Seven years on from the Asian financial crisis, Malaysia boasts one of southeast Asia’s most vibrant economies and a thriving commercial property market.
Overseas investors, having been scattered by the imposition of capital controls, an antagonistic political leadership and a much-maligned currency peg, are returning in droves.
According to research from global real estate advisor DTZ, around RM60bn (€13.3bn) was invested in Malaysian real estate in 2004. This amounts to a 38% increase on 2003, with commercial property accounting for approximately RM10.95bn or 18%.
For the first half of 2005, transactions amounted to RM28.5bn, about the same level as in the corresponding period in 2004. Transactions involving overseas investors increased by 51%, amounting to RM7.6bn.
Foreign investors to have concluded deals recently include ING, Pramerica, Sedco Capital, GIC Real Estate and Mapletree.
These transactions, although generally concentrated in and around Malaysia’s capital, Kuala Lumpur, also extend to secondary cities such as Johor Bharu, Ipoh, and Seremban. They reflect an increased level of investor comfort and a willingness to assume higher levels of risk by investing beyond the capital and in different sub-sectors of the market.
As an investment destination, Malaysia straddles the middle ground between the high-risk, high-reward opportunities in fast-emerging countries such as China and India, and the low-risk, low-reward prospects in more mature economies, such as Singapore and Hong Kong.
The country’s advantages stem from a clear land ownership regime, strong legislative provisions and a political stability that remains largely intact despite a hiccup over the sacking of the previous deputy prime minister and present concerns about Islamic extremism in the post 9/11 world. In fact, the risk premium for Malaysia has been steadily on the decline and has been reflected in the country’s improved credit rating.
With a well-diversified economy now churning out a healthy average annual growth rate of 5.1% over the past five years (7.1% last year) and improving domestic demand, the commercial property market is beginning to look attractive to investors. With more realistic pricing by owners, ample liquidity in the banks and improved fundamentals, the number of investment transactions is growing.
The low interest rates offered by Malaysian government bonds as well as a need for enhanced diversification of portfolios has encouraged domestic institutions such as the Employees Provident Fund, and Tabung Haji (The Pilgrim Fund, which facilitates savings to finance individuals’ pilgrimages to Mecca) to load up on property assets.
The continuing liberalisation of government policy on foreign ownership and access to funding in the local currency is also helping the development of the property market.
Even before the removal of the last vestige of capital controls in August this year (the ringgit peg), foreign property investors had Malaysia on their radar screens as real estate elsewhere in the region, particularly in Singapore and Hong Kong, began to overheat.
The retail sector showed much resilience with demand in large part being domestically-driven, aided by a strong increase in foreign visitor arrivals. Consumers’ disposable incomes have hardly been affected by the recession, due to the lack of large-scale retrenchment, and have recovered rapidly.
As a result, the major retail centres that were completed during recent years, such as Suria KLCC and MidValley Megamall, were not only able to lease to full occupancy, but also saw strong rental growth at lease renewals at the end of their three-year tenures. Rental levels are now at pre-crisis projections.
Project casualties remain, but these were mainly concentrated at secondary projects in badly located neighbourhoods undertaken by financially weak developers. Some of them are currently being revived.
Although average occupancy remains at 86% in and around Kuala Lumpur, this has not deterred new projects being planned. At proposed prime centres, retailers’ leasing interest remains high, buoyed up by bullish private consumption indicators such as car sales, credit card receipts, and imported consumer goods.
In the office sector, demand has been recovering and has been aided by the public sector despite the relocation of government departments to the new capital, Putrajaya, about 45 km south of Kuala Lumpur.
Underpinned by a strong growth in the key services sector (6.8% in 2004 and 5.8% projected for this year), the occupancy rate had been creeping upward from the low of 78% in 1998 to the current 87% with limited new supply. Most prime office buildings are enjoying close to 95% occupancy and rental rates in such buildings have also increased by about 50% since 2000 to an average of RM5.50 psf/month.
Capital values have also increased, with prime buildings likely to command a price of RM600-650 psf, up from RM450-550 psf a few years ago.
With the strong growth in global shared services and outsourcing, Malaysia has suddenly found itself in the enviable position of being a potential global hub, ranking third in terms of attractiveness in this sector. Cyberjaya, the centre of the Malaysian IT industry, is the main beneficiary of this. To encourage the sector, the government has already announced additional tax incentives in the form of building allowances to developers of offices catering to such companies. These come on top of a slew of tax incentives under the Communication and Multimedia Act 1998.
The presence of key players such as HSBC, DHL, Shell and NTT had already established the reputation of the country as a successful host of such services.
Based on its high-class infrastructure, cost competitiveness and the highly trained, multilingual work force, Malaysia is already ranked first in the key categories of customer support and back-office processing.
The hotel sector has also begun to see some improvement, with a booming tourist arrival figure that is expected to reach the 16.7 million mark this year, 7 million more than in 2000. The effort to diversify the tourist market to new and non-traditional markets such as the Middle East, South Africa and China has borne good results. After years of low occupancy and subdued room rates, international-class hotels in Kuala Lumpur are enjoying a mini boom.
According to hospitality consultant Horwath Asia Pacific, average occupancy and daily room rate registered 72% and RM295 respectively in 2004, up 8.8 percentage points, and 2.5% above 2003. Although occupancy for this year is likely to decline to 68% due to the recent opening of two major hotels (The Hilton and Le Meridien) room rate is expected to improve to RM306. Although room rates have been low by international standard, they are improving, especially for hotels catering to the business sector.
Several new establishments are being planned, including a Four Seasons and possibly a Grand Hyatt.
The recent completion of two state-of-the-art convention centres (KL Convention Centre and Putrajaya International Convention Centre) augurs well for the conference industry and the flow-though to the hotel sector.
Looking forwards, the emergence of the Malaysian real estate investment trust (REIT) market provides an alternative entry to Malaysian property investment as well as an avenue for a viable exit strategy for property owners. The government’s push for this new asset class with the various tax incentives in place has already shown results with the successful launch of Axis REIT, an RM296 million (€65.7m) fund in August this year. The unit made its debut with a gain of 34% over listing price. Various other REITs are following closely behind such as the Starhill REIT (RM1.2bn/€266m), the Sungei Wang (RM550m/-€122m) and others.
Under the year-old administration of Prime Minister Abdullah Ahmad, the government has already adopted a less xenophobic approach towards foreign asset ownership and has streamlined the approval processes. The improving market, strong economic fundamentals, increased liquidity, and depth of assets will see Malaysia becoming more and more attractive as a destination for foreign real estate investors in the coming years.