The Potential of Iskandar is Very High but Investing in Iskandar has Risks

Investing successfully involves picking out opportunities the market does not fully appreciate yet. Often the best returns are for those investments where very few investors see much potential or where investors are not convinced of the larger economic factors (being nervous about investing in some country…). I read more and more anecdotes of people (largely from Singapore) taking new interest in potential investments in Johor. This is potentially a good sign. It is a good sign if more people are sensible evaluating future prospects and deciding the long term viability of Iskandar is increasing. I do think the signs in the last year has been positive for practices to bring about Iskandar (as it can be) are being applied (backing up what people have said would happen). If these investors are merely following the current hot investing trend that is a risk (many markets globally have had problems with such herding investor behavior in the last decade).

Long term commitment, by countries, to economic investment (especially when short term interest get in the way) is fraught with risk. Few countries (Singapore is one of them) have shown the ability to stick to long term economic strategies when difficulties arise. Often short cuts are taken to aid the most powerful, governments fail to follow through with promises (to actually allow businesses to operate freely or to bring off mass transit systems well…).

Iskandar should still offer higher potential returns precisely because risks are still there for what will happen. This is good for investors. But investors need to also remember there are risks. One of the big problems in the last 10-15 years is large scale ignoring of investment risks across the globe.

Another thing investors in Iskandar should remember is the success of that investment is significantly dependent on government action following through on all the good talk. So far things are progressing very well. But investors should be very interested in making sure that continues. As an investor you can’t only notice once the issues reduce the value of your investment directly. If you wait that long, it is too late.

Investors jumping in before things like large theme parks, Edu City, new hospitals, MRT… will gain once those all come into being. But if things fall apart and the MRT doesn’t get completed, that may scare away large investors and decrease values across the board. At the current time it seems like the second wave of less aggressive investors are coming in. Those investors are often more skittish. So they may well try to run the other way if problems start to crop up.

I think the potential is great. I think other than picking the right specific investment (which estate, which unit…) the biggest factor in success is going to be how close Iskandar comes in practice to the words that have been spoken. It is much easier to say the smart thing than to do the smart thing day after day for decades. Many countries had the chance to do what Singapore did the last 40 years. Almost no countries did so as well as Singapore. How Malaysia does on this front will be the most important factor in how investors in real estate today do over the next few decades. I think the investment options are great.

But many mistakes have been made in the last few decades with investors overbuilding in expectation of great economic growth that didn’t appear. The biggest risks I see today in Iskandar is that. The risk that too much is built without the supporting base of local jobs. I think that is not a huge risk – if Iskandar is managed properly the growth should be very strong (the combination of Johor and Singapore has extremely strong potential). But it is far from certain this will succeed as quickly and fully as we hope.

One measure that helps real estate investors stay grounded is to find investments that have positive cash flows from rentals. This still can be risky, positive cash flows can turn negative (if rents are inflated and decline) but this measure can help investors avoid some markets with inflated prices. Low vacancy rates are also a good sign. Too much capacity (housing units) being added that can’t be obsorbed by the jobs being created, is a risk to pay attention to.

Related: Penang’s Economic GainsThe Value of Home OwnershipStrong Singapore Dollar

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