Once upon a time at the Malaysian-German Chamber of Commerce and Industry

Selangor's Direct Investment,1st H. 2012

Recently, I visited the Malaysian-German Chamber for Commerce and Industry (MGCC) to further our collaboration and discuss possible projects or new initiatives. It was a good opportunity to learn more about the commitment and strong investment position of German corporations in Malaysia. According to the German embassy and MGCC, there are more than 300 German corporations in Malaysia and many of them here in Selangor. Please also have a look at the MGCC Blog for their post on my visit. First of all, i had a little office tour, which included the German Business Centre and the meeting area of the chamber. Thomas Brandt, the general manager of MGCC, was so kind to explain all services and facilities to me. We finally sat down and discussed the current business and investment environment as well as the potential to work together. Certainly, it was my pleasure to mention that Selangor in the first 5 month of 2012 became the preferred investment destination in Malaysia and thereby leads the overall investment statistics of the country. German companies have been an important contributor in this context. Please refer to the table for more information.

As a matter of fact, besides one large-scale project from Switzerland, it is Germany with four projects leading the top-list of foreign investors. Even the crisis did not stop German corporations to come to Selangor and so the business community is growing every year. Basically, we are glad to welcome large international players as well as expanding SMEs with high-tech profiles. Selangor is meant to become a hub for R&D, innovation and design, which will only be realized through the combined effort of politicians, research institutions, domestic and international corporations. Companies can expect spill-over effects for their product and technology development as well as a strong network and governmental support.

Teresa Kok, Selangor State Senior Ex. Councillor

Coming back to MGCC and the German business community, I went to the plant opening ceremony of SGL Carbon in Banting, which is owned by Susanne Klatten, the daughter of the late Herbert Quandt of BMW. This facility is probably one of the most modern factories globally in its field. It was a great ceremony attended by the German ambassador, Dr. Guenther Gruber, the Malaysian Deputy Minister of International Trade and Industry Dato' Mukhriz bin Tun Dr. Mahathir, Selangor State Senior Ex. Councillor Teresa Kok and several management board members of the SGL Group, including Robert Koehler, Chairman and CEO. However, it was not only the obvious number of honorable guests, but also the number of SGL clients, business associates and the local business community which was impressive. Large corporations such as the Lion Group and other steel manufacturers from Malaysia were attending and proving that German business, know-how and technology is very welcome in Selangor.

Th. Brandt and myself (from left)

At MGCC, we were discussing some of the problems, which German corporations still face at the moment. Some of these issues are caused by federal policies and therefore cannot be addressed through the state government. Nevertheless, Selangor is ambitiously  aiming at new incentives and strategies to create an even better investment environment. Due to the excellent infrastructure in the state as well as the close proximity to Kuala Lumpur, the commercial capital of Malaysia and Putrajaya, the administrative capital, we certainly face high property prices around here. Also German companies have mentioned this point, as Thomas Brandt explained to me. At this point of time, I can only say that we are working on several options to decrease investment costs and make Selangor the best and most feasible option for any investment. During the next months, some of our ideas will be presented to the state government and so far, I am quite confident that many of the ideas will be implemented. Although I expect changes, we still will be able to offer some relief to our investors and that certainly includes Malaysian companies as well.

Stay tuned for more information on Selangor, Malaysia and the investment environment.

Selangor - Investment Opportunities in Malaysia

First of all, let me apologise for this long period of silence, in which I was not updating my blog at all. As it is happening in life, I changed my job and needed a little time to adjust to this new challenge. I believe it was worth it and for the future, I might be able to share even more interesting stories, research as well as insights.

Selangor in red on the Peninsular of Malaysia

As of now, I am working with the Selangor State Investment Centre, which is providing support, information and facilitation to international and domestic investors during the market-entry in Selangor. Probably not everybody knows much about the geography of Malaysia, so let me add a map to help you locating Selangor and myself.

Port Klang in Selangor

The state is located right in the centre of Malaysia and strategically at the famous Straits of Malacca. Consequently, Selangor also is home to the largest and best developed seaport as well as to the largest international airport, Kuala Lumpur International Airport and another smaller international airport at Subang. Besides, there are also freight related airfields in the state. In 2005 the capacity of the seaport surpassed already 109,700,000 and by 2010/11, more than 50 vessels are serviced at Port Klang every day in the year. Selangor is not only a strong manufacturing but also logistics hub.

With approx. 5.4m people living in Selangor, this region is the most populous state in Malaysia and the most developed in regard to infrastructure. Contributing about 22% of the Malaysian gross domestic product, Selangor is the industrial and services powerhouse of the country. Certainly, more than 130 universities and colleges ensure the rapid and knowledge-oriented development of high-tech industries and sophisticated services.

