Standing tall: New large-scale developments offer opportunities in the residential, retail and commercial segments

With property development now the third-largest contributor to gross development value (GDV) in Sabah, after palm oil and oil and gas, the state’s construction and real estate sector is a major pillar of the local economy. Concentrated on the west coast, particularly in and around the capital, Kota Kinabalu, real estate prices have risen in recent years to place Sabah among the most expensive states in Malaysia. Investment has been flooding in, too, with the skyline of Kota Kinabalu and other major settlements being rapidly and radically altered.

The sector is not without its challenges though. Legal and bureaucratic delays in project approvals are one, while the higher costs of materials and labour are another. Yet demand is certainly there, not only from Malaysians, but from foreign buyers eager to benefit from Sabah’s economic growth.

Facts & Figures 

One of the key bodies in the sector is the Sabah Housing and Real Estate Developers Association (SHAREDA), which brings together around 90% of all the developers in the state. SHAREDA’s research unit recently concluded that its members had generated a GDV of RM7.56bn ($2.36bn) in 2013 – more than either tourism or the manufacturing sector.

This figure was composed of some RM2bn ($624.2m) in mixed developments, RM1.82bn ($568.02m) in landed residential development, RM2.06bn ($642.93m) in condos and apartments, RM1.52bn ($474.39m) in commercial space and RM153.5m ($47.9m) in industrial developments. SHAREDA also calculates that a sum equal to an additional 80% of its GDV was created by its members’ activities in related sectors such as engineering, manufacturing, finance and ICT.

Geographically, the West Coast region took the lion’s share development, with some RM5.13bn ($1.6bn) of total GDV. The other five regions of the state accounted for the rest, with the next highest being the Lahad Datu region on the east coast with RM687m ($214.4m), followed by the Interior region, which generated around RM615.9m ($192.2m).

Demand Hike

In recent times, demand for real estate has been coming from several different quarters. One factor is strong organic growth – Sabah’s population of 3.5m had a growth rate of 2.3% in 2013, according to the Malaysian Department of Statistics (DoS). In addition, urbanisation is a major force, particularly among the young, who have been moving to Kota Kinabalu and are looking to rent or buy their own homes, in contrast to traditional patterns of extended family settlement.

SHAREDA estimates that some 15,000 property units per year are needed in the Kota Kinabalu area alone to accommodate this demographic shift. Additionally, spillover from the growing tourism sector has also increased the need for accommodations. In 2013 tourism arrivals were up 17.6% on 2012, with 3.4m visitors to the state. This drives demand for hotels, restaurants and other entertainment and leisure facilities, while also boosting demand for second homes and holiday apartments.

Sabah’s good connections to North Asia have been key in the latter segments, with much of the recent foreign demand for Sabah real estate coming from mainland China and Hong Kong. The state’s, and Malaysia’s, ethnic Chinese population have often been behind this, leveraging their family and business connections with the emerging Asia-Pacific giant. There is also a national campaign known as Malaysia My Second Home that aims to attract foreign buyers by offering residency and other benefits to those moving to the country.

GDP has also been growing, along with per capita incomes, boosting the buying power of the domestic market. The latest DoS figures for 2012 put GDP growth for Sabah at 4.1% in that year, rising to RM44.43bn ($13.87bn) at constant 2005 prices, with that breaking down into per capita GDP of RM18,758 ($5854) at current prices. Sabah has also benefitted from development plans, with the Sabah Development Corridor (SDC) bringing RM127bn ($39.64bn) of committed investments in the state since its beginning in 2008, RM25.7bn ($8.02bn) of which has been realised. In 2013 Sabah was among the top five states in Malaysia in terms of inward investment, with a total of RM3.4bn ($1.06bn).

Land Competition

With much of the state consisting of thick forest and mountain, development has historically been concentrated along the coast, with few settlements inland. In recent times, there has been a strong concentration of population and economic activity in the area around Kota Kinabalu and this has led to rocketing land prices.

Indeed, according to SHAREDA, in 2013 competition between Sabahan and West Malaysian developers and oil palm plantation companies pushed up prices along Jalan Lintas, one of the capital city’s main arteries around 10 km from the city centre, to some RM4m ($1.25m) per acre. City centre land, meanwhile, had surged to RM300-400 ($94-125) per sq ft, while even 12 km out land has changed hands for no less than RM3m ($936,300) per acre. This naturally reflects strongly on the eventual property price.

One other factor pressuring land prices is the lack of infrastructure beyond certain better-developed cities, such as the greater Kota Kinabalu area. This makes project development expensive beyond a narrow band of well-serviced areas. New roads for access and connecting water pipelines, pumping stations, electricity lines and sewage systems to grids that often halt some distance from the site adds to costs, making developers focus on an ever-narrowing supply of fully serviced land.

