Category Archives: investing

Property Slowdown in Johor

It was pretty easy to see the glut in residential property in Johor being created over the last few years, and I wrote about several times: The Potential of Iskandar is Very High but Investing in Iskandar has RisksIskandar Housing Real Estate Investment Considerations (2011), Singapore Sprawl Fueled by Cheap Housing Resulting in Long Delays at Border (2014), Malaysian Real Estate Slowdown May be Taking Hold (2014).

View of Downtown Johor Bahru looking away from Singapore
Downtown Johor Bahru with Danga City Mall (includes map) on the left (looking North-West).

The long term prospects for Johor remain strong. Building on the advantages of being a suburb of Singapore has huge potential. Managing that advantage should provide huge long term benefits. Still in the residential building boom seems overdone and not balanced with brining in enough high paying jobs or improved transportation to jobs in Singapore.

UEM Sunrise shifts focus away from Johor due to glut in the state

Iskandar Malaysia’s biggest property developer UEM Sunrise Bhd will focus on Peninsular Malaysia’s central region, as Johor faces a property glut and slowdown.

Managing director Anwar Syahrin Abdul Ajib said the company would be shifting focus to the central and northern regions as well as overseas.

“Right now, it’s a bit slow. There’s nothing to hide … everybody is feeling it. Some developers have already cut their forecasts, some are saying growth is stagnant while some say they’re going to do better than others last year,” he said.

Anwar is targeting a lower sales of RM2bil this year compared with RM2.4bil last year as buyers are also finding it hard to secure loans from banks.

“To tell you the truth, there are a lot of people who want to buy and we have a lot of bookings but they can’t get loans, so this is something that’s in the way.

“We need to find a solution and talk to financial institutions and see whether they need to relax a bit in terms of letting people be able to purchase houses for investment purposes,” he explained.

Malaysia should not relax lending standards. Property booms are followed by busts. Booms are most often triggered by huge investor demand made possible by lax lending standards. It is poor economic policy to stoke investor demand in real estate. This is a critical mistake when the rental market is weak, as it is in Johor. The luxury housing market is not supported by jobs in Johor.

The only hope for filling the luxury housing are getting those with high paying jobs in Singapore and retires from Singapore and elsewhere to move in (which has been happening but not nearly at the rate of production of new units). And given the long delays in addressing the transportation problems until the MRT is extended it is hard to see much more room for increased commuting. Once the MRT is complete the Johor market should boom.

Property development creates lots of economic value that can provide large rewards to those in power. When that pressure leads to stoking the fires of a boom the consequences will be felt in the economy very sharply once a bust develops. Johor needs to focus on attracting more high paying jobs and quickly improving transportation issues. Johor should be discouraging more luxury housing development at this time, not encouraging it – but it is hard to put long term economic prosperity above quick, short term cash. Few countries have done that well. Singapore is one that has and the future of Johor is tied to the success Singapore brings with that focus and how well Johor can show the same discipline Singapore has shown for nearly 50 years.

Marco Polo Netfix Series Preview (Production Studio is in Iskandar)

One of the major projects in Iskandar, Malaysia is Pinewood Studios (an Asian venture by the famous London studios). This post is a bit different from our normal focus but it shows the efforts to build up several economic engines to power Iskandar are making progress.

Education and health care are also moving forward nicely and construction of luxury housing is booming – though too much so in my opinion. Shopping outlets, including the ever growing Johor Premium Outlets is another area that has been helping the Johor region economy – with many visitors from Singapore, China and elsewhere. And theme parks have been another area that is doing well, with more planned.

Netfix is also booming. It seems like just 3 years ago they started to dip into producing their own shows and now it seems like then have tens of shows in production around the world.

Sadly Netfix is not available in Malaysia. It is somewhat funny that people where the show is made can’t see it. Maybe the Iskandar folks can work with Netflix to add Malaysia to the countries Netflix offers its services to subscribers.

Here is a Preview of the Marco Polo Series:

Shooting for the series also took place in Italy and Kazakistan. The project started with a plan for showing on the Starz network with filming in China, but things fell through and Netflix and Malaysia entered the picture.

