Of srata titles and shopping centres
NST 12/11/2005

In this first of a four part series, PPK Malaysia discusses the development of strata-titled shopping complexes and the issues affecting them - from service charge to management control and winning formulas. Here, we begin with a overview.

Over the last three decades of rapid growth, the country has been blessed with both successful and failed stratified developments.

Today, there are those who would swear by strata titles - even if there are many among us whose stratified dreams have been burnt to ashes.

What is it that makes a stratified building a success or otherwise? If there have been failures, why are developers still building stratified shopping centres, and more importantly, why are people still buying such units?

A stratified shopping centre in Kota Kinabalu, Sabah, sold RM100 million worth of units in one day! So, how it is possible to say that such shopping centres are "dead", or that they are not worth putting your money in?

Is there a winning formula for strata developments/ What are the pitfalls?

Over the next four weeks, we"ll look into these questions and issues in greater detail.

Malaysians really mean it when they say "Malaysia Boleh!" While strata-titled commercial and shopping centres have failed in many developed countries, many have become grand successes here n Malaysia.

The 1970s introduced our first generation of shopping centres. A decade later, we embarked on the second generation model, many of them sold on strata titled.

Today, even after some 25 to 30 years, some of these centres remain among the most successful in the country with units they contain capable of commanding high rentals of RM30psf and even manage a commercial sale value of RM4,000psf.

Yet, if you ask retailers and shopping centre managers, chances are that they will say: "Don't do strata. There is no control ... the management is not able to do anything."

Some years ago, a group fro the Scandinavia Council Centres came to Malaysia on a study tour of our shopping centres. They saw and discussed our strata-titled centres and then informed us they were totally against such developments in their home countries.

After learning about how stratified shopping centres operate in Malaysia, they concurred that given a chance to develop shopping centres all over again, they would not have opted for the strata concept - despite evidence in Malaysia about the high returns on investment and value.

Some of the million- ringgit questions on stratified developments would be:

What is a strata centre and how can we make it work?

How does one manage a strata centre? Is it different from managing a single-owner building?

Are there a lot of problems associated with stratified building?

Managing stratified centres

Strata property in a shopping centre comes about when the developer sells a part of the development to one or more corporate or individual owners. Thus, the centre could be on one land title that has been subsequently subdivided into two or more sub-titles or strata titles for individual buyers.

The parcels could be of various sizes. The law governing this would be the Strata Titles Act, but the Act will only be enforce after the property has its strata titles issued. A management Corporation (or MC) would then be formed to manage the building (We will discuss this at a later stage, when looking at the management of strata centres).

On the developers' side, there are several reasons why they like to build stratified shopping centres.

Firstly, new and young developers without the huge financial resources to fully develop a project that could cost RM100 million onwards will need to sell or divest by means of stratifying their development. This, in effect, helps to finance the construction of the project.

Secondly, successful stratified shopping centres are proof of extremely high returns for the developer. Imagine a sub­urban plot of possibly five acres with a mixed-use project that costs about RM120 million to RM150 million to build, including the cost of the land. In time, the value of this development would probably be in the region of RM250 to RM300 million.

Developers do not even need to sell all of what they build. They just need to control the prime and important locations that would make, in general, about 60 per cent of the total area and they would have made their earnings, comfortably.

Thirdly, there are developers that are simply focused on doing what they are good at ­building and selling. Some others would build, sell and keep some of what they have built for investment, so as to increase, their asset portfolio for possible listing purposes.

Fourthly, developers sometimes also like to test the market and assess market confidence in their projects by releasing some lots for sale. This is why you see some developers only release for sale 10 to 15 per cent of the total saleable area.

Then, there are those that would develop a stratified shopping centre and make it a point to stay in control of the management. There are many developers in this category, that is, those that own the majority of the units in the project. Some of them would just sell 10 to 20 per cent of the units built.

In practice, these developers keep the smaller, prime lots with higher value, or perhaps hold on to the bigger lots accommodating the anchor tenants and car-parking lots. This is done so as to make sure the centre is under their full control, despite it being a stratified development.

Having said all this, I have to point out that whatever the formula, a very crucial question that not just the purchasers will be asking but also the retailers and potential tenants as well is: Who will be the centre manager and what track record does it have?