Additional cost issues may arise in the future from the implementation of the goods and services tax (GST), due to go into effect nationwide on April 2015. However, developers are proposing that this new tax be introduced more gradually in order to prevent any sudden shocks in regards to affordability.

Similarly, the impact of another tax that was recently hiked, the real property gains tax (RPGT), is still being disputed. The RPGT was enforced in order to restrain speculative flipping of property, as the rate decreases the longer a property is held by the owner. The 2013 Malaysian budget hiked RPGT from 10% to 15% for property sold within the first two years. Some analysts argue that this has had a limited effect, as speculative buyers were cash rich and unlikely to be put off by the hike. However, others have suggested that it has seriously impacted the number of transactions in the market.

Homes For All

Such high prices have naturally caused some concern over whether ordinary Sabahans are being priced out of the market. This was one of the main drivers behind a March 2013 scheme by the Ministry of Housing and Local Government (MHLG) to regulate that all new developments had to make 30% of their units affordable housing.

This was opposed by SHAREDA and other real estate sector groups, with an alternative scheme then being adopted in Sabah instead. Under this new plan, SHAREDA’s members have undertaken to build 10,000 affordable housing units – all costing no more than RM250,000 ($78,025) – over the next five years. These will include 13 high-rise apartment projects and 15 landed terraced housing projects, spread all across the state.

Developers wishing to launch projects within a 10-km radius of Kota Kinabalu and selling in the RM300,000-400,000 ($93,630-124,840) range must also undertake an agreement with the 1Malaysia Housing Programme, which will take part in the construction of 20,000 affordable housing units in other parts of Sabah. The MHLG has set up a special panel to monitor implementation, along with SHAREDA and other stakeholders. Francis Goh, the president of SHAREDA, told OBG, “Sabah real estate development is in a better state than in the rest of the country, largely because the requirements in affordable housing construction are much more relaxed.”

Private developers are beginning to take note. “There is a lot of potential in low-income or affordable housing, and government support such as the 1Malaysia Civil Servants Housing scheme ensures that this kind of development is profitable,” Gordon Loke, CEO of property developer KTI Group, told OBG.

Yearly Results

In 2013 the real estate sector’s GDV declined by around 25%, according to SHAREDA. The developers’ association saw this as largely due to delays in procedures that have caused a bottleneck in construction, with new developments having to overcome a number of hurdles, along with a curb on lending to potential buyers by banks. The regulatory delays include a new requirement for all plans to be approved by a central board, and then by local councils. Certain very large or sensitive projects also require state cabinet approval. The Natural Resources Office is also required to sign off on any permission for sub-division and conversion. This affects land that is designated by a “native title”, which has to be converted to a “country lease” if it is to be owned by non-natives.

Meanwhile, banks have to follow a set of strict rules established by Bank Negara Malaysia, the country’s central bank, aimed at ensuring mortgage borrowers do not get out of their depth. A number of background checks are required and that sometimes deters applicants, while lending limits are based on net income figures. Nonetheless, recent times have still seen some impressive developments in Sabah, with plenty more in the pipeline.

In the Kota Kinabalu metropolitan area, the high land prices have also led to taller buildings, maximising the potential of limited space. Several luxury apartment and condo developments were thus launched in 2012-13, including the Lido Four Seasons Residence and Tropicana Landmark in Penampang, now a suburb of the capital, with others in the Luyang and Kolombong districts. In total 2013 saw some 4692 condo and apartment units in 19 projects launched in an area stretching from the Kota Kinabalu city centre, through Penampang, Putatan, Papar and Tuaran at prices ranging from RM380-500 ($119-156) per sq ft.

SHAREDA’s expectations for downtown condo and apartment prices is that they will continue around the RM500 ($156) per sq ft mark, with projects such as Loft C, The Peak Soho and Bay 21 TOO in this category. Limited opportunities for further, similar developments, along with the steep price of land in the downtown area, were also likely to keep prices increasing in these locations. The high prices in the Kota Kinabalu-West Coast region were also having an effect on the numbers of landed properties being built. These are typically either terraced or detached houses, with SHAREDA’s figures showing just 1555 units launched there in 2013. Typically, these were located more than 15 km from the city centre, given their larger land footprint.

Retail Boom

The Kota Kinabalu-West Coast area did see a relatively large number of mixed-use developments go up in 2013, however. Many of these combine residential areas with retail and some commercial space. Modern retail is comparatively underdeveloped in Sabah, and thus recent times have seen some strong growth in malls in the state capital in particular. Once again, pressure on land in the downtown area is also driving retail malls further out along arterial roads from the centre to the suburbs.