‘Marco Polo’ brings the court of Kublai Khan to Netflix

Here on a new 50-acre studio built on recently cleared jungle, a crew of about 400 has spent months conjuring Kublai Khan’s 13th-century capital. Carpenters and plasterers are piecing together the royal quarters, including a lavish golden throne room, a dungeon and a wood-paneled dojo. Painters are decorating a multi-bed pleasure chamber replete with a hot tub fed by elephant-head fountains.

“It’s a giant adventure. The only thing on TV that matches it, production-scale wise, is ‘Game of Thrones,'” said Harvey Weinstein, whose Weinstein Co. is producing the series.

Netflix hasn’t expanded into Asia yet (as a streaming service) but they license their shows to networks in Asia to be distributed over regular TV (premium cable TV usually). But why not make Malaysia the first country in Asia to have Netflix? Actually my guess would be on Singapore and Hong Kong in the first wave with several countries, maybe including Malaysia.

Related: The Weinstein Company sets camp in MalaysiaIskandar Housing Real Estate Investment ConsiderationsNetflix Series ‘Marco Polo’ Shot in Kazakhstan to Premiere in DecemberThe Potential of Iskandar is Very High but Investing in Iskandar is Not Without Risks

Malaysian Real Estate Slowdown May be Taking Hold

The moves to cool off the overheated property sector by Malaysia in the last few years were wise (if a bit late). The 6% sales tax was also likely wise. Real estate development tends to get overheated and collapse – taking much wilder swings than other areas of the economy. Reducing those swings is useful but challenging. How the current situation plays out will be interesting and requires government paying attention and taking action to prevent bubbles and excessive speculation, as well as watching for signs the bubble is deflating too quickly.

Malaysia Builders Hit by Tax Amid Worst Slump Since 1998

Malaysian property companies are grappling with higher costs in an industry already reeling from central bank curbs on lending last year and the first interest-rate increase in more than three years in July. Property transactions in 2013 sank the most since the aftermath of the 1997 Asian financial crisis, while home prices in the first quarter rose at the slowest pace since 2010.

Property transactions dropped 11 percent in 2013, according to the National Property Information Centre, the most since a 32 percent slump in 1998, when Malaysia had its first recession in 13 years. The Malaysian House Price Index rose 8 percent in the first three months of 2014, the slowest growth since the third quarter of 2010.

Developers offered 6,339 new units in the first quarter, a drop of almost 50 percent compared with the previous quarter. Only 30 percent of the units were sold.

It is possible the slowdown in real estate development will be too sharp which creates problems. But if that happens the main reason will be the bubble was allowed to build too quickly. And there is also the possibility the slowdown will not be quick enough (the bubble will keep growing); this seems less likely.

Luxury condos in Johor Bahru seem the most bubbly of all areas in Malaysia. It seems like Kuala Lumpor and Penang are also in danger of too must leverage and speculation. The moves to reduce that leverage, speculation and bubbly markets are good. We will see how the market develops the rest of this year and next year.

Related: Singapore Market Impacts on the Johor Bahru Real Estate MarketSingapore and Iskandar MalaysiaPenang’s Economic GainsIskandar Housing Real Estate Investment ConsiderationsJohor Bahru Restaurant ReviewsSingapore Taxes Increase In Attempt to Cool Condo Prices

Singapore Sprawl Fueled by Cheap Housing Resulting in Long Delays at Border

As I have written previously the potential for Johor Bahru, Malaysia is great. The proximity to Singapore give JB the extra boost that moves the potential above that of dozens of similar locations throughout South East Asia. But potential has to be managed properly or it is wasted. The inability of Singapore and Malaysia to cope with the demand for cross border traffic has to be a huge concern for investors.

The backups have become progressively worse throughout the last year and especially bad the last few months. As I have also written previously the massive supply of luxury housing in JB without a visible source of equally high paying jobs in Johor that will allow people to afford those houses is a worrisome sign.

