Oxford Business Group | Budget shake-up for Malaysian real estate

The Malaysian government has taken steps to cool speculation in the property market by imposing a capital gains levy on real estate sales, tightening up regulations governing developers and raising the price bar for foreign investors, moves that have won mixed reviews from analysts.

On October 25 Prime Minister Najib Tun Razak tabled the draft budget for 2014, which has a strong emphasis on raising state revenue and cutting spending. According to the plan, subsidies will be restructured in the coming years and public debt – currently at 53% of GDP – will be lowered.

Among the revenue-generating proposals are a number of new taxes, including a real property gains tax (RPGT), which is also intended to ease property speculation and reduce inflation in housing. Under the new provisions, set to come into effect on January 1, a tax of 30% is to be imposed on gains from real estate sales on properties owned for three years or less, with the rate sliding to 20% if the property is sold in the fourth year of ownership and 15% in the fifth. Any sales after the fifth year will not be charged a capital gains levy. Previously, the capital gains tax on property sales had been set at 10% when introduced in 2010 and later increased to 15%, and applied to sales within two years of purchase.

For foreign property buyers, a different tax scale will be applied, with non-citizens required to pay a tax of 30% on the capital gains for a property sold at any time over the first five years of ownership, after which the rate falls to 5%.

Another move, one seen as even more likely to cool speculation, was the banning of developer interest bearing schemes (DIBS). As their name suggests, developers that offer DIBS agree to pay any interest on home loans during the construction period, making the purchase more attractive to potential buyers. The new provisions also prevent commercial lenders from involving themselves in DIBS-related projects. This measure will probably result in a slowing of off-plan sales by developers, while also reducing the property lending component of some of Malaysia’s larger banks.

While many in the sector have said banning DIBS was a positive move, one that would directly target speculation, others believed it would make it more difficult for first-home buyers to enter the market. One critic of the reform was Michael KC Yam, the president of the Real Estate and Housing Developers Association. Yam told the local media on October 25 that DIBS had been of benefit to many.

“We think that innovative home financing packages such as the DIBS offered by developers of high premium properties should be encouraged to facilitate financing and promote home ownership,” he said.

The RPGT also had its supporters and opponents, with Foo Gee Jen, managing director at property consultancy CH Williams Talhar and Wong, describing the increased levy as a measure that would boost stability in the market.

“The increase in RPGT is a wake-up call for flippers,” he told the local media on November 6. “Investors will have to go back to investing in property fundamentals, such as location and yield.”

However, some analysts have queried whether speculation is as rife in the sector as has been suggested, saying that the higher tax rate on capital gains will do little to reduce price increases for residential properties, one of the stated aims of the bolstered levy.

Foreigners eased out of the low end of the market

The budget also lifts the minimum value of a property that foreign investors can buy from the current RM500,000 ($161,000) to RM1,000,000 ($322,000), a move that may cool some of the speculation by overseas players.

Given the still relatively low price and solid value of Malaysian property, even the increased threshold may not curb foreign interest, though Chang Kim Loong, the honorary secretary-general of the National House Buyers Association, believed the higher ceiling will ease pricing pressures for Malaysian buyers.

“Foreigners must be prevented from snapping up property meant for the lower- and middle-income and thus artificially inflating property prices and creating a domino effect which can result in higher property prices across the industry,” he said in a statement issued the day after the budget was handed down.

Boost for low-cost residential segment

The budget also lays out a plan to add 223,000 new residential units to the national accommodation stocks in 2014, with both the government and the private sector expected to play a role.

The state will directly provide funding for the construction of low-cost housing, while at the same time offering a subsidy of $6000 per unit to private developers that build homes directed at low- and middle-income buyers.

It will be well into the new year before the full impact of the 2014 budget articles dealing with real estate will become apparent. To some degree at least, the buoyancy of the property market will depend on the strength of the Malaysian economy. The government has predicted growth of 5-5.5% in 2014, though ratings agencies and analysts are predicting GDP expansion may fall somewhat short of this target, at 4-4.5%. It could be that a relatively sluggish economy, rather than any increased tax, could slow activity in the property market.

