Property markets suffer from a high level of inefficiency compared to the stock market. Unlike Singapore, data on Malaysian real estate is less transparent and most articles or reports on Malaysian property are often clouded by perception bias or are based on irrelevant facts.
Given our strong on the ground presence in Iskandar Malaysia, I am more than happy to write this article and guide readers here on some important trends that we should pay attention to.
No 1 – Yes there is currently an oversupply
Similar to the Singapore property market, Iskandar Malaysia is in a state of oversupply today. Rental yields have dropped across the board as competition for tenants intensify. A terrace house in Horizon Hills could rent in the RM3,000-ish range 2 years ago is now going in the RM2,000-ish range. Tenants have a broad choice of options and have negotiating power.
I would like to emphasize however that the oversupply DOES NOT MEAN that there is zero rental demand. In fact Iskandar Malaysia’s population has been growing strongly an annualized 7% p.a. compared to just over 1% p.a. in Singapore. This has been driven by new job creation of both locals and foreigners with Johor’s economy being the 2nd fastest growing state by GDP in Malaysia. So where is the problem?
One problem is that the properties on offer do not match the tenant’s income levels. For example Malaysians migrating from Kuala Lumpur to work in Iskandar Malaysia on a MYR salary base will unlikely rent a luxury high rise in Danga Bay. They will rent a mass market apartment or landed home in the suburbs. These property segments will hence perform much better and is largely resilient. However luxury properties or the mid high end market don’t perform as well as the supply-demand dynamics are less in their favour.
The second problem is that many locales that were popular with Singaporean buyers in the past few years are effectively still construction sites. It is quite common to see recently completed condominiums sit next to other under-construction projects that make the locale quite difficult to live in at this point. Many examples can be seen across Medini, Puteri Harbour and Danga Bay. As these areas are still new and developing, there are also a lack of amenities or services required to service a stable population. This will take time to develop, likely once construction activity abates and potential tenants/ end users feel more comfortable to move in.
The third problem is that many of these luxury homes bought by Singapore based investors are not renovated to be fit for occupation and hence not suitable for expatriate tenants i.e. Westerners, Japanese or Koreans who tend to be looking for furnished properties. This is explained further in point no 2.
No 2 – Some of the problems investors face are self inflicted
Many Singapore based property investors have picked up poor property management habits. Upon completion of the property, Singapore based owners are always the slowest to take the keys, slowest to report the defects, slowest to furnish/ renovate, slowest to pass keys to property agents and hence the slowest to get tenants or viewings.
And this is assuming they bother to do something about the property in the first place. Many leave the properties empty for months and now years. Owners continue to pay the monthly bank instalments diligently but make little effort to dress up the property, doing zero value add and expecting property agents to perform a minor miracle.
Property agents cannot do much for owners if the house/ apartment is not clean, with no quality furnishing or basic renovation done. Any potential buyer or tenant will be turned off and given the choices in the market today, they would have little reason to choose a poorly managed or un-furnished property.
I was regaled a story recently by a German tenant moving to Johor on how surprisingly few units in the market fit her requirements. This was despite several days of viewings and her expectations that there would be a good number of choices in the market, quite many of them were simply not up to par with poor quality furnishing or worse yet, seem to have been left empty for months with no maintenance.
My advice to such owners who may be reading this article – Don’t be lazy, do some value add to the property and you can expect better results from both a rental or sale perspective.
No 3 – New incoming supply will taper off from 2018 onwards
The poor primary market has caused many property developers to hold off new launches. Most of the incoming supply will be completed by end 2018 and thereafter new completed supply will drop significantly, very much mirroring Singapore’s own situation.
New launches today are driven mainly by mass market properties that rarely target Singapore based buyers and in most cases in-eligible to foreign buyers.
It is a good time to start bargain hunting and we have seen some evidence of that. Prices have remained somewhat flattish over the past 2 years and as properties get completed, bargain hunters start to sniff out choice units that can be bought at a good price and held over the longer term. We see interest primarily in well located freehold landed properties as they are still a fraction of the price to equivalents in Singapore. Many buyers now fall into the category of local upgraders, weekend home or retirement home buyers with longer investment timeframes.
No 4 – Forest City is building fast and doing well, but it is in a world of its own
Forest City is much misunderstood in Singapore. To the uninitiated, Forest City will throw in a huge amount of new residential property supply in Iskandar Malaysia. The reality is much more complicated.
Forest City is built on 4 reclaimed islands off the 2nd Link to Tuas. Traditionally this area is only known as where the Port of Tanjung Pelepas (PTP) is. Other than PTP, there is only jungle and plantations with very minimal human habitation. Hence to many locals and Singaporeans, to even consider Forest City as a place to live and work is still a far off possibility today.
But Forest City has been a huge boon to Iskandar Malaysia, creating new attractions and providing much exposure of Iskandar Malaysia thoughout China. For a start Forest City will do well as a tourism and retail destination, what potential lies beyond still remains to be seen. A good comparison in my opinion is how Genting Highlands is to Kuala Lumpur. Genting is near Kuala Lumpur but not near enough for residents to live there and work in Kuala Lumpur, but a great place for KL-lites to visit and enjoy its attractions, but effectively are 2 separate destinations.
No 5 – Iskandar Malaysia’s economic prospects are bright and getting stronger
For 3 years running, the state of Johor has attracted the highest manufacturing investments in Malaysia. In fact up to H1 2016, Johor is still the state with the highest manufacturing investments in Malaysia and 2016 may be the 4th year running for this trend. Industrial land and properties in good locations are seeing strong take up.
The latest to migrate from Singapore to Iskandar Malaysia will be carmaker Volvo’s regional aftersales operations joining BMW that has a similar operations in Iskandar Malaysia for several years already. There are various others too many and perhaps too sensitive to mention but the migration trend is fairly strong and Iskandar Malaysia now attracts new manufacturing investments that want to be in South East Asia and get a good balance of low costs and a strong location.
Other strong economic indicators are seen in tourism, retail and construction sectors, all of which are doing well in Iskandar Malaysia. As incomes and population rise, there is an influx of new service operators to meet the demand of a more discerning consumer. The popular township of Bukit Indah now boasts a growing Korean and Chinese population, with Korean hair salons and BBQ restaurants coming up alongside Chinese hotpot restaurants. IKEA has chosen Johor Bahru as the site of its 3rd store in Malaysia (after the first 2 in Kuala Lumpur) and opens in late 2017.
When construction of the High Speed Rail and Rapid Transit System start in the next 1-2 years, confidence in the economy can only improve. The need for it remains as strong as ever, traffic on the two links are still as bad as it was despite toll increases 2 years ago. If you are an investor with a 5-10 year timeframe, there is only 1 direction for Iskandar Malaysia, and that is up.