Malaysia’s real estate prices raise concerns

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The property sector in Malaysia has been attracting plenty of attention from foreign investors and could draw in even more. But after a period of strong price growth, new regulations on lending and slower economic expansion may cool the market, leading developers and the government to target projects and investment incentives more carefully.

Malaysia’s real estate market has significant growth potential, according to Singapore-based real estate agent Kenny Tan, the local press reported in July. Tan, a group division director at ERA Realty Network, was reported as saying that Malaysia had particular appeal for Singaporean investors, given high prices on the Singaporean market and Malaysia’s proximity to the city-state – among other competitive advantages.

Iskandar Malaysia, a development region near Johor and adjacent to Singapore across the Strait of Johor, has proved particularly popular with Singaporeans looking for investment properties and second homes. Tan added that property prices in Kuala Lumpur have displayed steadier growth since 2004 than those in Singapore, which have fluctuated.

Tan’s views were echoed in August by Kayseon Yuen, regional president for Malaysia at Hong-Kong-listed Country Garden Holdings, one of China’s biggest property developers. The company’s only solo project outside China is its RM18bn ($5.52bn) Danga Bay project in Iskandar Malaysia. Country Garden entered Malaysia in 2012 in a joint venture with Malaysia Land Properties, with which it is developing high-end townships in Selangor state.

Like many developers in Iskandar Malaysia, Yuen is targeting foreign buyers (who account for 60-70% of home buyers in the development region), particularly from China. He is confident that Malaysia My Second Home, a government programme to promote foreign investment in property, is seeing success in attracting buyers. The right to buy freehold land in Malaysia is particularly attractive for Chinese buyers, as most property in China is leasehold.

Since 2006, Iskandar has attracted RM118.93bn ($36.5bn) in committed investment, making it a leading light for development in Malaysia. But substantial foreign and domestic investment has also come to Kuala Lumpur, the capital, which the government is working to establish as a regional business centre. While it is not yet truly challenging Hong Kong and Singapore as South-east Asia’s business capital, low prices in Kuala Lumpur are helping draw in foreign investors.

However, partly thanks to growing foreign investment, as well as increasing affluence among Malaysians, Kuala Lumpur is not as cheap as it used to be, with prices having more than doubled compared to five years ago, according to local developers. There is concern about occupancy rates at the higher end of the market, and as a result, some developers are moving towards building smaller, more affordable units.

The market has already been cooled to a degree by external factors – firstly a slowdown in the second quarter of the year as investors waited for the results of Malaysia’s general election. While the re-election of the Barisan Nasional government reduced the political risk element that was likely holding back investment, moves by the Bank Negara, the central bank, to tighten property lending conditions are expected to pull back demand. Loans for residential and non-residential properties will now have a maximum tenure of 35 years, down from 45 years.

Significantly, Bank Negara has opted not to raise its benchmark policy rate, which has remained unchanged mid-2011. An increase could have a significant effect on the real estate market, as the majority of mortgages in Malaysia are adjustable rate. A worst-case scenario would see a rise in defaults, leading to a sell-off of distressed property and a decline in prices.

However, that is the pessimistic viewpoint, and Malaysia’s economy is expected to rack up a good pace of growth this year, at around 5.1%, according to the IMF. Even with the world economy still in troubled waters, South-east Asia has been performing well. Squeezing some of the speculation out of the Malaysian real estate market should make it healthier in the long run, even at the cost of price moderation.

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