In 2013 five mixed developments were launched in the West Coast area: the Grand Merdeka Mall in Menggatal; C Park on the Penampang bypass; 8 Avenue, which is on the Jalan Tuaran bypass; phase one of Pacific Heights at Likas Bay; and Sutera Avenue The Residences in the city centre.

The first development is a RM751 ($234) per sq ft mall, while C Park includes retail space and hotel suites. 8 Avenue is a commercial venue that includes small office-versatile office (SOVO) space, a new variety of retail estate currently being offered in Malaysia. Pacific Heights is largely condos, while Sutera Avenue is service-apartment based. However, all include a variety of other facilities. More malls are also in the pipeline and include the luxury Imago Mall, scheduled for completion in the fourth quarter of 2014 in the iconic, downtown Kota Kinabalu Times Square development. The mall will have some 300 retail outlets and a net leasable area of some 800,000 sq ft. According to mall management, 65% of the area had been leased out by March 2014.

Mix & Match

Another major mall development is in the mixed-use Kota Kinabalu Waterfront development, due to be completed in 2014. Located there, the Oceanus Waterfront Mall adds a three-story, 200-unit shopping centre to a residential, commercial and hotel complex, which comes complete with a 2-km seafront boardwalk. Nearby, the 247-unit Riverson Walk, also due to open in 2014, is located on a site some 10 km from Kota Kinabalu International Airport (KKIA). Containing another three-storey retail mall, this will sit side-by-side with a Gleneagles medical centre, six storeys of office space and seven small office-home office (SOHO) units – another new real estate phenomenon in Sabah, combining office with residential space.

In addition, 2015 should see the opening of the Pacific Parade Mall, which is in the mixed-use complex PacifCity. The mall seeks, as do many other shopping centres, to benefit from inhabitants of the attached Pacific Heights luxury residential apartments, with 13 storeys and 204 luxury units, phase one of which opened in 2013.

The Kota Kinabalu-West Coast region saw a total of nine major commercial developments in 2013, with these consisting of two-to-three-storey retail/office buildings, another variety of property popular in Sabah. Prices for these were within the RM300-500 ($94-156) per sq ft range, with prices being higher in projects such as C Park for four-storey office buildings. C Park is being developed by the Chang Cheng Group, with the development also boasting the tallest hotel in Sabah at 28 storeys, as well as three floors of retail shopping and a SOHO development in its second phase.

In terms of industrial units, 2013 saw three main developments in the Kota Kinabalu-West Coast area. These totalled 152 units, with prices ranging from RM261 ($81) per sq ft for warehouse space at the Kota Kinabalu Industrial Park, to RM496 ($166) per sq ft for light industrial, semi-detached units at the Bundusan Industrial Park.

Tourism is another potential growth area, both in and outside the capital. “Tourism remains undeveloped in Kinarut, although the town has potential for resorts. As Kota Kinabalu grows, this will be a key area for marine and historical tourism,” Susan Wong, managing director of Mega Sunwise, told OBG.

Beyond The Capital

The East Coast region, which includes the commercial and industrial hub of Lahad Datu and its Palm Oil Industrial Cluster, saw some residential developments in 2013. The Palm Garden condo development saw 320 units placed on the market, at a price of RM261 ($81) per sq ft, while the Bandar Seri Gemilang, Peak Residency and Damansara added 336 units, with prices ranging from RM216 ($67) per sq ft to RM514 ($160) per sq ft for detached residences. All the developments were in Lahad Datu, which was affected by falling palm oil prices and an incursion by Sulu militants in 2013. “Palm oil land prices fell dramatically after the Lahad Datu intrusion, which meant land previously worth RM500,000 ($156,050) per acre became worth only RM20,000 ($6242) per acre,” Goh said.

Other Projects

In terms of condo and apartment developments, other areas that had new projects come on-stream in 2013 were Sandakan and Kudat with 1440 units and 352 units, respectively. In Sandakan the six-storey Taman Permata apartment complex accounted for all social housing units in the area, which are priced at around RM200 ($62) per sq ft. Landed property developments in Sandakan totalled 406 units, with prices ranging from RM238-319 ($74-100) per sq ft. The apartments in Kudat were all part of the 1st Avenue Residence, selling at RM280 ($87) per sq ft. Given the greater availability of land, the Interior region saw a great deal more activity in landed property, with 11 projects launched there in this category in 2013. These totalled 1087 units, with prices ranging from RM160 ($50) per sq ft in Beaufort for a terraced house to RM392 ($122) per sq ft in Beaufort and Lumat for a semi-detached house. The Interior region is a popular area for commercial development, mainly in shop/office buildings, with 438 more units coming on the market in 2013. The Tawau region saw 1037 landed properties opened in 2013, retailing for between RM200 ($62) per sq ft for a terraced house in Tawau itself and RM382 ($119) per sq ft for a detached house in the same area.

