Economic Update

Published 22 Jul 2010

Malaysia’s property sector has experienced strong performance this year following the government’s introduction of a series of regulations and measures aimed at making the country an international property location.

While many industry observers believe Malaysia now has the right legislative environment to match its attractiveness as a property destination, to become a truly global property hub, they feel that awareness of these assets is lacking and needs to be strongly promoted abroad.

Following a series of roundtable discussions between the government and the business community, it has been decided that joint government – private sector action is to be taken in the form of promotions and road shows so the country’s advantages can be communicated to potential international investors.

A low cost of living, relatively low crime rates, widely spoken English, and cosmopolitan cities all make Malaysia an attractive destination for a foreigner choosing somewhere to resettle or retire to.

There is strong consumer confidence in an economy that is forecast to grow 5% over the next few years, and an anticipated 4.3% appreciation of the ringgit against the US dollar by year-end makes Malaysian assets an attractive investment. On the commercial side, for anyone wanting to do business in the South East Asian region, Malaysia offers a central location and abundance of affordable flight routes to other area hubs.

Pricewise, in a recent JP Morgan comparative study of luxury housing affordability, Malaysia came in with the highest regional ranking. According to the study, a prime property in the Kuala Lumpur City Centre (KLCC) costs on average $261 per sq ft compared to an equivalent property in Hong Kong Island costing $2900 and $1743 in Singapore. Only properties in Bangkok and Manila are similarly priced. However, taking into consideration that Malaysian property developers such as United Engineering Malaysia and Malaysian Resources Corp are gaining world-class reputations and expanding successfully to developed markets such as Australia and Europe, Malaysian property is, relatively speaking, considered a very strong value for money.

On April 1 of this year, the government removed capital gains taxes on foreign property ownership, eliminating a significant barrier that discouraged foreign ownership in the past. This followed the launch of the ‘Malaysia My Second Home’ programme in December 2006, whereby foreigners who purchase property costing over $73,000 no longer require special government approval. As part of the programme, foreigners are also no longer limited to the purchase of only one property, nor are there any conditions placed on the usage of the properties being purchased.

The new policies have thus far had a positive impact on the sector. In a recent survey of property developers conducted by the ministry of finance, 22% responded they had received an increase in sales inquiries since the new reforms were announced. Transactions in the property market reached over 65,000 for the first three months of the year, accounting for a transaction value of $4.35bn. On the commercial side, 45% of the value of office transactions involved foreigners, compared with only 19% the year before. Investors are also garnering strong returns, with condominiums in the KLCC area fetching prices from $320 to $580 per sq ft compared to $232 to $290 one year ago.

While increasing property prices are earning investors strong returns, some worry that Malaysia could lose its competitive edge in attracting new buyers should prices continue to rise. NK Tong, managing director of Bukit Kiara Properties, a company responsible for a range of properties situated in the upmarket, strongly expatriate-populated Mont’ Kiara neighbourhood of Kuala Lumpur told OBG, “Yes, property prices are increasing, but they are increasing everywhere in the region, and it is not unique to Malaysia. The discount between Kuala Lumpur and Singapore has to close as it cannot last forever. Therefore Kuala Lumpur, overall, is still very good value.”

While the sector is performing well, industry players are calling for more overseas campaigns to ensure foreign investors are fully aware of all Malaysia has on offer. The ‘Malaysia My Second Home’ programme, according to analysts, has had mixed results, with Ng Seeing Lion, president of the Real Estate and Housing Developers Association, telling OBG, “The […] campaign will take some time.”

Following the June 20 roundtable discussion between the government and private sector, a matching grant of $14.5m has been allocated for international promotions and road shows. Malaysia’s premier properties are to be showcased at exhibitions overseas in target markets that include the Middle East, Korea and Japan.

According to Tong, “People are expecting too much too soon, and it will take time for demand to arise. Foreigners are just learning about the programme and in three to five years time it will snowball as the first people come, then they tell friends, who tell their friends, and momentum is created. So for now, marketing should focus on the early adopters.”

Another point of discussion at the roundtable was addressing what some have labelled as a non-competitive Real Estate Investment Trust (REIT) structure compared to other markets in the region. Despite the lowering of the withholding tax for individuals to 15% and institutional investors to 20% last year, analysts have said Malaysia still lags behind the likes of Singapore when it comes to tax incentives for the REIT market.

“I am excited about REIT regulation changes. At moment, we are not as tax transparent as Singapore for foreign investors, but I expect the government will amend that over time to make Malaysia more competitive,” said Tong.