been eclipsed by the crop of newer, sleeker buildings in the city over the years. All that is about to change. Axis Real Estate Investment Trust (Axis REIT), which bought Nestle House in 2007 for RM39.8 million, is embarking on a major makeover to ensure that the PJ landmark regains its lustre.
Stewart LaBrooy, CEO of Axis REIT Managers Bhd, tells City & Country: “As is common for buildings built during that period, Nestle House has a very solid structure but the façade is tired looking. The time is due for a makeover and this is the perfect opportunity for us to reposition the building as a 21st century icon.”
Renovations are to begin in 3Q2009 and are targeted for completion by January 2010. Work will commence on the façade, to be followed by interior upgrading once Nestle (M) Bhd vacates the building at end-November 2009.
Axis REIT has been eyeing Nestle House for a long time and upon receiving an offer from property consultants Cushman & Wakefield, jumped at the chance to acquire the building. That raises the question as to why Axis REIT would acquire Nestle House knowing it would require a major refurbishment.
LaBrooy says: “Our management team has been in this business for 20 years and we know the market like the back of our hands. As with any commercial property, location is key and Nestle House is in a great location. PJ Hilton is next door, there are two LRT stations within walking distance, bus stops all around and plenty of amenities within its vicinity.”
He cites Axis REIT’s acquisition of Wisma Kemajuan in 2005 as a perfect example of its strategy. At the time, Wisma Kemajuan in Section 19, PJ was a nondescript and rundown property with an occupancy rate of 60%, generating a yield of barely 7%.
Axis REIT’s general manager of asset and lease management David Aboud says W isma Kemajuan was bought for RM29 million and a further RM34 million was spent on refurbishment. The building’s current value stands at RM52.5 million.
“In PJ, there are two things vital to a property; location, and the extra quality to the building itself. Location is fine, and what we have done is to increase the quality. After which, we revise the rent upwards by 40% to 70%. The occupancy since then has gone up to 85% and we are still filling up,” says Aboud.
“So, based on past experience, we know what tenants look for. Aside from Wisma Kemajuan, take a look at Menara Hap Seng and Menara Standard Chartered in Kuala Lumpur. Both buildings underwent a makeover and both, upon completion, were filled up within a few months,” he adds.
As at Dec 31, 2008, Wisma Kemajuan generated a gross yield of 13.84%. The six-storey Nestle House building boasts a net lettable area of 106,000 sq ft and the rent is expected to be RM3.90 per sq ft upon completion.
Cosmetic changes
The changes to the building will be largely cosmetic, as Nestle had spent a substantial amount of money upgrading the property over the years, including bringing the electrical and air-conditioning systems up to international standards.
The floor space of the building will remain as it is and Aboud says it is “a question of time and cost, rather than the opportunity”. “It takes a long time to obtain approval if we want to alter the work space. We don’t want to take any risk on a long waiting period and spending unnecessarily. We are investing RM7 million for the refurbishment and we want to spend it where it gets the most value. We aim to achieve a triple net rent of between 9% and 10%,” he says.
At RM375 per sq ft for a building in a prime location, LaBrooy deems the acquisition a “bargain” and considers it one of the trust’s best buy. He has confidence that Nestle House represents a profitable piece of real estate with development potential that will bring about an increase in value. LaBrooy stresses that the acquisition and planned renovation will not affect the return on investment for the shareholders.
“On the contrary, the building, upon completion will definitely have a much higher profile in terms of value. I believe the shareholders will benefit from an increase in the trust’s value and better returns on investment in the long run. This is a sound investment,” says LaBrooy, adding that he also takes into account the company’s ability to spread risk over a large base with its diverse portfolio of 19 properties.
Axis REIT set the wheels into motion six months ago and after a call for tenders, appointed S.I. Design Sdn Bhd as the lead consultant for the Nestle House project. S.I. Design was chosen not only for its impressive track record in delivering professional standards and services but also for its proven prudent management of budget, timing and functionality without compromising on aesthetics.
“This is a speed jump and an opportunity we should not miss. If this were to be a building with multiple tenants, it would be difficult to do what we’re doing now. With Nestle moving out, we are given a blank canvas to do the necessary work for a month or two. We need to turn the building around as soon as possible and get it back into the market. That is not all, what we also want is the ‘wow’ factor. We want that ‘wow’ to be heard when someone walks into our building,” LaBrooy says.