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Oxford Business Group | Budget shake-up for Malaysian real estate

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Malaysia: CPO Power

After a slow year in 2012, Malaysian officials expect exports of crude palm oil (CPO) to expand in 2013. Prices that have fallen due to oversupply and slower demand are now on the rise again, and though they may moderate in the second half of the year, an average steady climb over the next two years seems likely.

CPO is a major export earner for the country, which is the world’s second-largest producer of the product. In 2012 Malaysia exported RM71.5bn ($23.03bn) worth of palm oil, down from RM80.4bn ($25.9bn) in 2011 – an all-time high. The 11% drop was largely attributed to a fall in CPO prices caused by a number of factors, including the uncertain international economic environment, a production glut and controls on the CPO trade. The average CPO price fell 27% year-on-year (y-o-y) and 24% quarter-on-quarter in the last quarter of 2012.

Despite this, officials believe the long-term outlook for CPO exports looks sound. In February Hamzah Zainuddin, deputy minister of plantation industries and commodities, said he expected CPO exports to exceed the 2011 record within three to five years. Even given ongoing issues of inventory surplus, the ministry forecasts growth in 2013, partly thanks to an export tax cut.

From January, the government brought the levy down from 23% to a sliding scale between 4.5% and 8.5%; if the CPO price falls below RM2250 ($725), the tax will be cancelled. Meanwhile, Indonesia, the world’s largest CPO exporter, raised its export tax from 7.5% to 9% in January.

Mohammad Jaaffar Ahmad, CEO of the Palm Oil Refiners Association of Malaysia (PORAM), said his members were already “seeing better margins as they ramp up production”. Jaaffar said rising exports would help lower Malaysia’s inventory, which was in substantial surplus at 2.53m tonnes at the end of January 2013, to a “manageable level” of 2m tonnes.

In the first half of February, Malaysian palm oil shipments rose 18%, to 673,555 tonnes, following a 10% decline in output and 1.6% fall in exports in January, the former partly attributable to a run-down of existing stocks and seasonal factors. Rabobank, a Dutch agricultural bank, said it expected Malaysia’s palm oil production to fall 2% y-o-y in the first six months of 2013 as the inventory is fed into exports. However, Malaysia-based Kenanga Research said that it did not expect stocks to fall below 2m tonnes in the first quarter of 2013 due to lower export demand.

Jaafaar said he expected the price of CPO to rise as inventories ran down. In early February, it climbed to around the RM2250 ($725) tax threshold, and by the end of the month, it stood at RM2330 ($751). Meanwhile, futures for delivery in April topped RM2500 ($805) in mid-February. Officials take the view that prices have now bottomed out, as the surplus falls and a number of demand factors kick in, but also due to a seasonal drop in production.

Local press reported that analysts expect prices to rise to RM2600-2700 ($838-870) by the middle of 2013. Kuala Lumpur-based RHB Research Institute, part of bank RHB, has said it has a price assumption of RM2800 ($902) per tonne for 2013, rising to RM3000 ($966) in 2014. It expects prices to fall again in the second half of this year due to the seasonal rise in output.

Meanwhile, Kenanga expects an average price of RM2500-2700 ($805-870) this year and next, and takes a more bearish view on planters’ stocks than some of its counterparts. PublicInvest Research has a neutral recommendation, expecting an average price of RM2750 ($886) this year and RM2850 ($918) in 2013.

As ever, CPO prices will be strongly influenced by the global economic situation, particularly by major importers, such as China and India. India’s proposal to levy a tax on CPO imports concerns Malaysian planters, for whom the country is the second-largest market. With the worldwide economy expected to grow only moderately in 2013 and 2014, it is little surprise that CPO prices are unlikely to reach the peaks seen five years ago. However, as oversupply moderates, a steady rise should boost the sector.

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Malaysia: Forecasting growth in insurance

The insurance sector is forecast to see substantial growth in the next few years as continued diversification, consolidation and international activity spur rising premiums and uptake of new services. Moderate GDP growth for the rest of the year, however, could pose a challenge to growth as the effects of a weakening global economy trickle down to private consumers.