Infrastructure

All this real estate activity has naturally boosted Sabah’s construction sector, as has the range of other projects currently going on in the state. These include investment into transport and ICT infrastructure, new oil and gas industry work, and other industrial plant development. The SDC and roll-out of schemes under the 10th Malaysia Plan and the Economic Transformation Programme have also injected much needed federal government backing into local development. Under the federal budget for 2014, some RM312m ($97.4m) was allocated to upgrade airports in Sabah and Sarawak, and RM850m ($265.28m) to install ICT cables.

In oil and gas the Sabah Ammonia Urea Project, the Sabah Oil and Gas Terminal, the Sabah-Sarawak Gas Pipeline, the Seri Kembangan integrated oil and gas project and plans for a re-gasification plant at Lahad Datu are also included. Major clusters for particular industries are also being developed, such as the Marine Integrated Cluster in Eastern Sabah, the Sepanggar Bay Manufacturing and Logistics Cluster, the Sabah Agro-Industrial Precinct, the new cruise ship terminal at Jesselton Quay, and expansion of Sepanggar Bay Container Port, among other things.

A number of road construction and expansion projects are also under way – one of the most impressive being the RM66m ($20.6m), 2.5-km Sepanggar Port Tunnel, a dual carriageway expected to be completed in April 2015. Ongoing road developments include an upgrade of the Pan-Borneo Highway and a coastal road, linking Tuaran, Kota Marudu and Kudat. The Sabah state budget for 2014 also included RM1.58bn ($493.12m) for infrastructure improvement, with RM347m ($108.3m) of this going to roads and RM627m ($195.69m) to water treatment and supply infrastructure. Beyond Kota Kinabalu, the frequency of paved roads drops rapidly, with a 2011 estimate by the state’s Public Works Department suggesting that some 65% of roads in Sabah are not tarred. Much of the road allocation in the state budget will likely go to road improvement in rural areas.

The involvement of the private sector in major construction projects is also highly encouraged. The Aeropod project in Kota Kinabalu is one example of how this has worked out in practice. The project will see the creation of a RM3bn ($936.3m) multi-purpose development around the old Tanjung Aru railway station. Aeropod will eventually contain a major new logistics hub, taking advantage of the rail link and proximity to the KKIA, as well as providing residential, office and commercial space. Malaysian firm SP Setia is the Aeropod developer and the deal with the Sabah government also entails that the firm redevelop the train station and related buildings, such as the headquarters of the local railway department, in return for the go-ahead for this mega-development. Three hotels will be built on the site, along with 5000 residential units.

Construction Challenges

The construction sector faces some important challenges in terms of the cost of materials, equipment and labour, along with the logistical issues associated with building in remote areas with little existing infrastructure. Nonetheless, recent years have seen a boom in the number of companies active in construction in Sabah, particularly in the small and medium-sized enterprise category. On the labour front, skilled supervisors and experienced labourers were in short supply. Goh told OBG, “There is currently a very acute labour shortage, with concern over the adequacy of professionals in particular.”

In the past this has been partly addressed by hiring foreign workers, particularly in the semi-skilled and unskilled categories. This was previously allowed from Indonesia and the Philippines. Yet economic growth in both of those countries in recent times has begun to dry up the pool of surplus labour. In order to address this, in 2011 the Sabahan authorities added Bangladesh, Nepal, Myanmar and Vietnam to the list of countries that companies can recruit from, a move that was welcomed by the sector. According to SHAREDA, at the start of 2014 the ratio of local to foreign workers was around 50:50. However, the presence of large numbers of foreign workers in the state remains a politically sensitive issue though, with the issuing of Malaysian identity cards to foreign workers causing some controversy.

Rising Costs

Meanwhile, recent increases in wages – a minimum wage of RM800 ($250) a month became compulsory for all workers in Sabah as of January 1, 2014 – and a levy on foreign workers paid to the state government have also added to project costs, and thus real estate price tags. Other factors also impact this, some of which are politically controversial. At the top of the list in this regard is the current cabotage policy. Ships engaged in domestic maritime trade in Malaysia must be Malaysian flagged, a policy passed in 1980 to try and encourage the development of a domestic maritime sector. Because Sabah lacks a major, state-based construction materials industry or construction equipment manufacturing industry, much of what is needed for real estate projects has to be imported.