Over the last few years, Selangor was always one of the top destinations for foreign and domestic direct investments and received in the first half of 2012 already more than RM 4 billion in new investment projects. Some of the major projects include companies from Switzerland, Germany, France, the UK and US, while local players have been growing in many of the following industries:

• Aerospace
• Electrical & Electronics
• Life Sciences
• Green Tech (Solar and other renewable energies)
• Machinery and Equipment
• Marine-based industrial & port related activities and services
• Packaging, Storage, Distribution
• Petrochemical and Polymer Industry
• Pharmaceuticals & Cosmetics
• Transport Equipment Industry
• SERVICES INDUSTR: 
• Regional Establishment
• Support Services
• Real Estate (Housing)
• Transport
• Financial Services
• Distributive Trade
• Hotels & Tourism
• Education Service
• Health Services
• Halal Industry

Sepang Gold Coast Resort in Selangor

Overall, the state has the best educated workforce and infrastructure, stable national and international corporations and a strong service sector to support different industries as well as a great standard of living. Selangor offers not only the most shopping malls in Malaysia, but also has some of the most attractive resorts, golf courses and entertainment parks. Without telling too much, there is more to come during the next years and some of these attractions most likely will be unique to the ASEAN region, partly to the whole of Southeast Asia and the Pacific.

Finally some words from my heart, Selangor has been my new home for the last two years and I feel honoured to support the state in developing an attractive investment environment as well as a higher living standard through economic advancement.

So stay tuned for my future posts on different industries, the development of Selangor’s investment environment and investment opportunities.

Malaysia's Real Estate Market - Sounds good, but what about the bubble?

I surely let you wait on this last post, but I hope that it is worth it. 

Some people might argue that it all sounds too good. Domestic demand is strong and growing, foreign investors might move in, while some locals shout about the high prices. All in all the indicators seem to present a healthy picture. However, there are regions where the prices developed in rather irritating ways, e.g. Kuala Lumpur, parts of Selangor, Johor and Penang. (Thean Lee Cheng 5 May 2012: Where is the market heading?)   

No Gordon Gekko in Malaysia

Let me start with the last comment. Irritation has been strong with locals, who are having money, wish to buy a house, but cannot afford it in the spots, they look for. We have discussed that matter earlier. The economics and simple math do not cause any confusion for this question, but politics in an election year do. People are shouting out their frustration and hope that the government can protect them from market forces. Even worse, they wish to get houses above their living-standard in prime areas for medium area prices. Obviously, there is no way to rule out the principle of supply and demand, which is even for the government impossible. Furthermore, the blame on foreigners and also a new law demanding foreigners to buy only property above RM 1,000,000 will not offer any solution. With about 2 % of all unit sales to foreigners, the market is not driven by foreign, but domestic demand. At least once in a while, we do not provide ground for the ugly foreign capitalist/investor argument. Since most politicians have been aware of this situation, we did not experience any response to Malaysian’s request for higher prices if foreigners buy. I would call this a promising investment environment. (Thean Lee Cheng 3 March 2012: Malaysia a real-estate shopping destination)

US subprime crisis

At this point, it is still right to ask, how we can see rising prices that the mentioned rates, if foreigners are not buying in huge bulks yet. Basically, domestic players have been engaging in real estate deals and hope to make their fortune by buying especially in luxury residential projects during the construction phase. Even though these buyers are not capable of buying the real estate, many bought more than one unit, they are betting on rising prices. If the market supports their gamble, these buyers would sell off after the prices surged and they would keep the difference. For many of these private buyers, it would be a small fortune. Obviously, this gambling has quite some downsides. What happens, if they find nobody to buy the property? What happens, if the prices are dropping? Well, quite easy to respond, we would experience default and most likely non-performing loans. If this issue becomes systemic with too many players in a bear market, a subprime crisis like in the US would be possible. 

So there is some bubble risk?

Gambling Problems?

Probably this would lead us to the current bubble risk, but from the little data I have, there is hardly any evidence for systemic threats. Some people would lose their hard earned money, because they engaged in a game, which can always turn ugly. If you invest in stocks, everybody knows that it can go down any time. Same for the real estate market, but for Malaysia the speculation potential is rather small and limited to certain regions. Malaysian Banks were also in line with international standards for their capital requirements, which was mentioned during the last few weeks. As a matter of fact, they believe to be able handling some blows. A breakdown again is rather unlikely from a smaller default. On top, the national bank, Bank Negara, called for caution as soon as they recognised this speculative trend. In their eyes, local banks have the responsibility to check carefully during the approval of loans if applications are based on sufficient funds and income. New guidelines have been introduced and are accepted for most banks. 