Gross direct premiums are expected to reach RM14.3bn ($4.48bn) in 2012 and rise to RM17.5bn ($5.49bn) in 2015, according to the Malaysia Rating Corporation (MARC), a full-service ratings agency, which released its forecasts in a research note in June. This represents a compound annual growth rate (CAGR) of 7%, which is likely to outstrip broader economic growth.

MARC expects new business premiums in the life insurance segment to reach RM10.2bn ($3.19bn) this year, rising to RM13bn ($4.08bn) by 2015. The non-life (general) segment is also forecast to grow from RM4.1bn ($1.29bn) in 2012 to RM4.5bn ($1.41bn) in five years’ time.

The agency said that the life insurance market would benefit from rising incomes, as well as increased deployment of “new and innovative products”. General insurance would see growth stimulated by the implementation of mega-projects, leading to greater demand in a number of segments, including workers’ compensation, employer liability, contractor risk and engineering. The medical and personal accident segments will also continue to perform well, MARC said.

Other observers are even more upbeat about the sector’s outlook. In May, the local press reported that the Life Insurance Association of Malaysia (LIAM) said the life sector could grow by 10% in 2012. Growth would be driven by “the large and growing middle-income population in the region with higher levels of disposable income and who are also financially literate,” Donald Joshua Jaganathan, the assistant governor of Bank Negara Malaysia, the central bank, has said.

The market’s recent growth and promising outlook have led several major international players enter the market. In 2009, the government lifted the ceiling on foreign ownership of insurers to 70% from 49%, allowing greater participation from international firms, which have brought an increased level of dynamism to the industry.

Competition is expected to rise further following the pending auction of the insurance joint venture between the UK’s Aviva and Malaysia’s CIMB Bank. Aviva is selling its 49% share in the local firm as it withdraws from non-core markets, partly to raise cash to offset its exposure to the eurozone crisis. CIMB may also sell a substantial portion of its 51% stake in the venture.

Competition, greater international participation and a new risk-based capital (RBC) framework are also driving consolidation in the industry, as players look to pool resources and capitalise on economies of scale and strategic fits. The RBC regulations require firms to have a minimum 130% of supervisory capital-adequacy ratio (CAR).

According to Matt Harris, the CEO of Chartis Malaysia, the local branch of the international insurer, “RBC implementation helped accelerate the pace of consolidation, with seven mergers and acquisitions taking place in 2011. Many of the local conglomerates took RBC as an opportunity to consolidate. It is widely known that other existing players in the market would entertain potential suitors if approached, so more consolidation is expected.”

Harris told OBG that he expects the sharia-compliant Islamic insurance segment – known as takaful – to continue to grow strongly. In June, the local press reported that Etiqua Insurance & Takaful, the insurance branch of Maybank, the country’s largest bank, has forecast that the family takaful market, which accounted for 80% of the Malaysian takaful segment in 2010, could grow to RM7.2bn ($2.26bn) in two to three years from the current RM4.2bn ($1.32bn).

CAR regulations for the takaful segment similar to those rolled out for conventional insurance are being introduced and are expected to be in effect by the beginning of 2013. While the Malaysian Takaful Association is confident that existing industry players will be able to meet the new requirements, Tunku Dato’ Ya’acob Bin Tunku Tan Sri Abdullah, the CEO of MAA Group (MAAG), which has interests in the takaful sector, told OBG that he expected the new legislation to catalyse mergers and acquisitions in the segment.

According to Abdullah, conventional insurance firms owned by banks have survived better since the CAR regulations were tightened, as the high profits of the banking divisions have funded the increased capital requirements of the insurance business. The insurance divisions, which tend to make a smaller contribution to profits, are not able to meet the significant increase in CAR themselves.

With the insurance market in the process of dynamic change, due to rising demand and regulatory changes that aim both to increase solidity and allow greater international participation, consolidation, diversification and the rise of the takaful segment look set to transform the sector over the coming years.

