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Malaysia - a long-term property play
M ALAYSIA property market has witnessed a post-global financial crisis boom between 2009 and 2013, with prices of housing units in some areas of the country doubling within a few years. To curb the sizzling property sector, the government has introduced a series of cooling measures in the 2014 Budget. These include the upward adjustment of Real Property Gain Tax (RPGT), the revision of the minimum price of residential properties that foreigners can purchase to RM1 million (S$345,595), and the removal of the Developer Interest Bearing Scheme (DIBS) (a similar interest bearing scheme was banned in Singapore in 2009). Also, Bank Negara Malaysia (BNM) instructed the banks to follow stricter guidelines when issuing housing loans.
The implementation of these cooling measures has successfully weeded out speculations. Sentiment in residential property has been soft especially since 2015, following growing economic uncertainties. According to the latest preliminary market overview report released by the National Property Information Centre (NAPIC), both the number of transactions and value were down by 4.6 per cent and 10.5 per cent respectively in 2015 from 2014. Developers have held back launches, citing negative consumer sentiment due to the cooling measures and rising costs as a result of the implementation of Goods and Services Tax (GST) in April 2015.
While there is no denying that the near-term outlook for the residential sector remains shaky, we think that it is sentimentally rather than fundamentally driven. Political uncertainties, plunging ringgit and oil prices, and sluggish economic outlook are not equivalent to reduced genuine demand for housing sector.
Despite concerns on the potential glut of properties in certain areas, the reality is that demand for housing, especially for young or first-time home buyers, is still very strong. Developers are aware of this and have repositioned their products towards meeting the demand for mass-market housing. Mah Sing, Malaysia's third-largest property developer by sales, is confident that the market has already bottomed and a rebound is expected over the medium term. The company is ready to buy more land after it halted purchases of land in 2015 for the first time since 2005.
In fact, there are several exciting developments in Malaysia, which could be game changers for the property market. Greater Kuala Lumpur (Greater KL), which already boasts world-class rail, road, sea and air infrastructure, is currently rolling out the 51km MRT Line 1. By 2017, Line 1 is expected to be fully operational, improving Greater KL's accessibility tremendously.
The line will have 31 stations, connecting northern and southern part of Greater KL. Apart from that, the cross-border High Speed Rail (HSR) project is expected to reduce travelling time between Singapore and Malaysia to 90 minutes. While the stations of the HSR are yet to be finalised as details of the line is currently under review, it is confirmed that its Malaysian terminus will be built at Bandar Malaysia, which recently has seen China Railway Group (CREC) investing 60 per cent equity stake worth RM7.4 billion together with joint venture partner Iskandar Waterfront Holdings. CREC has announced its plan to build an integrated office complex at Bandar Malaysia to serve as a hub for multinational companies (MNCs).
Outside Greater KL, there is indeed some encouraging news. In Iskandar Malaysia, where concerns of oversupply of high-rise residential projects were growing, news of the entry of several high-profile foreign companies has boosted confidence in the growth corridor. These include Microsoft announcing that it would develop a data centre in Sedenak, Coca-Cola relocating from Tuas in Singapore to Iskandar Malaysia and China's Alibaba looking to start a logistic hub in Johor. There have also been various announcements from Korean, Chinese, Russian, US and Japanese MNCs to set up their facilities within Johor. While the oversupply concern of residential projects are based on concerns over the lack of commercial activities and population growth in the region, investors should breathe a sigh of relief as these projects, when completed, could bring in more population into the area.
Looking further North to Penang, transformation in the state is taking shape. With the opening of the Penang Second Bridge in 2014, which connects Batu Kawan in Seberang Perai on mainland with Batu Maung on Penang Island, economic activities have been sparked by the mushrooming of new housing projects in Batu Kawan, which was once considered a quiet backwater mainly filled with plantations. Since the announcement of the Second Bridge was made in 2006, the price of nearby vacant land has jumped more than five-fold, now hovering between RM40-RM50 per square foot. In 2018, Ikea is slated to open its third store in Malaysia in Batu Kawan. It is also noteworthy that Singapore's Temasek Holdings has signed an agreement with Penang Development Corp to establish a shared services hub in Bayan Lepas and Batu Kawan worth some RM11.3 billion in gross development value.
Property investment is a long-term play, and it is important to adopt a long-term view when making investment decisions. Property prices may see some adjustments this year but it is not necessarily the end of the world. In fact, in challenging times come opportunities. While the sentiment is weak, we think that it is a buyers' market. The average bank lending rate has been trending down from 6.6 per cent in 2007 to 4.5 per cent at the time of writing. Interest rate is not expected to rise anytime soon as BNM reiterated its stance towards being "accommodative and supportive of economic activity".
While Malaysia's GDP growth is generally expected to be weaker in 2016, a downward rather than an upward adjustment to the policy rate is more likely should there be any change. Also, the weak ringgit is a blessing in disguise for the sector. For foreign investors, it is a bargain to shop for Malaysia property considering the ringgit has weakened by more than 20 per cent from its five-year average. As the political noise fades and especially with oil prices rebounding recently, the concern of ringgit volatility may be over-rated. We believe the long-term prospects of property investments in Malaysia remain strong as the country moves towards achieving its vision as a developed nation by 2020.
- The writers are respectively senior manager at JLL Malaysia, and head of South-east Asia research at JLL.