Battersea not for sale yet

MALAYSIA’S two biggest state investors have given themselves the most valuable asset in finance. Optionality.

After reports that Battersea Power Station might be up for sale, Permodalan Nasional Bhd (PNB) and the Employees Provident Fund (EPF) moved quickly to steady nerves, saying there are “no immediate plans” to exit.

Yet they also made clear the phones are ringing, with third parties keen to invest.

In other words, PNB and EPF will listen to offers, but they won’t be rushed.

“As investors, PNB and EPF would evaluate any such proposals carefully in line with our investment criteria and considerations, which is always based on creating value for the benefit of our PNB unitholders and EPF members.

“As such, typically when investments reach maturity and achieve targeted returns, we would consider the opportunities for monetisation or the introduction of strategic partners to support future capital requirements and growth.”

That statement does more than calm market chatter as it highlights that the owners are not interested in a fire sale.

If anything, it signals an orderly watch-and-wait approach as the landmark asset seasons, cash flows stabilise, and the UK property cycle eventually turns.

What they own and why it matters

PNB and EPF own the redeveloped power station building itself, which comprises offices, retail units, a food hall and an event venue, rather than the wider Battersea project site.

They paid £1.6bil in 2019 in what ranked among Britain’s largest property deals, with PNB holding 65% and EPF the rest.

Apple Inc’s UK headquarters is the anchor tenant of the office space, an imprimatur of covenant strength that few London assets can claim.

The power-station building is the centrepiece of a redevelopment story that began in 2012, when a Malaysian consortium comprising S P Setia Bhd (40%), Sime Darby Property Bhd (40%) and EPF (20%) bought the crumbling plant and surrounding land for roughly £400mil after Irish owner Real Estate Opportunities veered toward bankruptcy.

Multiple developers had failed to revive this industrial cathedral over decades, but the Malaysian team didn’t.

In 2019, PNB and EPF simplified the ownership structure by acquiring the power-station building outright from the consortium, which continues to own the rest of the Battersea development.

For clarity, the main partners of the consortium – S P Setia and Sime Darby Property – were government-linked companies at the time, with PNB holding majority stakes in both.

That cleaner structure has been matched by an impressive operational performance of the Battersea Power Station.

Parliament was told last year that the office space within the power station is fully leased and retail is at 95% occupancy.

The 2019 acquisition also carried built-in protections for PNB and EPF, namely, a minimum guaranteed yield through construction and up to five years after completion.

In addition, the deal included a price adjustment mechanism to account for any difference in actual rental income earned compared to forecast.

The intention was to ensure downside protection for PNB and the EPF, while enabling the seller to earn-out upside in the development – should the actual rental income perform better than expected.

Even so, this is an asset that ripens with time.

An industry expert tells StarBiz 7 that it typically takes five to seven years for revenue from a mall to “stabilise”, referring to the retail space within the Battersea Power Station building.

“Not only that, there will be rental reversions every five years. The power station was only opened three years ago.

“This means rental income is likely to go up in two years’ time. Why would PNB and EPF sell now?”

The rejuvenated icon only opened to the public on Oct 14, 2022, nearly four decades after the turbines went quiet. In commercial real estate, three years is still early innings.

If fundamentals argue for patience, macro conditions make the case even stronger. UK property, like much of Europe’s, remains under pressure from higher rates and uncertainty.

“The market is bad at the moment if you want to sell, amid high interest rates and macroeconomic uncertainties.

“So while there will be buyers trying to bottom fish, I don’t think there is a sensible and reasonable offer for Battersea Power Station at the moment,” says the industry expert.

That’s Finance 101. Don’t offload a marquee asset into a weak bid.

If anything, the right move is to wait and let the leases mature, lock in higher rents when they reset and revisit strategic options when pricing power returns.

Politics, optics and accountability

Big deals attract big scrutiny. In 2018, Datuk Seri Anwar Ibrahim – then Pakatan Harapan’s de facto leader – reportedly said the Battersea purchase would be reviewed as part of “dubious” investments under the previous Barisan Nasional administration.

With retirement savings in the frame and two government-linked companies at the wheel, questions about governance and returns were inevitable.

Yet the investment case today is more straightforward than the politics around it.

National pride may burnish the story, one in which Malaysia salvages and reanimates an imperial icon.

But for PNB and EPF, the priority is fiduciary and to achieve risk-adjusted returns for unit holders and members.

Also, even trophy assets can be non-core. A senior analyst says the Battersea Power Station building is a non-core asset for both PNB and EPF.

“So, I doubt it would be on the books for long.

“How long they retain the asset will depend on how good the return is and how well they know about the UK real estate business.

“One thing for sure is that both PNB and EPF are advised by at least one common real estate investment adviser.”

That’s a pragmatic lens. For institutions of this size, capital rotation is standard practice – stabilise, extract value, and recycle into higher-priority mandates.

Not all investments beat underwriting, but few missteps sting more than selling a high-potential asset too early.

From here, expect a slow burn rather than a sudden twist.

PNB and EPF have already said third parties are keen, and London always has sovereign and institutional capital searching for scale, income and story.

Strategic partners could emerge to share future capital expenditure, especially if the owners prefer to derisk while preserving upside.

For now, though, the base case is to hold.

If a compelling bid materialises sooner, the owners have left themselves room to engage. If it doesn’t, they’re not penalised for waiting.

The decision to sell, whenever it comes, should be commercial, not sentimental – anchored in the numbers and the duty to beneficiaries.

Asset monetisation is a feature, not a bug, of disciplined portfolio management.

In the end, PNB and EPF answer to the government, and more importantly, to the rakyat.