THE settlement between Johor Corp and companies aligned to Tan Sri Desmond Lim once again shows how a corporate strategy that is not so well thought out cannot be undone, even after years of litigation.
Just a week after the general election that saw a new menteri besar in Johor, Malton Bhd, a company in which Lim is a major shareholder, announced that it was disposing of an office block in V-Square, Petaling Jaya, in return for 186,667 sq ft of office space in the re-developed Pusat Bandar Damansara (PBD).
Close scrutiny reveals that Impian Expresi Sdn Bhd (IESB), which is a private company that is also substantially controlled by Lim, had entered into a supplemental agreement with Bukit Damansara Development Sdn Bhd (BDDSB), an indirect subsidiary of JCorp, with regard to the settlement of the PBD land.
PBD, one of the earliest developments in Damansara Heights, is an office complex comprising nine blocks. It is located right smack in the heart of an affluent neighbourhood, with two mass rapid transit (MRT) stations being built nearby.
According to the Malton announcement, the agreement between BDDSB and IESB, which is the third supplemental agreement between the two, was signed on May 10 — just five days after the conclusion of the general election.
This has sparked curiosity because JCorp is a company that comes under the purview of the state government. The chairman is normally the menteri besar. In this case, Tan Sri Abdul Ghani Othman was already on his way out and was being replaced by Datuk Khaled Nordin.
So who gave JCorp the authority to go into an agreement with Malton on the PBD land?
Until the new menteri besar has been sworn in, no big decisions are normally made, unless it was something that had already been decided way before the state assembly was dissolved and it was just a matter of civil servants going through the process.
It has happened even in Selangor, a state ruled by Pakatan Rakyat.
On April 15, Permodalan Negeri Selangor Bhd (PNSB) entered into an agreement to dispose of a piece of property in Canal City to Dijaya Corp Bhd. The announcement came out after the state assembly was dissolved.
The announcement drew attention because questions were raised as to how such a deal can be signed off with only a caretaker menteri besar in Selangor in the form of Tan Sri Khalid Ibrahim.
But later, it was revealed that the sale of the land had been initiated some time ago through an open tender process. Also, Khalid did not sign the agreement and the mandate was given to the state financial officer and state secretary.
The same could have happened with JCorp going into a settlement with companies aligned to Lim. Probably, it had already been concluded before the general election and only came about after the polls.
However, this can only be answered by JCorp or the new menteri besar.
The dealings between JCorp and Lim with regards to the re-development of PBD have not been smooth.
It took a turn for the worse with Lim taking the state government entity to court after JCorp terminated the re-development agreement in February 2011.
The re-development agreement can be traced to 2009, when JCorp entered into an agreement to sell PBD to companies related to Lim for some RM700 million. A downpayment of RM50 million was made.
JCorp was then controlled by Tan Sri Muhammad Ali Hashim, who left suddenly in July 2010 after having served for 18 years as CEO and president of JCorp.
Following Muhammad Ali's departure, a new team came onboard JCorp and wanted a better deal for giving up PBD. The new team estimated the value of PBD at RM1 billion.
But it was contested by companies linked to Lim and finally ended in a legal suit in 2011.
Two years later, JCorp finally caved in.
Why? Was a new settlement reached between both parties more favourable to JCorp?
Or was it because JCorp did not see any point in going into a protracted legal battle with Lim, who is no pushover anyway?
On the first question, the answer is "no".
The terms of the new settlement — RM700 million — is really not much more than what was agreed upon previously.
BDDSB will get RM500 million cash, with the remaining RM200 million to be paid in office space in the redeveloped PBD.
A significant difference is that JCorp will get to monetise RM140 million worth of office space immediately through an asset exchange exercise with Malton Bhd.
Under the exercise, JCorp is to give up 186,667 sq ft of office space in the re-developed PBD to Malton in return for taking control of a 20-storey office tower with 964 car parking bays in V-Square, which is located in Petaling Jaya and worth RM140 million.
JCorp will still have 80,000 sq ft of office space in the redeveloped PBD that must be handed over to the state government entity by IESB five years after taking control of the PBD land.
As for a protracted legal battle, it should be noted that JCorp, as a state government-owned entity, has the financial clout to go through a long legal battle with Lim.
However, there would be financial implications and lost opportunities.
The office space market is soft at the moment and the PBD is not exactly a building that can be categorised as an excellent asset that commands high yields.
Poor maintenance over the years has made it a less desired address in Damansara Heights, where numerous new buildings are coming up in anticipation of the two new MRT stations that are being built.
This means more competition for PBD and pressure on yields, going forward.
For years, PBD depended on long-term leases with government offices. But now, most have been relocated to Putrajaya.
The biggest problem is the legal suit against Lim that will easily put off any buyer.
Any credible property developer will not touch the project before the legal suit is settled.
Under such circumstances, can JCorp get a credible buyer? It is highly unlikely.
In the meantime, JCorp will have to pay the cost of maintaining the building and servicing interest on loans tied to PBD.
PBD has been with JCorp since the 1990s but it was utilised more as collateral to raise funds rather than viewed as a potential major property project.
Although it is practically across the highway from Bangsar Shopping Centre and has enjoyed easy traffic access especially now. The two developments are poles apart in terms of vibrancy.
BSC, which is under Bandar Raya Development Bhd, has been refurbished and new office space added to make it one of the best yielding assets in the area.
In contrast, PBD continues to lose its allure because of poor maintenance. The property was not re-shaped to cater for the changing tenant mix.
There is nothing wrong in having loans tied to fixed assets. But the money should rightfully be used to improve the yields on the asset by refurbishing the buildings and improving returns.
In PBD's case, this was not the practice.
Why is that so? Is it because JCorp simply had so many assets in its stable that it was not able to focus on reaping benefits from some of the better ones?
At the end of the day, another property goes from a GLC to a private developer. Who is to be blamed for this? It's definitely not the private developer.
M Shanmugam is managing editor at The Edge
This story first appeared in The Edge weekly edition of May 20-26, 2013.