Creating a place of value in the heart of Kuching

Plaza Merdeka is a large shopping mall and boutique business hotel development located in the central business district of Sarawaks capital Kuching. It is part of the revitalisation and transformation of Kuching’s historic district into a premier tourism and retail destination. Inside Investor asked Steve Ng, Managing Director of Plaza Merdeka Holdings, about the progress of the project and how he promotes business at the location.

Q: What has been the overall investment for the mall plus hotel and how is the funding structured?

A: The land’s present market value was appraised by VPC Alliance at RM75 million, and our total project costs are RM240 million. The funding for the project comes from shareholder funds to the company, combined with bank financing and a small portion from sales of retail lots (18 per cent of net lettable area). The sale of the retail units comes with a mandatory leaseback from the purchasers. The structure of the leaseback is unique and the first for the market here. We guarantee the investors a minimum of five per cent annual return over nine years. The other feature of the leaseback, which was first not easy to grasp for many, is that we are not the end user of the unit, but we take it and we lease it on to somebody else. Should the return be higher, the difference will be paid to the investor. The principle is that investors should receive the full benefit of the returns on their investment. Our role is to manage the retail mix to ensure the success of the property thereby enabling all investors to achieve the highest and best possible returns.

Q: In a ranking of biggest malls in Malaysia, what place does Plaza Merdeka occupy?

A: Regarding the size of the mall, I would say it’s among the top five in Kuching. They are all quite similar on the surface, apart from their ownership structure. More important is, how the mall is structured in terms of retail mix and the ability to attract key anchors, subanchors and key international brands. Size does not equal success. The Spring is still the market leader in Kuching and I have a lot of respect for their management and ownership.

Q: How many tenants have already signed?

A: We are aiming for an opening in November this year, and as of now, we are sitting on an 84 per cent lease-up. While this is positive at this point in time, our target is 95 per cent lease-up at opening, and I hope we can achieve that. As far as tenants are concerned, the major anchor is Parkson with its flagship store at 135,000 square feet. Sub anchors are Everrise supermarket (20,000 square feet), and Kamdar Fabrics, a publicly listed fabrics retailer from Kuala Lumpur. They came to us and we instantly found that it would be a good fit for our retail concept. They committed to 30,000 square feet, which will make their store at Merdeka their largest in East Malaysia.

With these three anchors we are confident that we will achieve our footfall targets. For key tenants, we are fortunate to confirm Cotton On from Australia, they are taking 7,000 square feet but are now requesting for an increase in retail size. We also have Esprit with close to 7,000 square feet. Both Cotton on and Esprit will have their flagship store in Plaza Merdeka. As well equally important we have secured international retailers like Levis, Dorothy Perkins, Tomei, SASA, Hush Puppies, Bata, Primavera, Clarks, Samsonite, Shop of Shoes, Apple, Guardian, Watsons, Starbucks, Pizza Hut, and McDonalds, to name a few. Overall, I believe that the mall will be we should be quite successful. Having said that, it’s been a long process and this shopping center project is the toughest thing I’ve ever done.

Q: What is your target group?

A: The main target market of the mall is the middle-upper income crowd. Having said that, we will also accommodate local players and will create places that are more affordable and therefore serve wider market segments. The ground and first floors will be mainly key tenants and will serve the middle-upper income segment and on the second and third floors we will cater more towards local tenants, for example tailors, hair salons, boutiques, food court etc. These tenants are also every bit as important as they account for 50 per cent of our non-anchor occupancy. They bring variety, and together they will also assist to complete the mix and bring in the footfalls. The retail mix cannot be underestimated.

The target market for the hotel is the business crowd and the premium travellers. Kuching has the cheapest hotel rates of anywhere in Malaysia and therefore it is a difficult market. However, our 360 Group’s ‘Constantly Evolving Value Concept’ model is working very well. Even in this challenging market, with our model our investors and property owners are making anything between eight and 16 per cent net return. In this market we believe that if you can deliver a cost efficient product at a value price you can succeed. For ‘The Waterfront, An Artrageous Hotel’ at Plaza Merdeka, we are targeting the top end of the market, but again at a value price. Our average room rate will be on par with Pullman, and we will feature a truly premium product. The hotel will comprise 208 rooms and suites and the ambiance of the hotel will be truly ‘artrageous’. The hotel will have two executive floors which will feature four loft suites (first for Kuching), an infinity pool facing the Astana and the majestic State Legislative building with a panoramic river view, and a roof deck for private functions and parties. As well we have a large function hall and meeting rooms and will be well positioned to accommodate the MICE market and complement the Borneo Convention Center. Other amenities are a fully equipped 10,000 square feet gym and a 24 hour fine dining café and restaurant on level four with seating that will provide guests a panoramic view of the river and Kuching city.

Q: How would you assess the investment environment in Kuching for setting up such big projects like a shopping mall with hotel?

A: The opportunity is always there. My only question is whether new investors are able to get good anchor and key tenants. In a development like this, if it is not possible to secure good anchors, then the success is very much in question. To depend purely on the participation of local retailers is not enough. Anchors make up almost 60 per cent of mall occupancies. But I do believe that over time there will be room for growth. There is currently a lot of interest from the major retailers in Kuching but it is important that projects are properly conceptualised, proposed, and executed, otherwise it is difficult to maximise the chances of success.

Q: The mall project was also part of a revitalisation programme for the city’s landmark historic district. Did you encounter special challenges in design and planning in this respect?

A: A major challenge was getting permission from the government to alienate a portion of the road as well as the infrastructure (entry and exit tunnels), and having to build into easements to create extra parking. These ‘extracurricular’ infrastructure costs were very high, but we believe it is necessary to ensure the property remains relevant in the long term, 20 and more years. Other unforeseen costs were the excavation of rock (about 50 per cent of the excavation) to create the substructure almost 60 feet deep, as well as the issues building such a structure within close proximity of the 100 year-old shop houses with no foundations. However we were able to overcome these challenges because we had engaged the top consulting firm in Sarawak (KTA Sarawak) as well as having a reputable and committed contractor (Bina Puri Construction).

And yes, there have been delays, but understandable ones under the challenging circumstances. Together with the contractor and with our full involvement, we were able to minimise damage to the surrounding shops. As well, we were proactive in engaging the community as initially there were lots of questions and apprehension by the shop owners. But now that the trust has been established and we have a very good relationship. We will be building on this relationship to create an integrated commercial district that is both local and tourist friendly.

Q: How did you get along with finding qualified personnel for operating the mall?

A: We have been fortunate to be able to secure good management personnel for the mall management. As far as difficulties in obtaining staff are concerned: Yes and no. For example, for our hotels we were able to avoid the issues with staffing and staff turnover plaguing other hotels. At our hotels, our staff turnover is probably a tenth of other hotels, and I attribute this to our ability to build teams. We intend to replicate the same model at Plaza Merdeka. There is a lot of good personnel locally – they may not be adequately qualified, but it’s personnel with good abilities and talents. It’s a matter of the management’s willingness to work proactively with them and bring out the best in them.

Q: What will be Plaza Merdeka’s role in Kuching?

A: We would like to play a major role, more than just being a shopping center and hotel complex, in realizing our original stated vision which is the revitalisation of the historic district of Kuching. We are even looking at not-for-profit community projects in partnership with the Sarawak Tourism Federation and the Ministry of Tourism, so that we are able to realise a district similar to Orchard Road, Singapore, or KLCC, Kuala Lumpur. This whole area is already the premier area from a land cost viewpoint, and with our focus and the participation of area stakeholders and the tourism industry this entire district will continue to outperform expectations.