Special Report: Mixed fortunes for a new frontier

BY LIAM ARAN BARNES

Despite recent cooling measures implemented by the Malaysian government, Iskandar remains a key investment target for international property investors.

The Malaysian state of Johor has maintained a long- standing tie with its island neighbour, Singapore, for the best part of a century. Originally connected to the Malay peninsula by the Johor-Singapore Causeway, the trans-Straits relationship has at times been somewhat strained. The 1964 Singapore race riots—one year prior to the Lion State’s secession from Malaysia—resulted in temporary closure of the causeway, while calls for its termination followed the 1986 visit of the Israeli prime minister to the island nation.

Plans proposed more than a decade ago to replace the existing link with a new bridge again fuelled political tensions, with the nations unable to agree upon conditions for construction. Although negotiations are still ongoing, bilateral relations have improved in recent years and Malaysia’s momentous economic zone Iskandar is expected to bolster economic relations as an increasing influx of Singaporean currency crosses the causeway.

Officially established in 2006, the 2,217-sq km Iskandar Malaysia development is the government’s flagship project in its Economic Transformation Programme, which aims to establish the country as a high-income economy by 2020. Since its inception, high-end residential projects in the zone have proven popular with overseas buyers from China, the Middle East and Singapore. Investors from the island state are turning to Iskandar not only due to its geographical advantage, but also the strength of the Singaporean dollar against the Malaysian ringgit and the development’s timely emergence alongside Singapore’s introduction of property market cooling measures.

The introduction of the measures — notably the 7 percent Additional Buyers’ Stamp Duty and reduction of financial institutions’ Loan-to-Value limits from 60 percent to 50 percent — has made it increasingly difficult for Singaporeans to purchase additional properties on the land- starved island, and therefore heightened interest in Iskandar, according to Khalil Adis, property analyst and co-author of the book Get It Right – Iskandar.

“The Malaysian government has shown a lot more follow through in Iskandar Malaysia, compared to the 1980s and 1990s when many Singaporeans [who invested in Malaysia] got their fingers burnt by errant developers who abandoned their projects,” he says. “Sentiment has grown positive, and Singapore is now the top foreign investor in Iskandar.”

Figures released by the economic zone’s regulatory body, Iskandar Regional Development Authority, reveal that RM6.608 billion (USD2.07 billion) of the total RM128.21 billion (USD40.07 billion) invested hails from Singapore, while UEM Sunrise, the master developer of the zone’s epicentre Nusajaya, states that Singaporeans account for 74 percent of all homebuyers in the city.

Tebrau 8

Such is the demand from the Lion State for residential property that a number of Singapore-based real estate firms are almost exclusively focusing on Iskandar projects. Chesterton Singapore, an entity of international property consultancy Chesterton Global, recently re-entered the Singapore market and is working closely with major Malaysian developer See Hoy Chan on Tebrau 8, a luxury residential project based in the heart of the Johor state capital Johor Bahru. Launched in December, the two-tower development, due for completion in 2017, is set to feature 342 units ranging in size from 49 sqm to 278 sqm.

“Johor Bahru has a bustling population of over 1.2 million and that’s a ready base in terms of demand when looking at buying and renting properties,” explains Donald Han, managing director of Chesterton Singapore. “Other markets like Danga Bay and Medini are exciting, but it will take about 10 to 15 years for infrastructure and population to reach maturity.”

Although the 9.2-sq km Medini township, located within the Nusajaya zone, or Zone B, is a relatively recent development, it has attracted significant investment in line with its ambition to become Iskandar’s central business district. This is due to the lack of foreign quota restrictions, brand-new infrastructure and cheaper prices on landed title properties, which, according to Adis, start from about MYR2.5 million (USD782,000).

“In Singapore, such homes, defined as good class bungalows [landed title properties], will cost more than SGD20 million (USD16 million),” he says.

One notable development within the township is Mah Singh Group’s mixed-use project The Meridin@ Medini, which comprises a boutique hotel and retail and commercial towers, in addition to three residential blocks. Located within eyeshot of one the country’s leading tourist attractions Legoland Malaysia, lifestyle marina Puteri Harbour and only a 45-minute drive from Changi International Airport, the project’s residential units Meridin Suites Residences have recorded strong sales since entering the market last May.

Some 88 percent and 69 percent of units at Tower A and Tower C, respectively, have sold—prices start for the studio to three-bedroom condos start at MYR7,319 (USD2,298) per sqm—while the larger apartments in Tower B, which launched in July, are also in demand, according to group CEO Leong Hoy Kum.

“Most options offer international investors both strong yield potential and medium- to long-term stable growth and this means that the real estate sector in Malaysia continues to be favoured,” he says. “So long as the property type suits the investor’s portfolio, it will be well-received.”

Meridin Suites Residences, phase one

A major catalyst fuelling Singaporean interest was the pivotal land swap between the two countries in 2010, which saw government-owned Singapore firm Temasek Holdings enter Iskandar, paving the way for a flurry of interest from across the Straits. This has since resulted in palpable price growths in key Iskandar destinations where asking prices now surpass those in prime areas of Kuala Lumpur. The average price of recently launched Nusajaya residential properties, for example, currently stands at MYR17,222 (USD5,403) per sqm compared to estimated transaction prices of about MYR11,840 (USD3,715) per sqm in KL’s high-end Mount Kiara market.

A slew of nationwide and Johor-specific foreign investment-related cooling measures were recently unveiled in the government’s 2014 budget which could curb unsustainable price growth and speculative purchases experienced in the past few years. These include a countrywide hike on minimum foreign investment from MYR500,000 (USD156,570) to MYR1 million (USD312,840) — applicable from 1 May — and an increase in the annual real property gains tax to 30 percent for the first five years and 5 percent per annum thereafter, introduced on 1 January. A new state levy will also be introduced in Johor on 1 May altering the overseas investment fee from the current MYR10,000 (USD3,120) flat rate to 2 percent of the property purchase price.

“Too much speculation creates unsustainable growth in the property market,” Sulaiman Akhmady Mohd Saheh, director of research and strategic planning at Malaysian property consultancy Savills Rahim, says. “But some speculation is good for the market as it instils optimism, confidence and interest.”

Interest from Singaporean buyers however, looks set to be stymied for the short-term, at least, as the market comes to terms with the introduction of both the nationwide and state specific measures.

“The problem is some buyers are confused by the new budget announcement and thought all the measures would be implemented on 1 January 2014. It’s this misinformation that caused them to stay away,” says Adis. Demand, however, is likely to return in a couple of months once foreigners digest clearly that the new measures will come into effect in May, as announced by Malaysian authorities last November.”

Special Report: Mixed fortunes for a new frontier