Malaysia: Malaysia

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

Malaysia is spread across the South China Sea, occupying a peninsula bordering Thailand and a third of the Island of Borneo. The area is one of the most beautiful corners of the world, famous for palm fringed white beaches, gentle seas and rainforest. To this cultural and geographical vibrancy Malaysia adds flourishing financial and high-tech industries based in Kuala Lumpur. Popularly known as KL, Malaysia’s capital has a modern cityscape which compares with any financial centre in the region. With annual population growth of 1.8% Kuala Lumpur is growing fast. Seven out of every one hundred people in the capital are ex-pats, a testament to the economic strength of the city.The investment opportunities in KL mean that most property buyers look here first, often beginning in the prestigious ‘KLCC,’ the popular acronym for Kuala Lumpur City Centre. Otherwise, investment opportunities also exist in Malacca, Penang and Langkawi. Prices are highest in Kuala Lumpur, but rental yields generally sit at around 8% in most locations.

Is this a good place to buy?

Overseas investment in the property market concentrates on Kuala Lumpur with a secondary market in the resorts and islands. These areas are popular with people retiring to Malaysia under the “Malaysia, My Second Home” programme. Local consultants CH Williams Talbot and Wong say that the market is ‘highly energised’. Forecasts for 2005 and 2006 are optimistic, as the past year has seen completion of a number of sophisticated projects, but demand continues to significantly outstrip supply. The international research department at Knight Frank also believe that ‘the market benefits from good infrastructure and an improved regulatory environment, which should help Kuala Lumpur avoid an availability surplus.’ Demand has also been promoted by a flourishing tourist industry. 2005 saw the highest ever number of arrivals, with demand more than 10% higher than in 2004.

Two trends are discernable: firstly, there is a concentration on affordable luxury properties with the numbers of gated housing projects and non-landed luxury units increasing. Secondly, there is growing demand for serviced apartments, particularly in central locations. Sales of serviced apartments climbed by nearly 40% in 2003 and 2004.

The demand is attributable to the large numbers of professionals who relocate to the city every year. Relocation can be permanent, but more commonly people will be relocated for between 3 and 6 months, making serviced apartments the ideal solution for their companies.

Price History

During the 1990’s Malaysia was one of the leading Asian Economic Tigers, with a booming economy and a real estate market to match. Prices in KL rose rapidly, and new commercial and residential real estate projects sprang up across the city.

In 1997, the Malaysian economy, along with the rest of South East Asia crashed due to the Asian Economic Crisis which ignited as speculators caused regional currencies to fall though the floor. Every aspect of the Malay economy was affected, including the real estate market. The buoyancy of the market in previous years had led to many developers undertaking vast, ambitious projects. As the economy cooled, many developers went bankrupt leaving half completed buildings. Large amounts of completed stock also helped maintain a glut through oversupply.

In the years since 1997 Malaysia has recovered, faring better than many of its neighbours. By the early noughties demand for real estate in KL had begun to catch up with supply and prices have been rising steadily ever since. Even with these rises, prices in central KL remain as much as 30% below their 1997 highs. Sales in 2004 were healthy, with prices in KL up 13.1% year-on-year. The average price increase across Malaysia was 5.7%. Double figure increases were also registered in Terengani, Sabah, Perlin, Pelang and Kadah.

Despite the increases, Malaysian property has a proven track record at higher prices. Today the economy is more stable and more open, meaning that higher prices are likely to be far more sustainable than in the 1990’s. All this suggests that property in Malaysia represents a good bet.

Which type of property should you go for?

The best long term opportunities lie in the buy-to-let market of KL, particularly with high end or serviced apartments. The rise of Malaysia as a tourist destination has also awoken the resort markets in Langkawi and Penang. In these locations, luxury property can seem very cheap and the year round climate means that annual rental yields from short term holiday lets can be very attractive.

Buyers this market will appeal to

Malaysia provides relatively low cost access to a leading regional capital and world class tourist resorts. Long term investors should do well in KL in terms of capital appreciation whilst generating attractive yields. Malaysia also presents a great opportunity for expats due to the government’s “Malaysia, My Second Home” scheme which encourages foreign people to settle in Malaysia.