In practice, this means materials needed in Sabah and purchased outside of Malaysia first go through Port Klang and are then sent on to Sabah in Malaysian-flagged vessels largely belonging to peninsula-based shipping companies. Materials and equipment manufactured in Malaysia also usually have to be shipped from across the peninsula. This creates additional transport costs, pushing up the price of materials and equipment, which is then passed on in the price of construction contracts and, finally, in the real estate sector itself.

Figures published by SHAREDA show the difference. A tonne of three-quarter-inch aggregate, for example, costs RM59.40 ($18.54) in Kota Kinabalu, and RM25.53 ($7.97) in Kuala Lumpur (KL) – a 133% hike. Other materials show lesser variance, but steel, brick, plywood and ready-mix concrete are all more expensive in Sabah. Construction equipment hire is also generally pricier. According to data from the Malaysian Construction Industry Development Board, in July 2013, the most recent available data, a lattice boom crawler crane with a 60-tonne lift rented for RM1366.67 ($426) a day in KL, but RM1700 ($530) a day in Kota Kinabalu. A 60-cu-metre capacity dozer, meanwhile, rented for RM1150 ($358) a day in KL and RM1700 ($530) in Kota Kinabalu.

Debating Policies

SHAREDA and other groups in Sabah’s private sector have long protested the cabotage scheme, yet little change seems to be at hand in the near future. Defenders of the policy argue that such differentials exist because volume of both imports and exports in Sabah are smaller than in KL, and thus would not make sense for international shipping lines to go directly to the state, regardless of the cabotage policy. One thing, however, that costs the same in Kota Kinabalu and KL is cement, which is due to the fact that the state does have local cement production capacity, with Cement Industries Sabah (CIS) having a grinding plant in Sepanggar Bay. The plant has an annual production capacity of 900,000 tonnes, with a bulk terminal at Lahad Datu port capable of handling 460,000 tonnes per year. This enables CIS to supply the west coast, as well as the east. The state also produces aggregates. Hap Seng Building Materials, for example, has a quarry at Tawau for crushed rock aggregates, while also producing bricks via Hap Seng Clay Products. KTI Group also produces its own construction materials. Sabah is not without some of its own construction equipment firms, too. KS Equipment, based in Kota Kinabalu, supplies excavators, compactors and loaders, as well as other equipment, as does Hup Lee Engineering, which has leasing and renting equipment as its main line of business. Recent expansion in the offshore oil and gas sector has also given local specialist engineering firms a lift, as the state’s native expertise in this area grows.

Another recent factor affecting costs is the government’s move to end subsidies, leading to hikes in fuel prices. In June 2014 RON 95 petrol was subsidised at RM0.71 ($0.22) per litre, while diesel was subsidised by RM0.74 ($0.23) per litre, in both cases an amount equal to around one-third of the retail price. The imposition of GST in 2015 may also impact fuel prices, although as of mid-2014 the federal government had taken no final decision on this and currently petrol and diesel are exempt from GST. Hikes in electricity charges have also been occurring for similar, subsidy-reduction reasons. At the end of 2013 Sabah Electricity Sdn Bhd (SESB) raised prices by an average 16.9%, with future hikes also likely as SESB was still selling at a loss. Nonetheless, according to SESB, electricity tariffs are still lower than on the peninsula. Developers must, however, bear a capital contribution to SESB in their projects.

Electricity has, however, experienced serious problems in the reliability of supply. Some progress has been made, with SESB reporting a decline in the system average interruption duration index (SAIDI) from 2867 minutes per customer in 2009 to 557 in 2012, with the period of January-June 2014 recording a SAIDI of 303 minutes, excluding a major blackout in mid-June. Indeed, the hike in tariffs was justified by SESB on the grounds that it would also enable investment in reducing the SAIDI rate still further.

Outlook

The fundamentals of the Sabah market continue to be positive, with strong population growth and an unsaturated market. Promotion of Sabah to overseas investors, and potential future residents, is widely seen as crucial to future progress. However, this will also depend on how the local government overcomes some negative perceptions of the state due to recent security issues. At the same time, the ease of doing business in real estate and construction could be improved, in part by revisiting the cost concerns related to the cabotage policy. Yet for these challenges, Sabah has seen strong growth as the local sector shows its resilience, while demand for space in one of Malaysia’s most diverse and dynamic states shows no signs of letting up.

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The Report: Malaysia 2014

Sabah chapter from The Report: Malaysia 2014

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