The failure to complete a 3rd link by last year and the huge delays experienced all this year create strong headwinds for realizing the potential of Iskandar. Obviously cross border transportation was going to be bad before the MRT was finally extended given the huge volume of luxury condos being build in JB. But things are tremendously bad already when only a few of the new luxury condos are completed.

The potential is still great but the huge problems with the borders already calls into question the ability to plan, execute and grow to meet that potential. More high paying jobs need to be created in Johor Bahru itself. I don’t see how the number of luxury condos being built will be workable in the next few years. 10 years from now all may be well, but from 2015 to 2018 (or whenever the border gets fixed so the median border delay is under 15 minutes, likely the extension of the MRT to JB will have to play a role in fixing the problem) I see big risks countering the big potential.

Johor Bahru street with KSL in the background
Houses on Johor Bahru street with KSL in the background (D’esplanade Residence @ KSL, KSL mall, KSL hotel and more condos are being build across the street).

People are willing to envision themselves putting up with huge commutes. but as they live with them year after year and miss their children, spouses and lives sitting at a border waiting to move forward many will decide it isn’t worth it.

Cut-Price Luxury Homes Fuel Singapore-Johor Bahru Sprawl

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Singapore Market Impacts on the Johor Bahru Real Estate Market

Singapore Property Boom Fuels Malaysia Spillover Bubble, Bloomberg

Malaysia is seeing the spillover from Singapore’s four-year property boom and its subsequent efforts to cool the market.

Now Malaysia is taking steps to prevent its own real estate inflation from emerging and appeasing locals who say they can no longer afford to own a home. In last month’s budget, Prime Minister Najib Razak doubled the minimum amount foreigners must spend on property and raised the capital gains tax to 30 percent on homes they sell within five years. The local governments of southern Johor state, where Iskandar is based, and Penang to the north, are considering additional tariffs on overseas buyers.

Malaysia’s central bank shortened the maximum length on mortgages in July, saying household indebtedness had risen by an average 12 percent per annum in the past five years. Last month, the government barred developers from helping home buyers by absorbing some interest payments on loans.
Malaysians have accumulated Southeast Asia’s highest level of household borrowings at 80.5 percent of gross domestic product, according to Bank of America Corp.’s Merrill Lynch unit.

Johor is planning to impose an additional 2 percent tariff on buyers from overseas across all segments of the property market from May, Singapore’s Business Times reported Nov. 13, citing Koh Moo Hing, chairman of the Johor branch of the Real Estate and Housing Developers’ Association.
Penang is seeking public feedback on proposals to introduce a 3 percent levy on foreigners purchasing homes next year, Lim Guan Eng, the state’s chief minister, said last month.

It is wise for the governments in Singapore and Malaysia to institute measures to react to the bubbles in the markets. In general, I think they are taking wise measures. Increasing the tax on foreigners is wise (it is always nice as a government to tax those who don’t vote for you). The trouble you run into with this strategy is making investors look elsewhere.

My belief is a 2% tax on real estate purchases isn’t going to have much of an impact (investors will still invest). Even an additional 2-3% by the states is likely ok, now, but that might get to be an issue at some point. Right now the appeal of Malaysian real estate is such that I don’t really see much impact.

The biggest risk is if other factors increase Malaysia’s need for foreign currency (government debt, consumer debt, less investment in manufacturing, lower oil and gas sales, lower tourism revenue) then the appeal of getting foreign currency puts pressure to make it as appealing as possible for foreign investors.

The other serious issue, that I have mentioned before, is the Johor real estate market is pricing in very good ties with Singapore. And the infrastructure right now is not sufficient and since no 3rd link was put in place in the last few years the problem is growing. Once the MRT is extended (and I am assuming a 3rd link will be in place years before that) things will be in much better shape. But there are maybe 6 years before that with huge numbers of condos being delivered that can only be afforded with Singapore jobs (creating huge capacity problems for the transportation infrastructure – especially adding that to theme parks in JB seeking to draw Singapore visitors).

