ARA Asia Dragon Fund, a fund affiliated with Hong Kong’s richest man Li Ka-shing’s Cheung Kong Group, plans to divest all five of its assets in Malaysia in the second quarter of 2014 but will acquire new assets along the way.
The five shopping centres – 1 Mont Kiara, Aeon Bandaraya Melaka, Ipoh Parade, Klang Parade and Citta Mall – are expected to be ripe for sale once the ongoing renovation and refurbishment exercise, costing in excess of RM200 mil, is complete in the first quarter of 2014.
“The renovation for each of the mall will be completed at different stages. The renovations should be done by first quarter of next year. The logical time to sell these malls is when the renovation is done,” ARA Private Funds CEO Ng Beng Tiong tells
FocusM
. ARA Private Funds is the manager of ARA Asia Dragon Fund.
Ng adds it hopes to see at least 20% in an internal rate of return (IRR). “Because we started building this portfolio since 2010, the holding period is not long. We are going to do well in terms of IRR,” he says. He adds that typically this fund looks at a three- to five-year investment horizon.
ARA as a group entered Malaysia in 2006 through a partnership with AmBank Group and the setting up of AmFirst Real Estate Investment Trust (REIT). “AmFirst REIT is primarily an office REIT but they do have a retail component.
“As for ARA Asia Dragon Fund I [ADF I], the focus has been on retail and in the span of 18 months we have acquired five malls.” Total investment in the five shopping centres with over 2.7 million sq ft of space is an estimated RM1.3 bil.
Ng is quick to point out the sale of assets that the fund holds will not necessarily be to AmFirst REIT. “In the case of a private fund, our investors’ interest will come first. It doesn’t matter if it’s AmFirst REIT, another REIT, the market or private investors. The important thing is we have to maximise the returns for the private funds’ investors.”
“If we do well for our investors, then they will come back to us and give us more money to manage,” he says, stressing that it has no obligation to sell to AmFirst REIT. “It will go to the highest bidder.”
ARA has already been approached by buyers but Ng says: “We are not in a hurry to sell as we want to get the renovations done first. If you have a portfolio of good malls, offering good yields, selling it will be a piece of cake.”
However, he adds that while the fund will dispose of the assets, it plans to continue managing the shopping complexes.
According to Ng, the fund – which now has a 200-strong staff in Malaysia – is looking at recurring income. “We want to continue the management of the five malls,” he says, indicating that ARA does a similar thing in Singapore, Hong Kong and China.
Ng says it is nevertheless open to discussion should an established mall operator prefer to purchase the mall as well as take over the management of the mall with its own team.
Despite the move to divest the five malls, ARA Asia Dragon Fund has plans to acquire more properties in Malaysia and it is not limiting itself to shopping complexes.
It is now in talks – all in various stages of negotiation – with a handful of players, both for retail acquisition and for offices, predominantly in Greater Kuala Lumpur.
Ng says Ara Asia Dragon Fund II (ADF II) has raised US$441 mil (RM1.45 bil) as of August 2012 and adopted the same strategy as ADF I; its intention is to acquire more properties in Malaysia.
“Retail is our preferred asset class but the fund’s mandate allows us to invest in office and residential. For Malaysia, our strategy is for a portfolio investment.”
Ng points out that 1 Mont Kiara has an office component called Wisma Mont Kiara but it remains the only investment with an office component.
“We do not want to be a one-mall wonder. Rather, we want to create a portfolio of shopping malls and build an operational team to run the shopping malls.
“This way, we can distinguish ourselves from other fund managers in Europe and the US. These funds [in Europe and the US] are basically financial investors, whereas for us we have adopted a philosophy of investor-cum-operator.
“We want to operate our own assets. Based on our past experiences in Singapore, Hong Kong and China, only if we have control over the assets can we maximise the returns for the assets.”
Ng is unfazed at a possible influx of retail space from mall openings, expected to come onto the market over the next two years. According to him, the fund has a portfolio (dating from 2003) of 30 malls; all are in the mid-market region.
“Our experience is during SARS, the middle-market malls serving the community or catchment of residences or office crowds were recession-proof. These malls serve the daily needs of the people and are pretty defensive.
“We have a team that can run the middle-market malls very well. We are very clear on this sub-sector of retail and we are fully aware that there is quite lot of supply coming in Malaysia, and this is not new to us. The oversupply in China is worse than in Malaysia but the key is to identify the right asset and have the team to run the asset. This actually makes a distinction between success and failure.”
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