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Malaysia: Manufacturing growth

Malaysian officials are confident the country’s manufacturing sector will continue to post strong growth throughout this year and beyond, on the back of an increasing swell of both foreign and domestic investment. There are some suggestions, however, that a general slowing of the global economy and the prospect of sharp wage increases could take some of the momentum from industrial expansion.

According to data issued by the Malaysian Industrial Development Authority (MIDA), the manufacturing sector accounted for just over half of all foreign direct investment (FDI) inflows last year, almost double the 27% drawn in by the services sector. With FDI in 2011 increasing by 12.3% to around $11bn, manufacturing’s share of that total came to around $5.5bn.

Total investments in the sector also surged in 2011, with 846 manufacturing projects carrying a total value of $18.57bn approved last year, a 19% increase over the $15.6bn recorded in 2010. Of these investments, locals’ contributions numbered $7.3bn, or 39% of the total, while the balance came from FDI. A full third of new projects approved were in the electrical and electronic industry, followed by basic metal products, and chemicals and chemical products.

Commenting on the latest manufacturing sector figures, the international trade and industry minister, Mustapa Mohamed, said investors were upbeat over the opportunities in Malaysian manufacturing.

“Foreign and domestic investors continue to respond positively to the government’s initiatives to invest in new growth areas and emerging technologies, high value-added industries, high technology and capital-intensive industries, and research and development activities,” he said.

While Malaysia is well placed to post solid growth this year, there are some signs that the national economy, and with it the manufacturing sector, could be easing back a gear. Total exports in January 2012 came to $18.2bn, the lowest level in a year, according to data released in early March. The year-on-year rate of growth for the manufacturing sector as of December 2011 was 4.5%, somewhat better than the 4% recorded in the previous month but a long way off the 8.2% of September or the 6.2% in October.

The long-running uncertainty over the state of Europe’s economy also ate into January’s export figures, which were released on March 7. Shipments to the EU plunged by 14.5% to $1.6bn, with falling demand for electrical and electronic goods and metal products being cited as the main factors in the slump. Though the decline was slightly less dramatic, exports to China also dropped in January, down 12.2% year-on-year, again with electrical and electronics products leading the retreat.

Overall, Malaysia’s economy expanded by a creditable 5.1% last year, in line with the rate of expansion of the manufacturing sector but below the 7.2% posted in 2010. The 2011 result was one that some analysts saw as stemming from the easing in overseas demand for Malaysian exports, a trend that will probably continue through the first half of 2012 but start to reverse itself mid-year and beyond.

According to Lee Heng Guie, the head of economic research at CIMB Investment Bank, it was the volatile external environment that resulted in stagnant demand for consumer electronics, though this could be offset to some degree by domestic demand.

“The question is how sustainable is consumption going to be and this will depend on key drivers such as commodity prices and income,” Lee said in an interview with The Star in Malaysia late February.

Many manufacturers are also somewhat wary of the government’s plans to increase the minimum wage at a time when there is uncertainty over sales abroad and growing competition from other regional producers. There have been calls for the raise, which will see the base wage increase from $215 to between $265 and $330 a month, to be implemented in stages, rather than all at once so as to lessen the impact on the manufacturing sector.

On March 6, Lim Kok Boon, the president of the Malaysian Plastic Manufacturers Association, said at a press conference that the government had to consider what the impact of a sudden implementation of minimum wage would have on the manufacturing sector.

“Almost all manufacturing companies in Malaysia rely on the export market and when we offer a higher price to our export market, they will not absorb our access cost and will look at other countries for cheaper supply,” Lim said.

While suggestions that up to 4m jobs, the majority of which are in manufacturing, could be put at risk by the wage increase may be somewhat alarmist, employers’ concerns are real. Mindful of the importance of the sector to the national economy, Mukhriz Mahathir, the deputy minister for international trade and industry, said on March 8 that a balance needed to be struck between the expectations of workers and industry.

“The minimum wage policy has become an ongoing debate, and the important thing is, the ability of the government to strike a balance between increasing the income of the people and ensuring higher productivity,” he said.

How the government will achieve this balance has yet to be determined. If an increase in manufacturing output can be assured, the result would offset higher labour costs, though something of a question mark remains over whether there are markets for the stepped up production the government is hoping for.

