A combination of a sluggish economy, a slump in commodity prices, an increase in the cost of living and a shaky domestic political landscape has had a neutralising effect on Malaysia’s real estate sector. Although 2016 is forecast to be a flat year, there are excellent deals to be had for forward-looking investors and those able to invest without a bank loan.

Shrinking Values

On February 29, 2016, the Malaysian Investment Development Authority (MIDA) disclosed that approved investments in the services sector in 2015 contracted by 29.5% on a year-on-year basis, a contraction blamed mainly on the deteriorating value of real estate projects.

The value of approved investments in Malaysia’s real estate sector tumbled by 70% to RM26.9bn ($6.7bn) in 2015 from RM88.6bn ($21.9bn) in 2014, according to MIDA’s “Investment Performance Report 2015”. MIDA approved 911 real estate projects (excluding commercial buildings) in 2015, almost all from domestic sources. Some 1321 such projects were approved in 2014. Because the real estate sector is linked to a variety of other sectors, any decline in its value can have a domino effect on the rest of the economy. This has been seen clearly with the fall in property investments being linked to a 21% drop in the total value of approved investments from RM239.7bn ($59.3bn) in 2014 to RM186.7bn ($46.2bn) in 2015 – an amount that still exceeded the targeted annual average of RM148bn ($36.6bn), according to MIDA.

The reversal of fortune has been swift. Between 2009 and 2013, all subsectors of Malaysia’s property market – residential, commercial and industrial – experienced healthy and rapid expansion. During this period, many Malaysians entered the property market, only to see growth begin to slow in 2014, lose pace in 2015, and then come to a near standstill in 2016. A recovery is not expected until 2017.

Some of this deceleration is intentional. As a result of cooling measures implemented by the central bank to reduce household debt and discourage speculation, potential buyers found that it was more difficult to get a loan and sales flattened. Furthermore, the implementation of a goods and services tax and a depreciating ringgit slowed appetite in most segments of the market. Still, bright spots remain, such as for real estate investment trusts and wealthy buyers able to snatch up bargains in prime locations.

Flat Year Ahead

The near-term result is that sector analysts have predicted a mostly flat year for 2016, with property volumes and transactions declining overall. The first half of 2016 will be “very quiet” for the property market, Siva Shanker, chairman of the Malaysian Institute of Estate Agents (MIEA), told local press in January 2016. He thinks it will “find its level” by the third or fourth quarter of that year, “slowly inch forward” in 2017 and 2018, then start to rise in 2019 before hitting higher growth in 2020.

However, large-scale infrastructure projects such as Bandar Malaysia in the Klang Valley and the high-speed rail project in Johor are expected to propel capital appreciation in those markets. In Selangor, the development of the mass rapid transit and light rail transit lines will not only improve transport connectivity around and within the Greater Klang Valley; these projects will also support the region’s residential and commercial property market. The same holds true for properties located near the large-scale infrastructure projects planned for Penang, Sarawak and Sabah. In Johor as well, more large-scale projects are planned. The Forest City project, for example, a mixed-use development to be built on four reclaimed islands in the Johor Strait, will offer investors financial incentives and corporate tax breaks for setting up shop on the duty-free islands.

The government has also identified four major projects totalling RM550.5m ($136.3m) to be implemented within Vision Valley, a proposed integrated development in Negri Sembilan. The 108,000-ha project aims to generate investment of over RM417.6bn ($103.4bn) by 2045, 80% of which is expected to come from the private sector. Plans for Vision Valley include an integrated development called Seremban Central, a resort city, housing and the Port Dickson Waterfront and Splash Park.

Policies & Regulations

A handful of new regulations have come into effect that have consequences for investors in the property market. These include the Housing Development Act 2012, which requires developers to deposit 3% of the estimated construction cost to obtain a developer’s licence and introduces penalties for abandoning housing developments, as well as amendments to the Strata Titles Act 2013 that extend the act to cover the federal territory of Labuan and facilitate the issuance of strata titles to purchasers. In a similar vein, the Strata Management Act combines the management and maintenance regulations for strata properties under one act and establishes subsidiary management corporations and limited common properties to provide for the management of mixed developments.

