The debate on the RM1mil price tag for foreign buyers is only relevant in the capital city of Kuala Lumpur and some of the more affluent Selangor neighbourhoods, parts of Penang and small parts of Iskandar. The rest of the country is pretty much stuck in the RM300,000 RM600,000 category.
The current unhappiness expressed by Malaysian house buyers however, are not those in the lower income bracket as there is an overhang of property in the lower price range. It has to do with the middle-income earners who would like to buy a house in a good location for less than RM1mil. The availability of prime residential land within KL is declining very rapidly and there has been an increase in conversion from residential to commercial. As KL becomes more commercially vibrant, this trend will continue. As a consequence, the price of land within the central part of KL is rising. Land owners are acutely aware of this and are profiting from the few available pieces of land in the city as developers bid for these scarce resources.
In the case of Johor, foreign property owners are mainly from Singapore. This is no surprise since the largest diaspora of Malaysians are Singaporeans. Given the proximity, close investments and business ties Malaysia has with Singapore, Singaporeans are the biggest real estate investors in Malaysia and vice versa.
On top of the rising cost of land, construction material and labour costs have been rising. Building material cost in KL increased by +50% since 2002. Developers try to sustain profit margins by raising prices of new launches and testing new grounds for affordability. Should demand be weak, new launches will be re-priced to ensure take-up. Very often, incomplete sales of high-end condominiums which are the less desirable to locals in terms of feng shui, etc are being marketed to foreigners. To raise the value of their projects, developers also add in features to make the development more eco-friendly.
More city housing
Greater KL is embarking on a path to increase its population from 6 million to 10 million by 2020. To ensure a smooth transition, Malaysia could learn from Singapore's experience which increased its population from 4.0 million to 5.2 million in 2011 in just a decade. One of the solutions that Singapore sought was to provide high density mass housing that replicates American skyscraper development. Built at densities of 6000 or more persons per sq km, a growing number of new public housing stock is more than 12 storeys. Under directions of upgrading and density intensification, old low-rise blocks in mature public housing estates are being demolished to make way for new taller developments. The latter ranging from 25 to 50 storeys is developed at higher plot ratios.
Approximately 85% of Singapore's 3.4 million resident population has moved to reside in public housing. While there are fears that high density housing reduces privacy in Singapore, this social loss is balanced with high levels of security that is easier to implement in dense cities, which has a higher-skilled workforce and an educated public that contributes actively to crime prevention. Also, point blocks release more land at ground level for gardens and Singapore has a zero car park policy.
What will the impact of a RM1mil limit on foreigners be?
n It could curb rising house prices that are targeted at foreigners but may not curb the demand from locals. In addition, there are unintended consequences on the business climate if foreign-investor sentiment is affected by random changes in policies.
n Whether it will push developers to sell prices below RM1mil will depend on the cost of their land purchase, the plot ratio, construction and labour costs.
n Those assets that are selling at slightly below RM1mil may rebrand themselves, above RM1mil to say that they are now targeting the foreign market.
Before implementing any drastic changes to curb foreign investment purchases, it is important to ascertain the contributory factors leading to price increases in KL. Malaysia can learn lessons from policy makers in other cities that have successfully grappled with rising city migrants within a short duration. For instance, Malaysia could consult the Singapore Housing Board and policy makers on how they have attempted to plan for the increase in expatriate population. With the proposed solutions, a public-private dialogue can be set up between developers, state housing agencies, Invest KL, Talent Corp, consumer bodies, both local and foreign, to look for long lasting solutions.
The dialogue should lead to a shared solution, which ensures future supply of mid-priced condominiums in the city. For instance, through a consultative approach, the government can give a higher plot ratio to help increase the margin of the developers and make it worth their while to target domestic buyers in the land-scarce city.
Striking a balance
At the same time, the Government can allow developers who have contributed to building mid-range products in the city to sustain their business operations by allowing the liberalisation of foreign ownership in the city ie have no Bumiputra content and no limitation on the sale of units to foreigners. Developers could then target entire projects in the city for foreign direct investment (FDI) and not exclude locals from paying the premium price for the asset. In other words, a 2-part structure like Singapore and Hong Kong.
To continue to attract FDI, which is critical for job-creation within KL, Malaysia can adopt the Dubai model, a very simple but effective model. Anyone can open an office in Dubai or buy a Dubai asset. Within a set boundary, work permits are given on demand and business registrations are on a one-day basis. You have to have your office in a designated area but you can live anywhere in Dubai.
What if we designated the Federal Territory of KL as a liberal international property investment zone. We can carve out parts that cannot be touched for FDI like Kampung Bahru. The opening of an Investment Zone could be similar to KLIFD, which is still a decade away from fruition. It should be for the whole of KL City Centre say a 10 km radius from KLCC as most of KL is in private sector hands.
It will certainly give a boost to our Invest KL and Talent Corp as Malaysia is walking the talk and is inclusive of everybody in the city of KL. It fits in with the 1Malaysia plan, liberalising KL to form an Asean Financial Centre.
More developed nations and some of the middle-income countries have been able to balance between development and using FDI to make better options for their people.
There are several possible ways of making housing more affordable. However, it is important to examine the consequences of taking such action. For instance, a house price control in the city may stop developers from building within the city. Other alternatives to explore could include, a housing trust that can be set up to acquire a land parcel through purchase, foreclosure, or donation. The trust arranges for a housing unit to be built on the parcel, then sells the building but retains ownership of the land beneath. The new homeowner leases the land for a nominal sum, generally for 99 years or until the house is resold.
This model keeps housing affordable for future buyers by controlling the resale price of houses on Community Land Trust (CLT) through a ground lease and resale formula. The CLT keeps the property affordable in perpetuity by restricting the profit buyers are able to take when they sell the house.
Up to March this year, Malaysian pension funds have spent US$2.4bil purchasing London property assets. That's RM7.3bil. Was there are any concern from the British press? Or the government? Actually they welcomed sovereign wealth funds coming into the country as they are seen to be passive investors. Why have western sovereign funds not bought passive assets in Malaysia? What has London got that we don't have. The answer stares at us in our face. It's a total lack of government control on who buys what in London. They understand that you can't take the buildings away. So they can happily enjoy the taxes they get from the funds.
Canary Wharf which is London's newest financial district has 100 countries fighting to have a share of it everyday. The UK government does not interfere in property transactions. Only collects the taxes and fees that comes with it. London has seen waves of investment from the 70s with the Japanese, Korean, Arab, Russian and now the Asian wave. The city is open to all investors and builders. It is now an international city.
The people of London have seen their salaries and fortunes grow as they participate and learn from the legions of investors that have occupied London over the past few decades. There is recession in UK but not in London.
We need to make Kuala Lumpur the city of choice to live, work and grow for Asean investors.
Kumar Tharmalingam is the CEO of MPI. MPI is a public-private initiative set up by the EPU to promote and facilitate foreign investment in Malaysian real estate. MPI raises Malaysia's profile in the international investment radar through constantly updating foreign investors on Malaysia and real estate information.
By The Star (by Kumar Tharmalingam)
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