• Is it a Good Time to Buy Malaysian Real Estate?

  • Is it a Good Time to Buy Malaysian Real Estate?

     

    Malaysia as a country has had a difficult time in 2014 and 2015. First, there was the unexpected, tragic loss of Malaysia Airlines flights MH 370 and MH 17, Airasia’s flight QZ 8501, and a series of major natural disasters – devastating floods in Kelantan that displaced thousands and an earthquake in Sabah that cost even Singaporean lives.

    Malaysia also faces economic headwinds, with oil prices falling since late 2014 to below USD$40 a barrel from their high of more than USD$100 a barrel. Palm oil, the other major commodity produced by Malaysia saw prices fall to less than USD$600 a tonne from its 3 year average of USD $750 a tonne. This dented the earnings of the national oil corporation Petronas, oil and gas companies and palm oil producers, which are amongst the biggest companies in Malaysia.

    And then, there was the implementation of the Goods and Services Tax (GST) in April 2015, the timing of which was fortunate or unfortunate depending on whose view you take. For consumers, the 6% GST is an unwelcome distraction and an added cost in times when the global economic outlook is uncertain. There is a negative impact to retail spending that has been more visible in the recent months. From the government’s perspective, GST is the bright spot to cover the shortfall in oil revenues and will help keep government finances balanced.

    The political situation in Malaysia is also precarious. Prime Minister Najib Razak sits in a delicate situation, owing to the recent 1MDB debt concerns and his links to a purported RM2.6 billion (SGD$855,000) political donation. This has created huge concerns over the political stability of his government and his ability to govern effectively.

    The combination of these factors have resulted in the plunging value of the Ringgit. The currency has fallen almost 17% against the Singapore Dollar in the past 1 year and is the worst performing currency in South East Asia.

    What does this mean for real estate investors? Is Malaysia now an attractive opportunity or an investor’s trap? We put forth the case why now might be a good time to invest in Malaysian real estate.

     

    Malaysia is a resource rich country and commodity prices won’t stay low forever

    Malaysia is blessed with natural resources from oil and gas, palm oil and rubber to a host of other minerals and an abundance of agricultural land. Commodities are now in a cyclical slump. An example would be in crude oil. Saudi Arabia has created an oversupply of the commodity to kill off American shale producers and demand from China is weakening. This creates under-investment in new oil production facilities and in a few years, we will see oil prices spike up again as economies recover and demand outpaces supply. A similar scenario exists for palm oil production. The rebound in commodity prices a few years down the road will only be good for the Malaysian economy.

    GST and Oil Prices Are Helping the Government reform its finances

    GST is estimated to bring in a total revenue of RM23 billion to the Malaysian government in 2015. This will go a long way towards offsetting the loss in oil revenues and financing new investments such as the High Speed Rail and MRT projects. The key benefit to the government from the drop in oil prices was the ability to remove the long-standing petrol subsidies that had, at one point cost the government more than RM20 billion a year. In the long run, this subsidy removal is beneficial to Malaysia’s financial structure and long term viability.

     

    Political issues will sort itself out

    Malaysia has been through a few major political crises, including the 1998 ouster of then deputy prime minister Anwar Ibrahim and the 1988 UMNO Baru vs UMNO Lama crisis. All these difficulties ended peacefully, with no riots or meaningful impact on the economic sector. The Bersih demonstration in Kuala Lumpur in August also went through peacefully, with no major incidents.

    Malaysia does not have a history of political violence, unlike Indonesia, Vietnam, Thailand or Myanmar and the military does not intervene in political matters. From that perspective, Malaysia is far more stable than many other countries globally. Also, the presence of a strong opposition has created a clearer sense of check and balance in the country. Political scandals and corruption are no longer tolerated easily, unlike before. This has long term implications for the future of Malaysia’s governance and reduction of corruption. The next general election, which must be held by 2018, will be a watershed for Malaysia’s future.

     

    Weaker Ringgit is Effectively a Discount

    Singaporean investors are effectively seeing a 17% discount from a year ago due to the currency impact. Cheaper real estate prices are only one factor; the other is the attractiveness of doing business for factories and other service industries as Singapore remains expensive. Iskandar Malaysia alone has seen major manufacturing investments in the past 3 years, owing to its greater competitiveness. Also, the currency changes result in an even lower cost of living for elderly Singaporean residents, especially in the Iskandar region, which will see improved connectivity with the High Speed Rail and the Rapid Transit System.

     

    Financing your Investment in Ringgit will Hedge Future Currency Volatility

    One big complaint by Singaporean real estate investors is how the weaker Ringgit has caused a currency loss effect on their investments. For most investors, it is advisable to buy a Malaysian property with Ringgit financing. Most Singaporean purchasers can easily obtain financing at a 70% – 80% margin. Hence, the only portion of your investment that is affected by currency movements is in the 20% – 30% equity down payment. When your financing is in Ringgit by a Malaysian bank, then currency movements are mostly hedged. The actual currency loss is not as bad as it looks.

     

    Property Appreciation Still Outweighs the Currency Loss Effect

    Malaysian property prices have appreciated quite a fair bit in the past 14 years (since year 2000). The compounded annual growth rate (CAGR) for Kuala Lumpur properties in that time frame is 6.5%, 6.1% in Penang and 3.2% in Johor (although Johor saw the sharpest increase in the past 3 years alone). A typical property bought in Kuala Lumpur in the year 2000 at RM 1million, would be worth RM 2.42million today.  Had you financed the investment in Ringgit to negate currency fluctuations, you would still have made a significant capital gain.

     

    Don’t follow the Herd Mentality

    Today, many people will tell you that investing in Malaysian real estate is a bad idea. Primarily, that is because of the negative news on Malaysia. I suggest you put emotion aside and consider the opportunities that are created as a result of the current market situation. If Malaysia is at a low point, let me remind you that good investors buy low and sell high. Today’s pariah can easily be tomorrow’s darling.

     

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