Bank Negara Malaysia

So far, a bank would mainly consider the gross income of a household in regard to a loan, but not the net income for every month. After all, we are paying taxes, energy, water, gas, insurances and probably the private school for your kids every month or so. It makes sense to deduct these costs, before banks decide on loan approvals. From my point of view, Bank Negara has done a great job in preventing and taking a little heat from the market, while not interfering with growth as the new guidelines deter black sheep already. Please check my articles for more details. (Adeline Paul Raj 4 May 2012: Bank Negara's loan guidelines begin to have desired effect, Daniel Khoo 24 April 2012: Bank Negara defends rules, New Straits Times 14 May 2012: Banking Guidelines: Bank Negara's stand apt)

In pace with current developments, market regulators have been acting cautious and with a sense for an open investment environment, but before we totally rule out any bubble, let us take one more perspective. I tend to be careful.

Where is the market heading?

There are quite a number of economic models in this world, but only recently economists were analysing the issue of bubbles properly. For this reason, we are now able to locate a market situation in this model following Dr. Jean-Paul Rodrigue of Hofstra University. Four phases are mentioned, where investors from different backgrounds act and cause pricing hikes as well as the bubble effect. In the beginning, there is a move of "smart money", which simply understood future potentials. Since this is mainly not recognised until results become obvious, this phase is called "Stealth". For Malaysia, smart money has already moved in and was achieving decent profits over time. In the following "Awareness Phase", institutional investors realise the potential based smart money examples and their enormous informational advantages over private investors. Interestingly, this phase also has been passed to some extent. A lot of money from institutional investors from Asian countries and to much smaller extent western economies is invested in Malaysia by now. The third phase's name says it all " Mania". It brings the public into the game. This is the time, when price hikes are most likely, because of all the emotions, hopes and dreams connected to investor's decisions and activities. Here I need to stop and go back one step. It is true that with no doubt, the public started to become overly aware of financial gains in the local real estate market. Rodrique pointed out media attention, enthusiasm and greed as points on this ladder of increasing prices. For us, we can consider that we have reached some point at the beginning of all this. Hazrul Izwan in an article of MPI pointed out that in mid 2010, he could see some signs of this "Mania Phase", but then the prices went down and everything cooled off. Following him, we would have climbed the dangerous ladder of the "Mania Phase" quite a bit again. (Malaysia Property Inc Jan 2012: property quotient)

My take is a little different. Rodrique mentioned a first sell off in his model, which happens during the "Institutional Phase", including a price slump. Probably, we have experienced this slump during 2010. However, we still have been heading into the "Mania Phase", just that we are at the very beginning. Here, I can agree again with Hazrul, since he also assumes us being at an early "Mania" stage. People started to invest again, there is also some greed in the market, but it is not yet pushing the whole market to any limits. Looking at the housing price indices and the 10 average housing price development over time, we are about 2.5 % in plus. This indicates at best an early "Mania Phase". (Malaysia Property Inc Jan 2012: property quotient)

Not yet!

Finally, I feel confident to answer the question on a possible bubble in the local real estate market. In many ways, we are always heading to a bubble, but investors need to assess at which stage of the bubble we are. Rodrique's model can give us an idea and furthermore, the regulators, such as Bank Negara, are providing hints on the health of the investment environment. For now, I believe that the bubble is still a good two to three years away. Furthermore, with sufficient control by regulating bodies and in a slower economy investments will not push quickly for new highs. We might even have more time.

Stay tuned for my next insights into another important sector of Malaysia's economy. With Felda Holdings approaching the largest IPO after Facebook, we should have a look into the local plantation sector.

Excursion: Island Dreams or Penang's Real Estate Market

Tackling all these exciting questions on where the local property market is heading, let me come across a few articles on the real estate market and development of Penang. Certainly, I am preparing the final account on if we are heading into a bubble, but I also thought that this small excursion might be most interesting to investors. First of all, let me locate Penang for you. As said before, it is a state on its own, which consists of two parts. One would be the old Island of Penang and the other part is located on the northwest of the Peninsular of Malaysia. Take a look on the map.

Location of Penang State/Island

I mentioned already that this year should become an election year for Malaysia and the blossoms of this are usually quite irrational demands of the public to politicians. Some of them have been described before in regard to real estate investment and increasing prices. The blame by citizens mainly went to foreign investors, who unfortunately only cover 2 % of all real estate unit sales in Malaysia. Consequently, there is no ground for these accusations. Penang is not quite different, but let me first provide a little introduction.

