The widely anticipated redevelopment of Tan Chong Motor Holdings Bhd's (TCMH) industrial property at Segambut, Kuala Lumpur, is a firm step closer to fruition with the group’s proposed purchase of the Ford plant in Shah Alam.

TCMH’s plans to relocate and redevelop its Segambut property is well-known among analysts and investors. Now, the purchase of the Ford plant should set in motion TCMH’s redevelopment initiative.

Sime Darby and the Ford Motor Company of the US, which owns the Ford assembly plant in Shah Alam, agreed to the transaction with TCMH  last week. The transaction, believed to involve less than RM50 million, was not announced because it does not form more than 5% of their respective net tangible assets, a threshold for public disclosure.

The proposed transaction is expected to be completed quickly before the end of the year as Sime and Ford would otherwise incur a 5% real property gains tax (RPGT) that was introduced in the 2010 Budget on Oct 23. The RPGT takes effect from Jan 1.

The Ford plant property was advertised for sale a couple of months ago. The plant had stopped operations since June last year when, it is believed, Ford moved production to the Philippines where it has an existing plant. The property in Shah Alam is owned by Associated Motor Industries Malaysia Sdn Bhd which in turn is 51%-owned by the Sime group and 49% by Ford.

TCMH will shift the production lines at its Segambut plant, where it assembles older Nissan models, to the Ford plant, the sources say. The group will then activate its plans for a high-end mixed development project of condominiums and offices on the site.

That will launch the motor group into the property sector in a big way as the Segambut land is spread over 47 acres. As luck would have it, and with the virtue of patience, the land will remodel TCMH into an accidental property developer.

Presently, the motor group is solely involved in the automotive industry and does not have any property development activities in this country. It is, however, keen on the redevelopment of its Segambut land because of the potential gross development value (GDV) in the billions of ringgit.

The reason for the high GDV is the size of the Segambut land and plans to develop high-end properties there. Towards the latter objective, the group engaged Michael Yam, the former managing director of Sunrise Bhd, as TCMH group’s adviser on property matters. It is believed he is  advising the group on the masterplan for the project.

In terms of capital expenditure (capex), TCMH will remain focused on the motor vehicle sector. Hence, it is expected to rope in well-known and successful property developers as joint venture (JV) partners. That would be similar to Sentosa in Singapore where various top developers are building on their own parcels of land there.

TCMH will contribute its Segambut land to the JVs while the partners will pay for the cost of infrastructure and construction. With such an arrangement, TCMH’s balance sheet will not carry any capex exposure to the property project. The initial infrastructure cost for the project can be heavy, amounting to about RM100 million, the sources say.

While not imposing any capex burden on TCMH, the commencement of the Segambut property project would actually be a boost to the group’s balance sheet. The Tan Chong assembly plant in Segambut was built in 1976 — more than 30 years ago — and has never been revalued.

As it intends to redevelop the land and initiates steps towards that, it would be appropriate to revalue it. The group has applied for a change in the land use from industrial to mixed use but even though that’s still in progress, it can revalue the land under industrial use to its current value. Even as industrial property, the land is worth a lot more than its cost over three decades ago.

When the change in land use is approved, the group could make another revaluation based on land use for mixed commercial and residential properties and plot ratio. If an average plot ratio of say, five storeys is approved, the group could erect buildings with a built-up area five times that of the land.

The revaluation estimates would be made by valuers but a recent valuation of Goh Ban Huat Bhd's (GBH) property across the road may offer a ballpark figure. GBH has 13.9 acres of land that an independent valuer estimated in July to be worth a total of RM143.3 million, which works out to RM10.3 million an acre or RM236 psf.

With that as a benchmark, TCMH’s Segambut land of 47 acres could be revalued to about RM480 million compared with its book value of about RM80 million or RM39 psf. That would work out to a revaluation surplus of about RM400 million when the exercise is carried out.

As for operating profits, that would only come after the properties are developed. It is believed TCMH may follow the See Hoy Chan model in which the latter retained ownership of much of the properties developed on its land. One branch of the See Hoy Chan group, for instance, owns all the commercial complexes (including the 1 Utama shopping complex) while it develops residential housing in Bandar Utama, Petaling Jaya.

The arrangement that TCMH may work out with its JV partners could be that they will sell the properties — like serviced apartments — they develop while TCMH will take its share of profit in kind in the form of buildings.

TCMH group will have rental income from the properties in Segambut, although the time for completion of the whole project will take many years, considering its size. Furthermore, the management needs to succeed in transforming a property in an industrial area into one of swanky, premium grade commercial and residential properties.

This may be the first time the group here will develop investment properties. The extended group, however — which includes Tan Chong International Ltd (TCIL), listed on the Singapore Exchange — has developed properties there.

These properties comprise its serviced apartments at Bukit Timah and at the city centre in Singapore, developed on land that TCIL had owned for years and may have previously used for its car showrooms.

“That’s why they’re bound to succeed in property. They’ve no land holding cost. They’re like plantation companies that harvest the fruits and later redevelop the plantation land when urban sprawl reaches their land. In the case of Tan Chong, they sell cars and many years later, redevelop their factory and showroom properties,” the sources say.

The financial profile of TCMH will change as it acquires a cluster of investment properties, and at the same time, it will not change as its core business will continue to be embedded in the automotive industry.

This article appeared in Corporate page of The Edge Malaysia, Issue 779, Nov 2-8, 2009.