The government has also stated its aim for at least 90% of bumiputera (indigenous Malay) households to own a residential property by the end of the 11MP period. To reach this goal, the 11MP provides for funds to be collected via a “clawback” mechanism that sets aside contributions from developers who are not able to comply with the quota policy. The policy compels developers to allocate at least 30% of all property units, residential and commercial, to bumiputeras.

Affordable Housing

In 2014 median house prices at the national level were 4.4 times the median annual household income, according to a study performed by the Khazanah Research Institute. This level qualifies Malaysia’s housing market as “seriously unaffordable”, with an “affordable” market defined as one in which median house prices are three times the median annual household income. At 5.4 and 5.2 levels, Kuala Lumpur and Pulau Pinang, respectively, are “severely unaffordable”, according to the study. The study also found worrying indications that without rapid intervention, social housing will be required for the bottom 40% and middle 40% of income earners.

State-run programmes to make affordable housing available are administered through several agencies, including the National Housing Department, the Ministry of Urban Wellbeing, Housing and Local Government (known as KPKT), and the Ministry of Finance’s Syarikat Perumahan Negara Berhad (SPNB).

Government-led financing aid programmes to enable low- and middle-income earners to buy homes include schemes such as Perumahan Rakyat 1Malaysia (PR1MA), for households earning between RM2500 ($619) and RM10,000 ($2480) a month to buy houses priced between RM100,000 ($24,800) and RM400,000 ($99,000); Rumah Mesra Rakyat (RMR1), for low-income earners who own land to build homes using a RM20,000 ($4950) subsidy; and Perumahan Penjawat Awam 1Malaysia, which is reserved for civil servants. In addition, the Malaysia The “My First Home” scheme enables young adults earning RM5000 ($1240) per month or less to purchase a first home by receiving 100% financing from financial institutions, and the MyHome private affordable ownership housing scheme provides a subsidy of up to RM30,000 ($7430) per low-cost house for qualified first-time homebuyers.

As outlined in the 2016 budget, the PR1MA programme will receive RM1.6bn ($396.1m) to build 175,000 units of PR1MA homes, with 10,000 units expected to be completed in 2016. The budget also allocated RM200m ($49.5m) for a First House Deposit Financing Scheme to be established by the KPKT.

The revised January 2016 budget mandated that houses priced up to RM300,000 ($74,300) in new projects would be available to first-time buyers only. It also announced the launch of integrated house ownership roadshows, in which over 100,000 housing units will to be made available.

In addition, the prime minister announced a 4% financing package initiative for houses priced at RM35,000 ($8660) that is expected to aid more than 10,000 homeowners. Administered by the People’s Housing Programme, the financing for this will be funnelled through Bank Simpanan Nasional and Bank Rakyat, which will draw on a fund of RM400m ($99m) . Supplementary allocations include RM200m ($49.5m) for SPNB to build 10,000 units of RMR1 subsidised at RM20,000 ($4950), and another RM863m ($213.6m) for KPKT to construct 22,300 units of apartments and 9800 units of terrace houses under the new housing programme.

Cooling Down

In the 2014 budget, tabled in October 2013, the prime minister announced that the central bank, Bank Negara Malaysia (BNM), was implementing “cooling measures” for the property market to curb speculation and reduce household debt levels. These measures included a 70% loan-to-value ceiling on a borrower’s third and subsequent property-financing facility, a rise in real property gains taxes, a tightening of real property gains tax (RPGT) rates, a reduction of the maximum tenure for property loans from 45 to 35 years, the abolition of developer interest bearing schemes (DIBS), and an increase in foreigners’ minimum property purchase price to RM1m ($248,000). Lending guidelines also became more stringent, with approvals based on the borrower’s net rather than gross income.