Rare Ethnic composition

Penang is a state in the northwest of Malaysia and most famous for the Island of Penang, while the state also comprises areas on the mainland Peninsular of Malaysia. With a total of only 400 sq mi, Penang is home to about 1.5 mil. people. Based on this data, we can calculate a population density of 3,800/sq mi. For Penang Island, the density is even higher, after all it can claim the title of the most populated island in Malaysia, including the highest density. In comparison to other parts of Malaysia, Penang has a rare ethnic setup, which favours the local Chinese Malaysians with 45 % over 43 % Malay and other races. For more information check the pie-chart. I will not elaborate on political and other implications, but let us acknowledge that this composition usually favours the opposition.

FDI for Malaysia by region in 2011

The state is currently led by Lim Guan Eng, who is with the opposition party DAP. During the past years, he has been praised for his achievements, while lately a lot of criticism was pushed by the mainstream and government close media in Malaysia. Elections are close, as I said before. Nevertheless, Eng can claim the largest share of foreign direct investment (chart) for his state and is said to have increased the transparency within government policies and politics, namely public tender. Economy-wise, Penang as island and with a historic harbour was a centre of trade along the Straits of Melaka, but became a modern business hub in our days. Especially E&E manufacturers, but also ICT and healthcare have spread on the island and in peninsular industrial parks. Just to name some well known manufacturers, we would find Siemens, Bosch or Braun from Germany among them. Besides, Penang is still a centre for the production of semiconductors and attracted a lot of investment in regard to solar panels. Once Malaysia has been the leading manufacturer for semiconductors globally with Penang at its core, which is probably not widely known. As Q-Cells stands for solar power, we also see most well known semiconductor and microchip brands represented such as Intel, Infineon, Fairchild and also Siemens' daughter Osram in regard to optic semiconductors. Finally, some major E&E names are found here, including Sony, Dell and Motorola. I do not intend to provide a full list, but I am sure this offers a fair idea. PenangInvest states that about 29 % of the total local workforce are employed in the E&E industries, which might be growing since Bosch announced in June 2011 a major investment of more than USD 690 mil. for an integrated solar panel plant. Penang has a strong economy and is attracting more and more  Chinese foreign direct investment, too. When I met the responsible Deputy Chief Minister Dato' Mansor last year, he was just about to hop onto a plane to China. It is worth keeping an eye on this state and also to observe the coming election. (Penang Invest 2011: Penang Bounces back with Bosch Solars RM 2.2 bill and for more information Penang Invest)

Real Estate Market Penang - What is happening?

George Town

I won't move on talking about the beauty of the island, tourist attractions such as the new Spice Gardens Experience or George Town, please follow my link for these information. My particular interest is focused on the real estate market, since I am currently researching on these topics. In my past posts, I have been naming Penang one of the Malaysian real estate hotspots. It might not surprise that the prices have been going up. Certainly, the island has its charms and since Malaysia offers permanent resident status or at least long-term visas for retirees under the Malaysia My Second Home Programme, we also see a number of foreigners settling down on Penang. Also in this context, I read about comments that residential property in Penang became too expensive and locals cannot afford a house anymore. Well, let me say it this way, these ol' chaps from abroad are required to buy homes valued at USD 150,000/RM 500,000 and above. Perhaps this could have caused some price hikes, but honestly, with only 2% - 3% of unit sales to foreigners it is not likely. Anyways, let us take a look at the island property market.

The situation was fired up by environmentalists' claims on dangerous and excessive hill slope developments, but right behind these arguments locals complain about high prices all over the island. When I read the news, I heard about some handpicked regions in Penang, which were obviously premium-priced. Nevertheless, mentioning these spots, I would claim them to be some of the most attractive ones on the island, e.g. the famous Gurney Drive. (The Star 7 June 2012: Island paying for its charm, pg. 4) The article mentioned that Penang has seen  prices going up by 25 % - 30 % during the last 5 years and depending on the region. This kind of development would mean that we saw an average annual growth rate of 5 % - 6 %. I believe most investors would not feel shocked. First of all, we are talking about an island property market with its own rules and limited land to develop. Furthermore, we should acknowledge that Malaysia so far has not been hit badly by the economic downturn or a real estate crisis. In this environment, it is absolutely normal to see rising prices. For more perspective, I compiled a few news on annual growth rates of different island residential property markets during the last 10 to 15 years. Surely a simple comparison but at least an indicator. (The Star 7 June 2012: Island paying for its charm, pg. 4)

Islands growth rates tend to be high

 The Cayman Islands saw for over 15 years an annual increase of about 12 % in average, while recently the prices dropped. What about Canada's islands? Prince Edward Island and Yukon also rose by more than 10 %, year to end July 2011. Some channel islands in Europe take it up to 25 % during 2010 with continuous growth rates since 1993. After the Olympic Games in Greece 2004, the island of Crete recorded annual increments of 30 % - 40 % until 2008. A quick look at my chart reveals a likely truth. In times of economic growth, most islands rather outperform and all of the mentioned islands also outperformed Penang. However, the steady growth on the island over the last 5 years also presents a great potential. On the one hand, we still experience prices and growth below sought after island locations in other regions. 