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Malaysia: Ties that bind

The recent strengthening of bilateral ties between Malaysia and Singapore bodes well for their construction sectors, as several planned projects between the two countries should bring lucrative business opportunities to both. A foreseen labour shortage in Malaysia, however, could stymie some projects’ development.

The construction and services sectors are expected to be the Malaysian economy’s main growth drivers in 2012 amid a forecasted drop in exports due to the difficult global economic environment. The government has targeted growth of 7% for the construction sector in 2012.

“Thus, construction projects will be a key economic stimulus due to their multiplier effect,” said Kwan Foh Kwai, the president of the Master Builders Association Malaysia (MBAM), when speaking with local media outlets at the end of December.

On January 5, the leaders of Malaysia and Singapore announced plans to boost transport links between the two nations, with a road tunnel and water taxi service the first of many projects.

Plans are already under way for joint operations to begin building projects worth $9.8bn and a mass-transit railway system linking Malaysia’s southern Johor state and Singapore that could begin operations by 2018. The leaders said they are also now looking to partner in areas such as aviation, with Malaysia’s Senai International Airport potentially cooperating with Singapore’s Changi Airport.

“There are many more areas for potential cooperation,” Malaysian Prime Minister Najib Razak told reporters in early January after talks with Singaporean Prime Minister Lee Hsien Loong. “All the current agreements that both countries have managed to reach will pave the way for stronger bilateral ties.”

The agreement was widely seen as symbolic of continued improvements in relations between the two neighbours, which between 1963 and 1965 formed one nation. Relations improved in 2011 when a decades-old land usage dispute was resolved, which saw Malaysia agree to relocate its railway station away from Singapore’s central business district.

Both governments appear to be eager to continue the process. “There should be more new initiatives taken between both countries,” the Singaporean prime minister told local reporters.

Examples of these new initiatives are many. Last year, Khazanah Nasional and Temasek Holdings, the state-owned investment companies of Malaysia and Singapore, respectively, announced plans to cooperate on property projects, including $8.67bn of retail and residential developments in Singapore’s downtown area. These developments will incorporate the former site of Malaysia’s train station.

The two investment firms also plan to jointly construct RM3bn ($968.73m) of projects in Malaysia’s southern Iskandar economic development zone region that will include retail and residential offerings. Located adjacent to Singapore, at the apex of Malaysia’s East Coast Economic Corridor (ECER), Iskandar is a territory of around 2217 sq km.

“The development of Iskandar and its success is very important for Singapore as it will benefit both sides in many ways,” said the Malaysian prime minister.

The planned railway linking southern Johor state and Singapore will make Johor Baru City — long the entry point for many visitors to Malaysia from neighbouring Singapore — something of a satellite city for Singaporeans, who are keen to take advantage of Iskandar’s much lower cost of living.

However, there has recently been a shortage of foreign labour in Malaysia, causing some to question how all these projects will get built – and causing some sector leaders to call for immigration changes to address this issue.

Foreseeing such an industry-wide labour shortage on the horizon, the MBAM appealed on January 20 to the Home Ministry to lift a temporary suspension of workers’ quota applications.

MBAM’s Kwan said the ministry has not allocated a new foreign workers’ quota, which means contractors have been unable to secure enough workers for their projects.

“The construction industry is facing a severe shortage of manpower resources as too many construction companies in Malaysia are competing for a limited supply of talent,” Kwan said in a statement. He added that the shortage of foreign workers could undermine the many construction projects planned under the 10th Malaysia Plan and the Economic Transformation Programme.

“We face a shortage in terms of volume and quality of skilled workers, technicians and supervisors,” said Kwan, adding that he hopes the government will relax the policy involving the entry of new foreign construction workers.

With the bulk of the country’s economic performance for the year hanging in the balance, the Home Office will likely be under increasing pressure to act quickly on the quota issue. However, with elections widely expected in March, the hot-button issue may well be one that is not easily solved. Meanwhile, builders and investors on both sides of the Straits of Johor will no doubt be eager to break ground on the many contracts that have now been signed.

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