Since then, with the market showing signs of stagnation and oversupply, some have called on BNM to strike a more flexible stance on the application of the new lending policy for first-time home buyers in order to increase property transactions and reduce the number of unsold properties. In theory, this could extend to allowing banks to provide 100% financing for first-time buyers of affordable housing – defined as property costing RM300,000 ($74,300) or less.

In a survey by the Real Estate and Housing Developers Association (REHDA), 68% of 159 developers in 12 states reported unsold units of up to 30% in mid-2015. Also during the second half of 2015, more than 50% of loans were rejected, the highest of which were for properties priced at between RM250,000 ($61,900) and RM700,000 ($173,000), according to the survey. Some 67% of developers surveyed blamed the high number of unsold homes on banks’ stringent mortgage eligibility criteria. The survey also pointed out a potential hazard of high loan rejection rates: if developers’ unsold stock increases, a knock-on effect could be a lack of provision of low-cost housing.

BNM’s measures are affecting the high end of the market as well. “As a consequence of cooling measures introduced by BNM, approvals of housing loan applications for high-end properties fell significantly to 8% in 2014 from 20% the year prior,” Chung Chee Leong, CEO of Malaysia’s national mortgage corporation, Cagamas, told OBG.

Mixing It Up

The stubborn issue of a lack of affordable housing in urban areas has forced developers who want to meet the demand for affordable housing to build mixed-use developments in less developed and less densely populated areas in order to take advantage of lower land prices. These integrated developments – in which shopping, residential and office space, and entertainment and recreation are combined – have proved very attractive to both residential and commercial tenants.

Shah Alam, around 30 km south-west of central Kuala Lumpur, is one popular site for such mixed-use projects. Recent offerings there include the fully subscribed Arahsia Residences of Tropicana Aman consisting of 432 units of link homes with a RM342m ($84.7m) gross development value (GDV); IJM Land’s new phase of affordable housing, Bandar Rimbayu, with a GDV of RM11bn ($2.7bn), and Eco Sanctuary, EcoWorld Development Group’s second township in the area, a 125-ha leasehold project of strata-titled semi-detached units, bungalows and terraced villas with a GDV of RM8bn ($2bn).

Residential Drives The Market

A REHDA Property Industry Survey found that in the first half of 2015 property sales fell 9% compared with the first half of 2014. Only 4373 of the 10,877 units that were launched – mostly residential units – were sold. The survey showed the number of unsold units rose 14 percentage points between the same two periods, to 78%. REHDA attributed the bulk of unsold units to loan rejections by banks and unreleased bumiputera lots, which were primarily in a price range of RM500,000-RM1m ($124,000-248,000).

Nationwide, the house price index rose by 5.43% between the first and third quarters of 2015, or 2.74% when adjusted for inflation. The index was down from 7.88% increase in 2014, according to the Valuation and Property Services Department.

Though housing prices continued to rise in 2015, analysts expect them to self-correct in 2016 and that this segment will continue as the main driver of the property sector, albeit with less momentum than previously. In the third quarter of 2015, residential property sales volume and value fell by 3.9% and 7.8%, respectively, compared with the previous quarter, according the National Property Information Centre. The three states with the highest number of launches in 2014 – Kuala Lumpur, Selangor and Johor – saw a reduction in the number of new residential launches in 2015, and this was expected to continue in 2016.

As of March 2016, the property market was officially in a slowdown, according to FD Iskandar, president of REHDA. He said the second half of 2015 saw more than 46% of houses near the RM500,000 ($124,000) price range, mainly in primary areas in Selangor and Johor, remain on the market. Yet despite this lull, the take-up rate for new homes kept relatively brisk in that period, which saw sales of apartments and condominiums rise by 120% on the previous half-year.

The apparent contradiction is partially explained by demographics. The country’s relatively youthful population – 30% of Malaysians are below the age of 15 – means the demand for affordable starter homes will continue to increase as these young adults enter the workforce and start families. If this group cannot afford to buy, they will be forced into the rental market. Monthly residential rental rates range from RM2100 ($520) to RM2800 ($693) in Kuala Lumpur, RM2000 ($495) to RM3500 ($866) in Selangor, and RM1000 ($248) to RM3000 ($743) in Johor Bahru.