Sector prices for sel. States

Besides, if I compare the price spread from last year according to the chart on the right, Penang is still far behind Kuala Lumpur and even behind Selangor in regard to premium residential real estate. News articles mentioned that in prime areas the prices for houses went from about RM 500,000 (USD 150,000) to more than RM 800,000 (USD 250,000). Most arguments are still based on end 2011 data, which is reflected in the chart on the right. Therefore, I assume that still about 60 % of all residential property is below the RM 500,000 mark. Even rising property prices in Penang mainland, I would call signs of normalisation, since most of Malaysia asks for the average residential property/house between RM 300,000 - RM 600,000. (The Star 5 May 2012: Priming, pricing KL property for the future) From this perspective, peninsular Penang prices are hitting RM 500,000 for houses only recently. (The Star 7 June 2012: Island paying for its charm, pg. 4)

Summing it up, I tend to call the development of real estate prices in the whole state of Penang rather healthy. As a matter of fact, the price spread is compared to Selangor or Kuala Lumpur not yet focused on premium property above RM 500,000. I have to admit that the direction is set and if the economy grows further, we will see higher prices during the coming years. While I understand the criticism of local Penangites, they also should start to understand the principle of demand and supply. Penang has little land to develop, but many people who wish to buy houses. Simple economics, the price will go up. On top, Malaysia's economy is still growing amidst the European turmoil. Real estate prices follow the current national economic trend and development, probably I could even say they mirror the GDP growth rate. Again, I would call it a realistic or healthy scenario, although I don't have the exact annual growth rates of real estate prices in Penang. Just take the average of 5%-6% real estate price growth and Malaysia's GDP average growth rate of 4,5 % during the last 5-10 years, it goes along quite well. (Dept. of Statistics Malaysia: GDP by State)

Penang is an interesting case for real estate investors and also an attractive investment zone. I should mention that the state government is mulling a RM 1,000,000 minimum price for all foreign investors, but only entered public consultation on this matter and did not implement it yet.  (NST 18 May 2012: A storm in a RM 1 mil teacup?)

Stay tuned for my final post on Malaysia's property market and if there is a bubble or maybe not!?

Malaysia's Real Estate Market - Prices gone haywire?

Kuala Lumpur and its close neighbours are perhaps the main hotspot for real estate investment, often called the Klang Valley. Looking at these core regions, as described before, we find serious oversupply, e.g. in luxury condominiums, office space as well as retail space. This oversupply situation usually means massive discounts and for office space, you would be right to expect so. 

Average prime office gross rents/month

Following DTZ Research, we are at the beginning of a slow downturn of prime office space prices. The diagram offers an idea of what is supposed to come. From a quite obvious peak in 2008, slowly rental prices are going down over the last yeasrs and might even accelerate the plunge during 2012. This effect might be increased as we cannot predict the total impact of the crisis in Europe and the slowdown in China. On top and as always, we have the unique situation of a massive amount of projects to be completed and therefore a big income of new office space supply in 2012. DTZ offers an overview in the second diagram, which shows that 2012 seems to be a developing or better completion peak for office projects in comparison with previous years as well as compared to plans for the coming years. Anticipating this development, we can expect during 2012 and 2013 a lot of pressure on office rentals. In this context, we even can conclude that for this specific sector a price bubble is rather unlikely.

Office development pipeline

What is next? Well, I will not extend a lot of attention to retail and industrial real-estate, since they usually do not become driving forces of a bubble. For industrial, we can already conclude that the overhang is rather small, while retail suffers especially in the range of cheaper shop lots of RM 250,000- RM 500,000. Larger projects, especially large retail malls, demonstrate strength in the current market. Furthermore, Malaysian consumers are still hungry for exciting new mall experiences, which increased the demand for integrated mall and entertainment projects. Mostly, vacancy has been low and replacement was achieved quickly. Consequently, this segment in the market seems to be less likely creating a bubble.(NAPIC Dec. 2011: Property Market Status Report Q4 2011) Moreover, if we look at the subprime crisis of the US, the main issue was the believe of private investors in residential property prices. Since they were supposed to always go up, loans would not cause trouble. Unfortunately prices went down and most investors could not settle their loans by simply selling their house. Certainly, there are other factors involved, but that does not concern this post. In the context of Malaysia's real estate market today, luxury condominium and overal luxury residential projects (incl. housing), although oversupplied, keep on testing new hikes every day. (DTZ Research 2011: Property Times) Property valuers  are puzzled and discovered that recently the primary market is considerably higher priced than the secondary market. That alone in prime areas would not be impossible, but we are talking about development in the periphery. Here normally people would buy houses below RM 500,000 (below USD 150,000). The sq ft would fetch perhaps RM 400 - RM 500, and  below. Developers are trying their luck and there are already adverse signals from the market. With prices going up to RM 3 mio for houses and more or respectively RM 600 - RM 700 per sq ft, the take-up of new units in mentioned projects is slowing down.

