Tag 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.

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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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

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.
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The Investment Potential for Iskandar is Attracting Interest from Great Britain

Article from the Telegraph (UK) on British investors interested in Iskandar real estate: British expats and investors drawn to Malaysian metropolis

A huge development three times the size of Singapore is taking shape across the border in Malaysia, bringing with it hundreds of thousands of jobs, new homes and international schools.

Foreign investors are not just being encouraged but expat families and students too. Along with Marlborough College, Raffles American School, Newcastle University and the University of Southampton will all open campuses.
It is expected that when Iskandar Malaysia reaches maturity in 2025, the region will employ 1.4 million people. This involves the creation of 800,000 new jobs.

Both the [Legoland] theme park and Marlborough College are due to open in the autumn of 2012.

The article is certainly written like a publicity piece, talking about all the possibilities without any questioning of potentially issues. I do agree the potential is great. On the ground in Johor Bahru the key I feel is new jobs. Currently there are many real estate resources that are greatly underutilized: malls with many empty stores or completely shut down, condos with high vacancy rates, skyscrapers downtown that are just empty shells. The potential is great.

Care has to be taken to develop that potential into real success. Brining in jobs that will then create income to spend at malls, renting higher end condos, paying for more services which in turn create more jobs is the key. The critical jobs it seems to me are office jobs (economically these are high paying and can be added quickly without too much difficulty). And many of those can most easily be created quickly by providing support for businesses in Singapore. So the second key is continuing to build the cooperative relationship with Singapore.

Health care and education are good industries to target for Iskandar and that seems to be part of the plan.

There are, of course, many other important factors. Qualified people are needed to fill the jobs created. There is a need to continue to improve the safety in JB and reduce crime. There is a need to build the infrastructure toward world standards (better public transportation, more walkable areas [improved sidewalks], intelligent land use planning… Getting the residence pass for talented expats so that it can be used by those that are not yet in Malaysia. The program is meant to attract foreign talent yet 6 months after they started the process by accepting only applications from those that have been in Malaysia for 3 years on a work visa the program still only accepts applications for this small group of people.

Related: Penang’s Economic SuccessPenang Condo MarketMalaysian Residence Pass for Skilled ProfessionalsHow Walkable is Your Prospective Neighborhood