Related: Singapore and Iskandar MalaysiaAbsolute nightmare at the Tuas continues for 2nd week (delays of 2 hours)The Potential of Iskandar is Very High but Investing in Iskandar has RisksIskandar Housing Real Estate Investment ConsiderationsSingapore Taxes Increase In Attempt to Cool Condo PricesTransportation from Singapore to Johor Bahru Malaysia

Corruption Perception Rankings; Singapore #5, Malaysia #54, Italy #72

The Corruption Perceptions Index ranks countries and territories based on how corrupt their public sector is perceived to be. The 2012 rankings:

  • 1 – Denmark
  • 1 – Finland
  • 1 – New Zealand
  • 4 – Sweden
  • 5 – Singapore
  • 13 – Germany
  • 14 – Hong Kong
  • 17 – Japan
  • 19 – USA
  • 45 – South Korea
  • 46 – Brunei
  • 54 – Malaysia
  • 64 – Ghana
  • 69 – Brazil
  • 72 – Italy
  • 80 – China
  • 88 – Thailand
  • 94 – Greece
  • 94 – India
  • 105 – Philippines
  • 118 – Indonesia
  • 123 – Vietnam
  • 133 – Russia
  • 157 – Cambodia
  • 160 – Laos
  • 172 – Myanmar

Related: Personal Safety International Rankings for CitiesMake Malaysia My 2nd Home (MM2H) StatisticsIskandar Real Estate Investment Considerations, Housing

Business Idea: Home Inspection

Reading a post on the Iskandar Living Forum got me thinking of a business opportunity. There is lots of interest in buying new homes (condos, link houses and bungalows) but lots of people express concern about buying used houses. There are several reasons for this but I think one of them provides a business opportunity.

In the USA there are professional home inspectors. They often used to be general contractors (and some still are – doing both). Pretty much every resale has a home inspector look through the house. Those doing it, do so many times each week and have checksheets (with dozens of things to check) and they know the area. So they know for example if some developer used bad wiring for a condo or whatever and can take special care to check things that are problematic.

If these don’t exist in Malaysia yet it seems like a great business opportunity (if they do, then just doing a great job at it is still a good business). If you can stake out ground as a reliable expert purchasers will gladly (smart ones anyway that are not home inspector experts) pay fairly well. You don’t need to do a lot of work (once you become expert) to provide a huge amount of value. This is a great place to be for a business (provide a large amount of value for not much work) as you can provide the customer a great value and still make a nice living yourself.

The smart ones in the USA have developed very extensive handbooks to then turn over to the new homeowner with all sorts of useful info. Again this is a great way to set your business as professional. If I were interested in creating businesses here there are lots of opportunity, but this seems like another great one. What you want to do is talk to lots of real estate agents and have them refer there clients to you. I think it is best if you just provide a great service that makes the agents look good (because they provide a good referral to their customer) but if it is legal in Malaysia you could even pay the real estate agents a portion of your fee.

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Investing in Palm Oil Plantations

I was in the KSL Mall a couple weeks ago and one of the temporary pop up displays they often have selling real estate (often to be build condos…) or wedding materials or… was for investing in palm plantations. Since it was the middle of the week and no-one was around I talked to the salespeople a bit. I am a pretty skittish investor. I am willing to take investment risks but I want to understand what the risks are. I can’t see myself actually investing in this now, but it was somewhat interesting.

They, Golden Palm Growers Berhad claim a 6% guaranteed rate of return. I asked who guaranteed it and I couldn’t really get an answer I understood. They did seem to agree the guaranty wouldn’t protect against some natural disaster or if palm oil prices feel below a certain level (I think the equivalent of $40 a barrel for oil). They seem to be able to use guaranteed much more liberally than would be allowed in the USA related to investments.

Palm trees, with rubber trees in the background
Palm oil trees, with rubber trees in the background by John Hunter, in Thailand.

On top of that return there was a “discretionary bonus” that in initial years was based on income earned on excess capital. I still couldn’t really understand the investment totally but it seemed similar to a limited partnership where the company was the general partner (owning the land and managing the care of the palms and selling the palm nuts to processors). I can certainly understand that the general partner may want to take on limited partners. In such situations the general investment market (palm oil) is important but it is also extremely important to trust the competence and reliability of the general partner. Their interest can be somewhat shared with yours but they have an interest in high management fees (to pay themselves) which is exactly counter to all the limited partner investors.