Lux. development in Kepong

From my personal perspective, it is a troublesome development to see prices going up that much in townships such as Kepong, Cheras or Ara Damansara, as these spots are partly more than 20 km away from KL-city. People specifically buy in these areas to escape overprized condos and houses in Bangsar or Damansara Heights, while not only the distance is an issue. The overal development, convenience, entertainment, education, you name it, cannot challenge the older hotspots yet. Some developers obviously argue, they invest a lot in security, but valuers clearly mention that this could only offer a premium up to 30 %. Besides, let us not talk about the neighbourhood. (Thean Lee Cheng 5 May 2012: Where is the market heading?)    

 

What reasons could we find for this unusual development, which puzzles valuers and customers alike? Well, greater Kuala Lumpur is expected to grow to 10 mio citizens by 2020. The drive into urbanisation and away from rural areas is strong. The potential for rising residential and commercial real estate seems to be set. Furthermore, foreign investors, who currently just comprise about 2 % of unit sales, are supposed to be attracted. In this context, Malaysia Property Inc. has been setup, as the sole government agency to promote Malaysian real estate to foreign investors. For more on MalaysiaProperty Inc, just follow the link.(Thean Lee Cheng 3 March 2012: Malaysia a real-estate shopping destination). It is also known that Malaysian's have a strong investment interest in real estate and heated up the market themselves. Observers stated that besides the developers price testing efforts, there are a lot of Malaysians who speculate on rising prices with their private money. The newspapers pointed at stories, where people would loan money for three or more luxury condos during the early sales period. This investment is way above their income and the banks are also to blame on it. While the project is completed and prices tend to rise, they would sell it off. This matter has caused quite some worries in the market and Bang Negara addressed this risk by announcing new guidelines for banks' lending policies. (The Star 24 April 2012: Bank Negara defends rules) This could already cool down the property market, which is why I will pick this matter up in my next post.

Another concern or let us call it some heat for this discussion has been added by local house buyers recently. It was for the ongoing price hikes that consumer advocates pushed forward and tried to increase the price tags for foreign investors to at least RM 1 mio. They claim that foreigners are responsible for the price hikes and Malaysian citizens, especially the middle income groups, were not able to afford housing or find condominiums in prime areas. On this one, I could be cynical, but let us be rational.

Real Estate Sector Price Spread

Firstly, I wonder, if these guys have done any research. Only 2 % of the yearly sales in real estate goes to foreigners. Secondly, foreigners already have to buy units above RM 500,000 according to the law. Now let us look the price spread of units in the market and what it tells us. The diagram on the left is in particular quite helpful and based on research of Malaysia Property Inc. If we take four real estate hotspots, we will realise that actually only Kuala Lumpur has a significant price hike of more than 40 % luxury residentials on offer. I believe for most experts and anybody with a rational perspective, this would make sense. Kuala Lumpur as capital and with only a limited amount of land available for development, but rising demand would see the demand driving prices up. Similar issues are seen in major cities globally such as Tokyo, Shanghai, Hong Kong, Singapore or London, Paris and Rome. I doubt that Americans start to complain about the sq ft price in Manhattan, New York, where we can see an average of more than USD 1,000. Not talking about prime property at all. Take a look at the article of CNN (CNN Money 2012: NYC apartment sells for a record USD 88 million). Probably Americans understood the principles governing prices, supply and demand. I really tried not to be cynical. Anyways, since we can conclude that hikes are mainly based on an exceeding demand for property in central locations, such as Kuala Lumpur, the point for a new price tag having a great effect on overall real-estate prices in Malaysia is quite weakened. Just take a look at spots such as Penang, which is basically an island with very limited space. Furthermore, in Johor we will find some places, where Singaporeans are taking up a lot of units and prices go up. I mentioned Iskandar before. After all, many large-scale development projects, such as Iskandar, are not possible without foreign investors. In the end, we are talking about very small areas. Malaysia Property Inc's KUMAR THARMALINGAM puts it like this: "The rest of the country is pretty much stuck in the RM300,000 RM600,000 category."  For more on this matter, I can also recommend his comment in The Star: The Star 5 May 2012: Priming, pricing KL property for the future. 

