Iskandar Malaysia property investments – 5 reasons why they are a bad idea

Image Source: http://www.iskandarmalaysia.com.my/our-development-plan

By Aaron Loy

A few months back, I entertained the thought of buying a property in Iskandar Malaysia, either as a home for myself or as a rental property.

The relatively weak Malaysian Ringgit makes it an enticing proposition, but while personal factors (like the location of friends, lack of personal transport and poor internet infrastructure) ruled out my using the property as a home. I also quickly realized that it’s also an awful idea to buy one as an investment.

Now, I don’t pretend to be an expert in property investing, but what I do have, however, are insights as the son of a real estate agent, and my penchant for analytical thinking.

So why is investing in Properties in Iskandar Malaysia currently a bad idea? Here are some of my reasons:

1. Limits on Foreigners

There are two parts to this.

The 1st one, which is arguably superficial, is that in every project, certain units are always reserved for the local Malay populace. There are informally called ‘Bumi Units’, named after the ‘Bumiputera‘, the policy. You can read more about it here.

In practice, you’ll find that some of the best units will not be available for purchase because you’re not a local Malay. An annoyance for those buying for yourselves, though probably not as big of an issue if you’re planning to rent the place (There are of course loopholes to get around the problem, but we’ll focus on the ‘official’ stuff only).

The most important thing though, is that foreigners are only allowed to buy property above a certain limit. It was RM500,000, and as of 3rd March’14, it has been raised to RM1,000,000.

Understandably, this is to prevent the rapid rise in prices due to over-speculation, which is a good thing for the locals. As an investor, however, this will be a problem for your exit strategy, which we’ll talk about later.

2. Are Businesses Moving In? Who are your Tenants?

Iskandar Malaysia is being sold as a holistic nirvana where anybody can work, play, and live a balanced life.

Be that as it may, there’s one fundamental a lot of new investors miss when they’re considering an investment here; Are businesses moving in?

Think about it. In any new town, businesses must set up shop first before the people (employees of these businesses) move in. I’m not sure that’s the case with this region.

The next time you bring yourself and/or your family along to Johor for your shopping and seafood, keep your eyes open and pay attention to the commercial spaces. Are the shops doing well? Are their customers mostly locals or Singaporeans who visit Malaysia during the weekends? Where are the offices, warehouses and other non-retail spaces? Are they filled or mostly empty? etc.

This is important information because you need to figure out who’s going to rent your property and if there’s demand. From what I see so far, demand from local business staff is extremely low.

The other side of this argument is that because of the increasing cost of living in Singapore, more people will starting living cross-causeway livelihoods, working in Singapore while staying in Johor. A valid point, I concede, but honestly, when will the demand start to rise?

How many are willing to spend the extra time, at least twice a day, five times a week, enduring traffic jams going to and fro work via the check points? Until Singapore and Malaysia stop bickering and solve this fundamental logistical issue can large-scale cross-causeway livelihoods become a reality. This, and the recent measures to (finally) increase the supply of houses in Singapore means that most people will still opt to stay here.

So, who’s going to rent your property?

3. Competition Against Other Investors

I shall attempt to figure out why you’re thinking of investing in Iskandar Malaysia with the help of my crystal ball… let’s see now… mmmm…ahhh… I see…

1. You’re new to property investing.
2. Malaysia is still ‘familiar’ territory compared to, say, the Philippines or Vietnam.
3. Properties in Malaysia are much cheaper than those in Singapore (2.5 times!)
4. No money down. (It seems like the Malaysian government is cracking down on this loophole though)

Close?

Hey, don’t take it personally. Knowing yourself is half the battle won yes? I’m in the same boat as you.

With that done… do you see a problem?

We’ve already established that rental demand isn’t exactly hot in that area right now. And yet, it seems like housing in Iskandar is (or was) selling quite well, and I suspect, to those with the same mindset as you and me.

So, not only do we have uncertain demand, but we also seem to have an oversupply of new wannabe ‘investors’ trying to rent as well, which means there will be a large supply of rental properties in the market. With that, it would mean lower rentals and a lower return on investment, isn’t it?

4. Cheap Investment?

One of my pet peeves is that the word ‘cheap’ is often misused. It’s often used to denote ‘low priced’ when it should mean ‘low for its price’ instead.

Let’s put it this way, buying a $1,000,000 sports car that costs $2,000,000 to make is ‘cheap’, while $7.90 for the same nail clipper that can be bought for $2 at a pasar malam (night market) is called ‘expensive’. Price ≠ Actual Value.

Anyway, a similar problem plagues the mindset of the wannabe investors who are exploring the possibility of investing in Iskandarian properties; They (or We, I should say) feel that these projects are ‘cheap’ because they’re ‘cheaper’ than properties in Singapore.

In my opinion, Iskandar Malaysia is, especially their residential projects, in effect, like Batam Island, in that they’re made to cater to Singaporean cash cows who are willing to be milked. In other words, most of it is hype, with inflated prices and an excess of fake demand.

5. Exit Strategy?

Let’s say, for whatever reason, the time has come for you to sell this property of yours. Now, before we talk about making or losing money, let’s look at the two primary factors that will affect your ability to do so:

The RM1,000,000 lower purchase limit on foreigners, and the fact that most properties launched are priced between RM500,000 and RM1,000,000.

Oops.

You have to remember that these projects are not made to be affordable for the locals; They’re there to maximize profits from foreigners (read: Singaporeans) with cash to spare. So, unless the government lowers the limit or there’s a miracle spike in property prices, the limit effectively eliminates all foreigners as potential buyers for your property.

So, how can you sell.. when there are no buyers?

Conclusion

1. Limitations on foreigners that limit choices.
2. A practically non-existent rental market.
3. Competing against a large pool of ‘investors’ for a small pool of tenants.
4. Bad value for money.
5. Effectively, no way out of this investment.

Honestly, all one needs to do is to ask some simple questions and do a little research to know that investing in Iskandar Malaysian properties is, at best, a questionable move to make. There are too many things working against you and expecting any of those factors to change is almost akin to gambling, hoping for a good card to appear.

Investing may be a game, but it’s a game you want to win by making informed choices.

There’s a word for taking chances and hoping for the best: Gambling.

At the moment, in my humble opinion, the local government and the property developers made a killing while the ultimate losers are those who bought units before the limit increased to RM1,000,000. These people are stuck with a property that’s extremely difficult sell or rent to break even, much less make a profit out of.

Here’s the thing though; There IS potential for that place. After all, with the cost of living in Singapore on the rise and its government’s penchant for taking short-cuts to solve its population problem, an increasing number of people will consider staying around Iskandar Malaysia as a permanent compromise between convenience and lower cost of living.

That being said, I believe that the potential will only be realised in the relatively far future, and things will only get much worst before it becomes a viable investment option.

I hope this ‘layman’s’ take on the subject has given some insight into the topic. Remember to share this post, especially with those who are considering a purchase in the area.

Do check out another take on the same topic @ Dr Wealth: Iskandar Malaysia is Only Going One Way – Down. Research is always important, yes?

This article was first published at theaaronloy.com