Malaysian Residential Property : Strategy for the Retail Foreign Investor

Under  the Malaysian Economic Planning Unit (EPU) guidelines foreign investors do not have to seek approval if the property purchase price is more than RM500,000. Prior to 1 Jan 2010 the threshold was RM250,000.

Why is Malaysian Property Attractive?

With this in mind what strategies should retail foreign investors adopt when purchasing Malaysian property. But before that let’s start with why the Malaysia property market is attractive to foreign investors:

• Comparatively inexpensive relative to places like Hongkong and Singapore
• Investor has direct ownership and title to the property. Unlike Thailand and Indonesia there is a need to go through complex roundabout ways via setting up shell companies, developer leases, or through using proxies.  These indirect forms of ownership have inherent risks.
• Mortgage Financing available from local banks up to 70% of property purchase price.  In Indonesia foreign buyers need to find their own offshore financing.
• No prohibitive anti speculative regulations for early liquidation (unlike Singapore).

Personally, from the regulatory and pricing aspect its fantastic.  I would even go so far as to say the RM500,000 threshold is not a hurdle to most foreign investors.
But have you considered the RM500,000 threshold in relation to the overall market?  What’s the price that average Malaysian buyer is willing to pay? What’s the supply situation like? Is there a solid secondary market?  What’s do foreign investors that currently own property say? Are you buying at the low end or high end of the property market cycle ? Have you considered foreign exchange risk?

Property Price Brackets

If you’re a retail investor with modest means in that RM500,000 to RM800,000 market bracket I’d suggest you do a bit more homework.   On the other hand, if you’re a high end buyer willing to shell out RM2,000+ per square feet for a unit at the Pavillion in Kuala Lumpur I’d not be so concerned.

Why? Because in a downturn the RM500,000 to RM800,000 market bracket  is likely to become the RM300,000 to Rm400,000 bracket and you’ve basically shut out the foreign investors. Secondly, the market demand from locals will be muted as the major demand from local residential  buyers is the RM200,000 to RM300,000  (160psf to 280psf) range. In a property market decline the RM300,000 is looking pricy to the majority of local buyers.  In this market liquidity and turnover starts to be an issue and if you need to liquidate the asset you’re stuck or if you’ve got a mortgage on it you’re doubly stuck.

The other point being the market supply. Unlike land locked places like Hongkong or Singapore there are vast areas available for development in Malaysia.  And GFA can be increased anytime.

I know of foreign investors who have taken a long time to liquidate condominiums in Kuala Lumpur. And mind you these are in very upmarket and not second tier locations. I also know Singaporeans who bought properties in the 1970s only to see their investments breakeven in SGD dollar terms today !  Another individual was hit by double whammy of FX risk and downturn in prices in the Asian financial crisis of the late 90s - never got back the capital. Think property is still a safe investment?  Think again. How about rental risk if you plan to rent. Currently, the yields arn’t that attractive.  In my opinion 5% to 6% is still not sufficient to offset the risk.

Does that mean that you should not invest. Not so. If you must then selectively find the property market segment within the largest population or demand base – ie KL.  Try the commercial shophouse property. Its certainly more liquid and rentable both as business and accommodations.  Again, if you’re buying to retire in a cheaper location or flushed with cash and want a second home go ahead and buy. You are in a different league!

If you're new to the game

Lately, I’m seeing prices shoot up in Johor and I’m turning cautious again. What was going for RM320 psf  two years ago is now RM450psf. Water front residential in new development locations are selling for RM600 to RM800 per square foot. Wow !

If you’re young , got some $, itchy fingers and need to borrow to invest my advice to you is Think! Think! Think! before you even consider Location! Location! Location!  You don’t want to be the  fool that goes where angels fear to thread.

All the best

Contributed by MC

Photo by mdpai75