In an election year, it is expected that people start screaming about "indisputable injustice" in Malaysia, e.g. that they cannot buy a house above their living standard.The most noise came from middle income groups, which would like to buy houses below RM 1,000,000, but in prime areas. There is indeed a shortage, since we have an oversupply in luxury and cheap residential property. However, I cannot see a solution, since in Kuala Lumpur prices will go up along the high demand and little supply. If you want to stay in the city, you need deep pockets.

Knowing more about the pricing and developments in the market as well as some irrational fears and populism, I will finally conclude on the question of a bubble in Malaysia. Prices partly went haywire, but I believe the market will correct these matters. Since sales did not take off, developers will need to adjust. After presenting so many facts and developments, I am sure everybody agrees that it is not as simple as it seemed in the very beginning. Let us put the puzzle together.

Stay tuned for my next post and the final question on whether or not we are heading towards a real estate bubble.

Malaysia's Property Market - Review

The Malaysian real estate market has been driven by local demand ever since, as only 2 % of all sold real estate units go to foreigners at all. Compare this with about 30 % in Singapore, where regulation only allows investment in private condominiums and a 10 % stamp duty comes on top. (The Star 3 March 2012: Malaysia real - estate shopping destination) Domestic demand is usually seen as a good sign, since it decreases dependencies on international money, especially when investors suddenly try to pull-out. In this context, it might not surprise that the last quarter of 2011 saw a jump of 3.6 times in real estate investment transactions, but certainly the listing of a major REIT contributed most of it, some RM 3.54 bil or USD 1.12 bil. 

Property Stock in selected States of Malaysia 2007-2011

While in Kuala Lumpur the incoming supply of new units is just about 38,000 for last year, with existing stocks of about 410,000 units, you can see in the tabble above that states such as Selangor have 136,000 units coming in on a stock of more than 1 mio. units. (Malaysia Property Inc Jan 2012: property quotient) This small comparison shows already the main problem. 

Selangor and Greater Kuala Lumpur

Kuala Lumpur with a limited space of 243 sq km, but 1,6 mio. citizens has little land to develop. However, the demand is rising to live in this buzzing city with its jobs and high living standard. Obviously, we can understand certain price hikes out of this situation. Nevertheless, Selangor is profiting, too. As the direct neighbour of Kuala Lumpur, Selangor has already more than 5 mio citizens. Morever, there is also a vast area of 8,100 sq km to be developed. Cities such as Petaling Jaya, which are in close proximity to Kuala Lumpur have seen a steady rise of real estate prices. For the convenience of staying close to the capital, but paying less, more and more people were pouring into Selangor. This also explains the rise in incoming supplies for Selangor, where many new residential and commercial projects are in the pipeline. Similar developments can be found in regions such as Penang or Johor. While Penang State has a densely populated island with enormous real estate prices, it also offers cheaper commercial and residential land on the mainland. Finally Johor as a real estate hotspot profits from its neighbourhood again. 

Iskandar in Johor and close to Singapore

With a direct connection to Singapore, the relatively cheap real estate in Malaysia attracts the attention of Singaporeans. They become cross-border commuters, but leave quite some Sing Dollars on Malaysian soil.We shall not complain about this situation, since massive development projects all over the country, such as Iskandar, are profiting from rich neighbourhood and foreign investments. Moreover, the Malaysian government tries to attract more foreigners to boost growth within these projects. Nevertheless, we were talking about a bubble and I started wondering, if the rich neighbourhood might calm down the effect of oversupply and therefore prices still go up.

MY Property Overhang 2011 (compl.)

If you look at the statistic in the diagram, we have quite some overhang in many different sectors. Certainly, the residential sector is by far the worst issue. There we can find an incredible overhang valued some RM 4.9 bill. by the end of 2011. Interestingly, one of the main points in the statistics worth mentioning would be the fact that the amount of units went down, while the value of the overhang went up. I have to admit that this development could have many explanations, including units being revalued, but it could also be a part of the swing to luxury projects. In addition, we would need to look at the units under construction and planned, as above only completed projects are represented. While sales is slightly going up, we still need to acknowledge that counting in the completed, constructed and planned projects some 100,000 units are not sold yet, worth several billion MYR. (NAPIC Dec. 2011: Property Market Status Report Q4 2011) What shall we make out of this?

On the one hand, I outlined before that we have seen price hikes, which seems to be surprising in regard to the high-value oversupply. On the other hand, sales is improving and foreigners slowly stream into Malaysia, who are willing to pay premium prices. So are the rich kids spoiling property prices? Let us take a look at this matter. In that context, I will also provide information on the general market prices and what is currently happening....stay tuned for my next post.

