This commentary was first published in TODAY, a newspaper in Singapore published by Mediacorp, on 12Aug2016 titled “Avoid Malaysian Property, Especially Iskandar”. 

This long awaited update of the HSR project finally revealed a more reasonable target completion year of 2026.

In Chapter 13 of Weathering a Property Downturn published by Marshall Cavendish, I hazarded a guess that the earliest date for the HSR to begin operations could be the year 2025. Inter-city and international railway projects are never simple, and deadlines get postponed all the time. Acquiring land across four Malaysian states, resettling of affected families and businesses and most importantly raising of sufficient funds for the entire project will require a few more years, especially if local issues and politics disrupted the timeline.

The project is repeatedly hailed by both governments as a “game changer” for our economies.

Fast acting investment advisors are already spouting the economic benefits of the HSR and recommending various types of investments all over Peninsula Malaysia. However to think that the HSR will change the game for the whole of Peninsula Malaysia, outside of Kuala Lumpur, we got to look deeper.

Dr Qin Yu, an assistant professor with the National University of Singapore, authored a paper titled “No County Left Behind? – the distributional impact of High-Speed Rail Upgrades in China”. She concluded that “the reduction of transport costs for people between large cities may divert economic activities from counties to populous urban districts”. The paper, already accepted and awaiting publication by the Journal of Economic Geography, also revealed that the major cities which host the termini stations fare better while the counties along the route of the high-speed rail saw 3-5% declines in annual GDP arising from a reduction of 9-11% in Fixed Asset Investments.

If findings from this study were applicable to the Singapore-Malaysia HSR, we could expect to see the economies of Singapore and Kuala Lumpur expand while the economies around the 6 intermediate stations shrink: Putra Jaya, Seremban, Ayer Keroh, Muar, Batu Pahat and Nusajaya. For the cities and towns such as Port Dickson, Tampin and Kluang which are bypassed, the economic outlook might be even more dire.

Residents of Kuala Lumpur, Seremban and Malacca will find it a breeze to work in Singapore via daily commuting, earning incomes in Singapore dollars, while returning home every evening to be with their families. There could be further “brain-drain” or “skills-drain” from various Malaysian cities to Singapore.

Malaysia My Second Home (MM2H) Program

The program started in 2002 and a total of 29,814 applicants have been approved since. The current total number of participants could be lower as there may be double counting in cases of renewals and there could also be dropouts along the way.

In the first 4 months of 2016, approvals were given to 424 applicants, meaning that on an annualised basis we might expect a total of about 1,300 approved applicants this year, or a drop of about 40% from 2015 (which itself saw a drop of 28% over 2014).

Compared with Singapore’s objectives of granting permanent resident status to 30,000 foreigners and citizenship status to about 15,000-25,000 permanent residents every year (reference 2013 Population White Paper), the MM2H program does not look popular.

Amongst the approved MM2H applicants are Singaporeans who have applied for the MM2H status in order to enjoy the privilege of buying cars at a discount for their relatives who reside in Malaysia. Each approved MM2H person is entitled to purchase “one new motorcar made or assembled in Malaysia” with an exemption from excise duties, thus saving tens of thousands of Ringgit for their families.

The cumulative 29,814 applicants added a mere 0.1% to the 30 million population of Malaysia. Even if all the approved participants chose to reside in Iskandar, they will only fill up 10 percent of the 300,000 residential units launched in the last 5 years. I am inclined to conclude that the 13-year-old MM2H program has negligible impact on both the economy and demand for properties.

Iskandar’s Promise

Closer to Singapore, pundits continue to sing praises about the growth potential of Iskandar. In a drive around Nusajaya in early July, we observed that the pace of construction seems slow, as several projects that were fully sold years ago remain under construction.

One large billboard proclaimed “Akan Datang” and “Coming Soon” above a construction site hoarding for a luxury condominium project which failed to launch after the 2013 peak of the Iskandar hype. Needless to say, construction has not started.

As for the completed condominiums, banners displaying “For Sale” and “For Rent” are commonplace. A casual count estimates that about 10% of the apartments are furnished with curtains.
A medical centre that was launched with much fanfare was opened for business in late 2015. As of July 2016, no more than a quarter of the clinics in the medical centre have been taken up by specialist doctors.

Refunds and Backing Out of Iskandar

Some developers in Iskandar have dropped prices to move leftover apartments, adding downward pressure on valuations. Buyers who took deferred payment plans and paid down less than 10% of purchase prices are walking away from their investments. Some investors have gone further, requesting developers to refund their down-payments by citing the inability to secure mortgages as the banks have tightened up on loans to foreigners.

The situation with commercial and industrial properties is similar. While millions of square feet of commercial and industrial space are completed and waiting for tenants, several high profile projects have never broken ground.

We have scant information about the value of investments into Iskandar. In particular, how investments into businesses and factories that will create jobs. Of the much quoted RM$202 billion invested into Iskandar between 2006 to March 2016, how much was for the reclamation of land and for the purchase of land by developers? How much was due to the sales of strata titled apartments, SOHOs, offices and industrial space by the same developers? What about the value of investments that were withdrawn?

Malaysia held promise until over development and over-hyped promises propelled valuations to the stratosphere, especially when Iskandar prices matched those in prime Kuala Lumpur districts. Investments from Singapore are unlikely to improve given the slump in trade, manufacturing and financial services, while corporate default risks are rising.

I am eager to be the first to upgrade my call on Malaysian properties to a “Buy”. However, against an uncertain political leadership and economic outlook, which could depress real estate valuations or weaken the Ringgit versus the Singapore dollar, my call on Malaysia real estate is an “Avoid” for now.