As I understand it, after 6 years the palms should start producing. The scheme is for 23 years (I think palms have a productive life span of about 17 years, so 17 + 6 = 23). During the productive years investors enjoy 100% of net profits with a minimum return of 9% expected, if crude palm oil exceeds RM 1,500 per metric tonne (today close to $US 500) and I believe equivalent to $40 a barrel for crude oil. It looks like the price might be at about RM 2,500 today (but I am not clear if this is

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Iskandar Housing Real Estate Investment Considerations

When investing in real estate, rental price checks help avoid investing in bubbles. No investment strategy is perfect. If you invest in a new area early, it can be that rental prices do not yet reflect long term value (say rental prices near an announced MRT station but one that won’t actually be in service for 5 years). But ignoring rental prices is risky (just believing long term things will keep going up – this was a big part of the problem in the USA bubble – prices way out of line with rental values).

For this reason, I am skeptical, of investing without rental market checks (including vacancy rates). It is also true I think it is not yet a fully functioning rental market in the new housing estates in Johor Bahru. It will likely be at least 3-5 more years to get a decent idea of where rental prices will be going and how much rental demand there is.

Properties can sell to investors from Singapore (and many other places) that buy the properties to use as vacation homes, retirement homes… for their long term plans). This can even be sustainable over the long term (a significant portion of units bought this way) BUT it is much riskier as an investment than if the units bought for investment are rented out and a fair market rate can be determined to evaluate purchase prices.

To me the key to the investment potential of JB real estate is most importantly, JB having jobs that allow people to buy or rent these houses. It seems to me at the current time there are not enough of those jobs. The second key is Singaporean’s buying (and working in Singapore – commuting). The 3rd pool of users of the real estate are retirees (Malaysians, Singaporeans and others). I would put vacation homes… as 4th, after all those others.

At the current time many sales seem to be going to investors. Those investors can sell to other investors but that is not a sustainable model for increasing prices. Investors have to sell (or rent) to users of the properties.

The most important strategies for Malaysia to encourage the real estate market in the Iskandar region therefor to me are:

  1. attracting high paying jobs is important for high cost housing (much of the housing stock being built is high cost)
  2. making it easy to commute and travel between Singapore and Johor Bahru. This is important for both those that want to commute and for say Singaporeans that want to retire to JB (or buy their parents a place in JB) – For some commuting times are important for others they just need it convenient for say weekly trips.
  3. making it reasonable for foreigners to invest: both making it reasonable for foreigners to buy real estate (increasing demand) and reasonable for large investments (factories, back office high rises…) that will create high paying jobs. It seems to me a big way to get things moving quickly is to get companies in Singapore to move some back office jobs to JB (so far there has been less of this that I think would be wise in the market – I think companies are still not convinced relations will remain very strong, though it is getting closer.). This can both decrease the companies cost and provide good paying jobs in JB. It also is a big incentive for those people working in Johor Bahru to live in JB. Many people commute from JB to Singapore but some don’t want to do that; if their high paying job can be located in JB that would make more happy to live in JB.

For several of these education for kids would be useful. Good local schools would encourage high income workers that want schools for their kids to consider the area (sending kids to school in Singapore is an option but the long commute is a drawback). Medical care would be good both for providing high paying jobs and especially for retirees (and young families).

Another thing to consider for the Iskandar region for attractive tenants (for Johor Bahru properties) are MM2H expats. The MM2H visa is an attractive option that isn’t really available in Singapore (unless you are [B]very[/B] wealthy). Right now many MM2H live in Kuala Lumpor or Penang, but Johor Bahru is a very attractive option (especially with the proximity to Singapore). It seems to me, at this time, few MM2H expats are not really considering JB. I think there could be a very large increase in this demand over time.

Related: Real Estate Investments in Iskandar Have Great Potential but Also Have RisksPenang Condo MarketMortgage Crisis Documentary