Malaysia's Real Estate Market – Bubble or Opportunity?

View on Petronas Twin Towers in Kuala Lumpur

The real estate market is a hot issue in Malaysia and that is not only because of CNBC, which rated Malaysia 9 of the top 10 hottest real estate markets globally. This rating was based on research by Knight Frank, an international real estate consultancy. (for more details: CNBC 2012: The World’s hottest Real Estate Markets) While everybody remembers the headache of the US subprime crisis, in Malaysia people feel determined to venture into property right now. Just a few days back, I met with the brother of a famous fashion designer here in Malaysia. It was obviously about getting some new suits, but we ended up talking about real estate. I told him that I will stay in Malaysia and intend to buy property myself. He promptly said: "Buy now." I asked him, in a quite naïve way, if we are not heading straight into a real estate bubble. Prices have been rising and almost everybody tried to make a profit out of it recently. He responded in a pretty simplistic way: “There could be a slight downfall or setback, but the prices will keep on rising.” From my observation, this is a general attitude of Malaysians and many people hope to make a fortune in real estate. In other words, property is a booming business with prices rising by about 28 %.(CNBC 2012: The World’s hottest Real Estate Markets)

Now that looks like a bubble, doesn't it?

Many educated people would say, the undisputed belief in ever rising prices is not going along well with fundamental economic theories as well as real-world events such as the global downturn caused by Europe and slowing growth in China. However, there is a lot more happening in Malaysia, than what I told you so far. In order to give you an idea and also some thoughts on the investment environment, I would like to throw some figures at you and see what happens in the market. In addition, I talk a bit about regulation changes and round it up with recent discussions on foreign investment in real estate, price caps and similar desires.

With REITs becoming more important and less restrictions on property investments for foreigners, Malaysia offers more opportunities than the highly regulated market of Singapore. Stay tuned for more insights into the development and prospects of Malaysia's property market.

Chinese Ghost Story III - Financial Scenarios in China

Finally, I wish to come to the tricky part of this story in regard to the unshaken belief in China. Bo Xilai pushed Chongqing’s economy hard for his political campaign to enter the circle of leadership of the communist party in Beijing. His investment policies were based on support programs for the inland provinces in opposition to the rather developed coastal provinces.  Due to the success of this project, he also made use of quite questionable investment vehicles to keep Chongqing going. The steady inflow of money and investment projects produced quite a hike in the real estate of that region, which Bo utilised for his investment policy. He backed his loans through the governmental real estate assets, while he firmly believed in its rising value. This strategy is alright, if investments are driving your real estate prices up, but it can be devastating when the investments slow down or come to a complete stop. Looking at the most recent news, China's foreign direct investment as well as other economic indicators are falling for the last six months.(The Wall Street Journal 15 May 2012: China Foreign Investment Falls Again) Obviously, we have to consider the situation in Europe and the US, which is threatening enough, but what if China goes down?

The Chongqing Scenario

Chongqing skyline

Currently, Chongqing is said to be burdened with about USD 30 billion. At this point, it is getting interesting to me, as people love to look at China as the stable and growing giant. What happens if China's growth is slowing down? We see more cities in trouble, since FDI will fall, factories are closed and all of this is quite likely in the current economic situation. Only Chongqing suffers from USD 30 billion, but what about the the rest of China. All provinces are very competitive and their leaders need to achieve certain goals to further their careers. On top, the local governments have a lot of freedom in regard to their fiscal and budgetary policies. Bo Xilais story is an extreme, I agree. Still, the debt risk is rising. Just assume an overal debt of USD 1 billion per 1 million citizens in a city. There are about 160 cities with more than 1 million citizens. I am sure you can do the maths, but keep in mind that there are many cities with more than 1 million and another 500 cities with 100,000 and above. Besides, we are only talking about the communal level. Certainly, there is no proof for this assumption, which is why I call it a scenario. The PR China does not really let us look into their books, but there is more to this issue. A last comment below.

China’s banking system is just another time-bomb of nonperforming loans (NPL). Many experts assume that China’s banks intended to list themselves on international stock exchanges to collect fresh money and cover the domestic NPLs. Basically, that is what they did during the last few years. Some weeks back, Reuters updated on this issue and mentioned that several banks are struggling with rising NPLs, again. And again, the main beneficiaries were local governments and the real estate sector. Does that ring a bell? (Reuters 29 March 2012: Update 2 Nonperforming loans tick higher at Chinese banks)

Stay tuned for my next story, coming back to Malaysia and ASEAN. Be smart and diversify.