Industrial Property the Way to Go for Iskandar
Much of the media attention in Iskandar Malaysia has been on the residential real estate market. This has unfortunately taken away attention from the manufacturing segment – the other rising star in Iskandar Malaysia.
Iskandar Malaysia has achieved more than RM 161 billion (S$ 56.4 billion) of cumulative committed investments as of Q1 2015, 31% of which is in manufacturing, which is also the segment that has achieved the highest investments in total, surpassing residential property. As a result, the most attractive segment in Iskandar Malaysia’s property market today is actually in industrial property. The following are some of the reasons:
Johor is achieving record highs in manufacturing investments
According to data from the Malaysian Investment Development Authority (MIDA), Johor state has achieved the highest amount of manufacturing investments in 2013 and 2014 at RM 14.4 billion and RM 21.1 billion respectively. These figures are also the highest among all the states in Malaysia as seen in Figure 1 and Figure 2.
These record figures will translate into job creation and actual spending on the ground in 2015 onwards, powering Johor into an industrial powerhouse and increasing the demand for quality industrial properties, among others.
This trend is relatively new for Johor. Prior to 2013, the state received only RM 5.5 billion in 2012 and RM 6.6 billion in 2011. We attribute the recent strong growth due to Iskandar Malaysia’s increased visibility in 2012, when several key infrastructure projects were completed and more Singapore companies took notice.
This comparison has often been made between Iskandar Malaysia and Shenzhen. The latter’s growth in the 1980s and 1990s was driven primarily by Hong Kong manufacturers relocating there to take advantage of cheaper costs. In fact the initial Shenzhen population was insufficient to support labour demands and workers from all over China soon moved to Shenzhen because of the availability of job opportunities.
Similarly, this arbitrage between Iskandar and Singapore is apparent and Singapore manufacturers moving to Iskandar Malaysia is not a new trend. In recent times, however it has been gaining momentum as Singapore tightens its foreign labour rules and industrial property prices in Singapore remain stubbornly high. While it may take 10 to 20 years for this trend to fully play out, it is one of the biggest macro-economic trends for South East Asia in the near future.
Land Cost & Utilities is Cheaper in Iskandar vs Singapore
Singapore is an island, and land scarcity is a known issue for the city-state. While land reclamation has been undertaken in Singapore for the past few decades, moving forward post-2030, very little reclamation can be carried out further as international water borders have already been reached. As such, many land intensive industries would have to consider moving operations overseas as the land usage intensifies for Singapore to accommodate its fast growing population. Industrial property prices in Singapore are between 3x – 5x higher than Iskandar Malaysia and the leases for new industrial land released are getting shorter, now usually at 20 – 30 year leases compared to Malaysia where freehold is readily available.
Utilities in Malaysia are also a huge cost savings for Singapore companies. Electricity and water costs are 40% cheaper than Singapore and natural gas as high as 80% cheaper. This translates into hundreds of thousands of savings per annum for the typical SME, and much more for companies that are utilities intensive.
Availability of Human Labour in Malaysia vs Singapore
In recent years, the Singapore government has embarked on a policy to tighten its foreign labour intake. The requirements for Employment Pass holders have been raised and levies for foreign workers has been increased, especially for the general workers in construction or service industries. In Malaysia, the levies for a similar foreign worker is cheaper by 80% to 90%, and requirements for employment pass holders are also less stringent. Singapore companies would embark on a policy of hiring Malaysians first due to the better cultural compatibility. Even if it were not possible to do so, it would at least be easier and cheaper to hire foreigners in Malaysia than in Singapore. In fact this has been the case with Johor, which has seen a large influx of foreign skilled workers in recent years.
Infrastructure in Malaysia is of High Quality and of a World Standard
If there’s one thing that Malaysia is good at and in which it has a proven track record, it is the construction of infrastructure. The Coastal Highway in Iskandar Malaysia and the North-South Expressway are great examples, they are well maintained and have important linkages. Water is plentiful (water is still being supplied to Singapore) and power supply stable with 2 gas fired power plants at Pasir Gudang and another coal-fired plant in Tanjung Bin.
Johor is also blessed with several world-class ports. The Port of Tanjung Pelepas (PTP) handled 8.5 million in 2014 and 7.6 million TEUs in 2013 and is ranked 18th in the world and now the busiest in Malaysia. Port Klang (consist of Westports and Northport) did 10.94 mil TEUs in 2014 and 10.35 million TEUs in 2013. If you compare the proportionate sizes of the Klang Valley and Johor economies, the ports in Johor have been punching way above their weights. Again PTP enjoys a significant portion of its business with Singapore which is the 2nd busiest port in the world at 33.9 mil TEUs in 2014.
The Pelepas Free Zone adjacent to PTP has developed over 600 acres of support space including warehouses and industrial lots. The existing 2.5 mil sqft warehouse space owned by 3rd parties are 99% occupied and another 2.4 mil sqft will be added progressively across 2017. Alternatively there are the Johor Port and Tanjung Langsat Port at Pasir Gudang, which tend to handle the heavier industries and oil and gas related work.
Johor is also home to three large upcoming infrastructure projects in Malaysia – the RM 40 billion High Speed Rail (HSR), the RM 90 billion RAPID petrochemical plant by Petronas, and the estimated RM 8 billion Rapid Transit System (RTS) link to Singapore. If you consider that Klang Valley’s 2 MRT lines cost about RM 40 billion to RM50 billion, the fact that Johor will get this much infrastructure investments is testament to the quality of infrastructure and connectivity that it will enjoy for the foreseeable future.
Low unsold stock of industrial property in Johor
Data from the National Property Information Center (NAPIC) shows that the stock of unsold industrial property in Iskandar Malaysia has remained low over the past few years despite new incoming supply. In fact the industrial property overhang (completed but unsold) has practically been cleared. This bodes well, as it shows end-users seeking completed space that can be put to immediate use.
Singapore Manufacturers get more established in Iskandar and Confidence Increases
While the trend of Singapore manufacturers setting up in Iskandar Malaysia is not new, we are seeing bigger names coming in, and their success will raise confidence and attract others to come in. A good example will be Ascendas with its Nusajaya TechPark. Ascendas is one of Singapore’s most recognizable providers of industrial space and the opening of their tech park in December 2015 will be a momentous event for both Singapore and Iskandar Malaysia. Several MNCs that have signed on with Nusajaya Techpark will be unveiled then, and this will boost the confidence of those who are still unconvinced.
If the Iskandar Malaysia story is new or still unfamiliar to you, there is at least one thing that you should remember, and that is Iskandar Malaysia is a play off Singapore’s economy which is only slightly smaller than that of both West and East Malaysia. With several restrictions to physical growth, it is only inevitable that some needs will spill over to Iskandar Malaysia. The best way to ride that growth is through industrial property where the numbers are most favourable today.