Malaysia's property market has slowed but remains attractive

Since Iskandar Malaysia, one of five regional growth corridors in the country, was first mooted a decade ago, it has attracted investments in property development, not just in residential but also in industrial, commercial and hotels.

The special economic area involved is three times the size of Singapore, and is divided into five further major development zones. Malaysia’s biggest property developer, UEM Sunrise, is leading construction at the new business district of Iskandar Puteri, which is the largest fully integrated urban development in South-east Asia. Other Malaysian construction companies – including Gamuda, Sunway, Tropicana and Sime Darby – have large projects in Iskandar Malaysia and Johor. UEM Sunrise has a landbank of 6070 ha, 77% of it in Johor. Singaporean developers, including CapitaLand and Temasek, have also been active, but it is developers from mainland China who continue to bankroll the construction of high-rise, high-density condominiums, the property type that has been most affected by the market slowdown.

Eastern Promise

Set to be built on four man-made islands between Singapore and Johor, the Forest City project was formally launched in March 2016. The first phase is expected to be completed in 2018, with prices averaging RM1200 ($297) per sq foot. The project is majority-owned by Chinese developer Country Garden, and has been given duty-free status and an array of additional benefits, including tax breaks for green developers, tax incentives and the removal of restrictions on foreign ownership for those companies that are eligible for the incentives. “Even though the property market has softened, the Forest City project proves the confidence and long-term commitment in Johor,” Md Othman Bin Haji Yusof, executive director of Country Garden Pacificview, told OBG. “We expect to become the economic hub of the western side of the Iskandar region and profit from stronger ties with China and Singapore.” Prime Minister Najib Razak, who launched the project, said that Forest City could attract foreign investment of RM175bn ($43.3bn) and create as many as 220,000 jobs over the next 20 years. It will be connected to Johor via a two-lane highway.

Greenland Group – mainland China’s biggest state-owned developer – is working in partnership with Iskandar Waterfront Holdings, and has pumped $3.2bn into two projects in Johor at Danga Bay and Tebrau. It will focus on commercial aspects of the developments in 2016. The Chinese developers are forging ahead in a market that has been slowing over the past two years. “The market is quite soft,” head of strategy at Forest City, Runze Yu, told OBG. “Forest City has very ambitious sales target so we are focusing on the mainland Chinese, and the response has been quite good. But that doesn’t mean we have given up on the local market. We can wait for the local market to wake up again, maybe in one to two years.”

At the end of 2013 the price of residential property in Johor was increasing by 25% per year, the fastest rate in the country. By the end of the first quarter of 2015 it had dropped to below 6%, in line with the Malaysian House Price Index.

Cooling Measures 

In its Economic Report 2015/16, the Ministry of Finance noted that cooling measures introduced in 2012 and 2013 to curb lending and changes to real property gains tax have reduced market activity. Nationwide, property transactions fell by 2.6% in the first half of 2015, to 119,604. In Johor, the transaction volume shrank by 18% and the state accounted for 23% of all unsold units in Malaysia. Banks have also become more particular about loans, with a maximum mortgage of around 70% of the property’s value. Foreigners can only buy property that costs more than RM1m ($248,000).

The state is going through a transitional period, Samuel Tan, director at KGV International Property Consultants, told OBG. “Locally we have challenging issues, such as the implementation of the goods and services tax, low commodity prices and fuel prices,” he said. “As a result, we saw declining transaction volume and value for all subsectors in 2015. The industrial sub-sector was less affected.”

Consumer confidence in Malaysia fell in 2014 and 2015, with the Malaysian Institute of Economic Research’s quarterly index falling to historic lows as Malaysians indicated they would put on hold plans to buy new homes, cars or furniture. However, the Institute noted housing plans were “more favourable” in the south and the middle-income group. Tan said demand for the kind of mass-market housing that most Malaysians buy – priced between RM250,000 ($61,900) and RM500,000 ($124,000) – is likely to be sustained even as the high end endures a glut.

Supply

Private developers have become fairly adept at managing supply, Christopher Boyd, executive chairman of Savills Malaysia, wrote in local financial newspaper The Edge in November 2015. Boyd said there is likely to be considerable demand for quality office space as multinationals step up investment and as transport links improve. Much of the office space in Johor Bahru is at least 20 years old, so developers of international-standard buildings will have first-mover advantage. Medini, a venture that is 60% owned by Khazanah in partnership with United World Infrastructure and Mitsui & Co, is the master developer for the business district in Iskandar Puteri. Medini currently rents out two towers, which have proved popular with companies in technology-related businesses. A third building – Medini 9 – is expected to be completed in around two years.

Industrial land is also a bright spot, according to UEM Sunrise’s CEO, Anwar Syahrin Abdul Ajib, speaking to the Star newspaper in August 2015. Demand for units in the firm’s RM1.3bn ($321.8m) Southern Industrial and Logistics Clusters is strong, he said, noting that prices had risen to RM100 ($24.80) per sq foot. Developers say many smaller Singaporean firms are moving their production to Johor while keeping their headquarters in the city-state.

Improving Connectivity

Nevertheless, connectivity remains a key issue for future growth. Discussions are continuing between Singapore and Malaysia over both the high-speed rail (HSR) and the Johor Bahru-Singapore rail transit system (RTS) link. The HSR is likely to be finalised in 2016, but the RTS link remains under discussion. Malaysia has agreed to site the terminus at Bukit Chagar, and talks on the crossing between the two countries are currently under way. After that an engineering study will be required, which is likely to take two years, the Ministry of Transport told The Straits Times. Johor, too, suffers from severe congestion at its borders with Singapore, both at the causeway in Johor Bahru and on the Second Link, a bridge over the estuary that divides the two countries near Tuas, located at the western end of Singapore. There is talk of developing a third crossing, but the railway projects are much more advanced.