S.I. Design executive director Brad Walls says: “When Axis REIT called a tender in the market place, we realised there are certain areas of expertise that are not our forte. So, we set out to scout for top-notch consultants to work with.” A consortium was then formed between HL Design Sdn Bhd (submission architects), MCE Consulting Sdn Bhd (mechanical and electrical consultants), SG Tan & Associates (structural engineers) and ISG Asia Sdn Bhd (main contractor).
HL Design director Martin Haeger gives City & Country an insight on the new architectural façade for Nestle House. “Though the building is nearly three decades old, it has unique architectural character and is a landmark building. We felt that rather than ignore that articulation, we would take the attitude not to reinvent but enhanced the existing structural articulation.
“We want to preserve the architectural icon and maintain all of the existing structure. Because of this, we can begin work on the façade with minimal disturbance to the existing tenants. To add more character to the building, we have added a covered roof canopy. This will provide additional space for the tenants and can be utilised as a recreational area or even a canteen for the staff,” says Haeger.
For the interior upgrading, Walls places emphasis on creating a design that is universally appealing. This is especially important, as the types of companies or whether it will be a single or multiple tenants coming in is not known. Another area of importance is working within the budget and yet being able to deliver a quality product.
On the issue of green buildings, Axis REIT currently does not have plans to put in green features for Nestle House. LaBrooy says: “This is a tropicalised building and there are already elements of ‘green’ present. The old design is not necessarily the prettiest but functionality-wise, it is highly energy-efficient. By preserving the tropicalisation and adding another layer of glazing to create an insulating layer, it will almost become a double-glazed structure.”
Haeger adds that the new glazing elements will be reflective and tinted to reduce the peak load on the structure itself.
As for prospective tenants, Axis REIT has contacted agents around the region, and is in discussion with three companies. “We have three prospective tenants — two are multinationals and another is a local listed company. Of the two multinationals, one is setting up its first office in Malaysia and another is relocating from its current premises in the city. Between the three, they will fill up the entire building,” says Aboud.
Over the past year, Axis REIT has seen a growing number of enquiries for its offices in PJ. Comparing offices in Kuala Lumpur’s central business district (CBD) to offices in PJ, Aboud says: “Offices in PJ offer quality and good value at lower prices. There will always be offices in KL’s CBD as it caters to companies which need to be located in such an area to do business. But for companies that do not, PJ is simply a better option as traffic in PJ is less congested and there is good transport infrastructure in place too.”
Commercial property market
Axis REIT was established to invest primarily in commercial real estate and in August 2005 became the first REIT to be listed on Bursa Malaysia’s Main Board. Since then, the company has been expanding its portfolio steadily. Axis REIT currently owns RM726.34 million worth of assets in Malaysia, with 19 properties mainly in Selangor and Johor.
Its expansion from 14 to 19 properties in 2008 has grown Axis REIT’s property revenue by 35.3% to RM63.33 million in 2008 from RM46.82 million in 2007. For 1Q2009 ended March 31, Axis REIT posted a net profit of RM10.4 million, an increase of 15.4% from RM9 million in the previous corresponding period. The global downturn has had minimal impact on the occupancy of Axis REIT’s properties. As at March 31, occupancy rose to 95.39%, from 95.19% at Dec 31, 2008.
On the global economic downturn, Labrooy says the trust has been monitoring the market and is quite optimistic that the worst is over but “we expect a slow recovery”.
“Malaysia has been spared because the banks here have been very resilient, as have most of Asia. We are optimistic about the future as we feel there is renewed investor interest in REITs,” he adds.
Companies are also adopting various cost reduction measures to sustain their businesses in the face of the global downturn. For multinationals, this may include relocating some of their offices to lower-cost countries.
“We are seeing multinationals relocating to Malaysia as the costs here are lower compared to countries like Singapore, Hong Kong and even India. Under our stable of properties alone, our tenants include multinationals such as American International Assurance, DHL, Philips, Samsung, Fuji Xerox and Honeywell Engineering,” says Aboud.
LaBrooy says for 2H2009, the company will focus on capital management and refinancing of their debts to take advantage of the lower interest rates and product enhancement. Axis REIT is also working with OSK Trustee Bhd on a programme to educate the public on REITs and promote it as an alternative investment product.
“The fundamental driver of a good REIT is having people who understand properties inside out. That’s what we are. It’s our duty to make sure that our portfolio is completely and continuously being rejuvenated to make them actually capable of maintaining and gaining momentum in the market,” says Labrooy.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 764, July 20-26, 2009