Hotspots

Malaysia’s main hotspot is its capital KL and particularly KLCC. Other opportunities exist in Penang and Langkawi with increasing opportunities in the regional centres surrounding KL.

Key Risks and Opportunities

The previous risks in the Malay economy have now been overcome and significant advances have been made in making the market more transparent. As always, Malaysia remains open to regional shocks as seen by the impact of bird flu and SARS in other parts of the region. However, the Malay economy is now important enough, especially in regards to trade with China, to survive all but the most damaging economic shock.

Properties in this part of the tropics can degrade quickly so it is important to employ a good property management company or to buy in a complex where these issues are taken care of.

The main opportunity lies in the recovery of the market to its 1997 highs and the further development of the economy and tourist market which should both impact positively on property prices.

Purchase Process

The purchase process in Malaysia will be relatively familiar to UK buyers as much of the legal system is based upon UK law. Non residents have the right to own property and even apartments are sold on a form of freehold known as strata title.

Upon completion of a new build project and obtaining the Certificate of Fitness (CFO) for the buildings, the developer is required by law to put in the application for strata title for each of the units. Upon issuance of the strata title, the title will be transferred and registered under the purchaser’s name as the registered owner of the property. This document of title is the evidence of ownership and will be the instrument for any subsequent and further dealings.

Residency visas are not provided with purchase of property in Malaysia, however there is a Malaysian Government plan for foreigners who wish to stay in Malaysia known as the Malaysia, My Second Home programme. This programme essentially permits a purchaser long-term stay in Malaysia for 5 years with a multiple entry visa. A number of other benefits are available to successful applicants.

All foreign nationals need to have their purchase approved by the Foreign Investment Committee (FIC) unless they have already been approved under Malaysia, My Second Home. This application is a simple formality and the solicitors handling your purchase will attend to this process on your behalf. For more information, you may wish to visit: www.epu.jpm.my under the heading FIC, specifically the section on FIC Guidelines – The Acquisition Of Properties By Local And Foreign Interests (http://www.epu.jpm.my/new%20folder/fic/GP – Properties.pdf)

Purchase costs will vary between approximately 2% and 4% of the property price. Specifically, the costs are as follows;

Legal Fees on signing of a sales and purchase agreement and Deed of Covenants;
-- 1st RM100,000 @ 1% of purchase price
-- thereafter at 0.5% of purchase price.

Legal Fees on FIC Application: RM200.

Legal Fees for application of State Consent: RM200.

Disbursements: RM650.

Stamp duty on Transfer of Title
-- 1st RM100,000 @ 1%,
-- RM101,000 – RM500,000 @ 2%; and
-- RM501,000 onwards @ 3%.

Capital gains tax is charged in Malaysia on a taper relief basis as follows

30% on disposal within 2 years

20% on disposal within 3rd year

15% on disposal within 4th year

5% on disposal within 5th year

0% after 5 years

The system is set up this way to deter short term speculators.

Income tax is a flat 28%. One more local tax which you should be aware of that is based on the rental income is the assessment and quit rent to be payable by the purchaser calculated as 12% on the rental income.

Repatriation of funds is not a problem; but buyers do need to disclose the source of the funds (from the sale of the property). All purchasers taking a mortgage loan in Malaysia will have a bank account opened for them in Malaysia, and all other investors will be permitted to open up a bank account. There is a 10% flat tax on repatriation of investments.

Finance is available to non-residents in Malaysia at up to 85% loan to value.

Opportunity rating

Prices in Malaysia remain significantly below their peak in the late 1990s and there is every reason to expect that with the current level of economic performance they should once again achieve these heights. Malaysia’s emerging position in the world of tourism should fuel demand, especially in the island and coastal resorts such as Langkawi and Penang.

Rating: $ $ $

Risk rating

There are no major political or social risks in Malaysia, although price growth is very dependant upon economic performance, which remains closely tied to trade with China.

Rating: * *

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in Supplied by ...

“Where to buy a property abroad – An investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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