Yet in many areas, and particularly in Greater Kuala Lumpur, an oversupply of high-cost, high-rise residential units and an undersupply of affordable housing has created a mismatch between supply and demand. To close this gap, developers are increasingly re-assessing their offerings in order to make them more affordable for this group of buyers, as well as catering to the buy-to-let market.

Office Space 

According to Savills Research published in May 2015, the supply of grade-A office space in Kuala Lumpur and its suburban markets is limited, perhaps comprising less than 15% of space. Grade-A space is generally located in new buildings constructed to a high quality that are well located and managed professionally. Savills found that if Petronas Twin Towers were subtracted from the pool, only 10% of KL City’s office stock would be considered grade-A. Savills estimated that about 22% of KL’s supply was grade-B. The existing stock is maturing rapidly: less than 15% of KL City’s existing office stock is less than five years old, and nearly 75% of it was built more than 15 years ago. Suburban KL’s office stock fares better. Of the total existing stock, 65% is less than 15 years old, with 30% having been built in 2010 or after.

Add to the mix a growing supply of commercial space coming on-line soon – 10 new shopping malls are expected to open in the Klang Valley in 2016 – and it looks like the region’s commercial property segment will face further dilution of its already oversupplied and aging retail space over the next few years.

Infrastructure Buoys Industrial

Although investors may find the entry level is higher, the market for industrial land and property is a bright spot in an otherwise subdued market. Indeed, due to the many infrastructure projects both planned and under way, the industrial subsector has been one of the only submarkets showing much positive movement of late.

According to the National Property Information Centre, the percentage change in the number of industrial properties transacted hit 4.7% in the first half of 2015, surging from -10% in the first half of 2014. The number of properties changing hands was 4118, making up only 2.2% of the total. However, this upward trend is expected to be buttressed by the introduction of incentives for purchasers of industrial estate (IE) land. To attract more development in industrial estates, IE landowners will receive a 100% tax exemption on statutory income for five years.

In the Klang Valley, analysts see rental rates for industrial lots below 100,000 sq feet retaining their rates as companies downsize due to the challenging economic conditions. Yet demand for industrial property in the north, especially Penang State, is expected to remain steady. This is because the key economic activity is export-oriented manufacturing supported by companies involved in the production of semiconductors and aerospace components – healthy sectors that require sufficient amounts of industrial land.

Changes On The Way

One area to watch in 2016 is the secondary property market. This is because time has run out for buyers who took advantage of the DIBS. Abolished in 2014 as promoting speculation, DIBS allowed developers to service the interest on home loans during a property’s construction period. This meant buyers paid only 5-10% down based on the property’s price until it was completed.

A day of reckoning may be on the horizon for DIBS speculators in 2016, as many projects that relied on DIBS financing are being completed. Purchasers of DIBS projects in 2013 will now have to start servicing the mortgage instalments. With the economy shaky, some may find themselves in default, leading to bank auctions of such properties. While foreigners are not allowed to buy auctioned properties, sales of properties on the secondary market by and for Malaysians will likely increase under this scenario.

Property sector stakeholders have called on the government to reinstate DIBS for first-time buyers. With so many unable to afford a new home, homebuyers could lock in properties at their currently lower prices if they were able to use DIBS, they argue. In addition, there is evidence that the cancellation of DIBS led to plummeting transaction volumes.


The market will take some time to correct, but for long-term investors and those who can buy without a loan, there are well-priced opportunities to be had. IE property and property connected to infrastructure projects are safe bets for the near and medium term. If the central bank changes its stance on loan restrictions, DIBS is reintroduced or the economic climate improves, the waiting time could be shortened. If none of these things happen, there will be a longer delay before the market returns to pre-2015 levels. A wait-and-see approach will likely be taken by all but the most high-rolling sector players.