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Cheap Malaysian Property Riddled With Risks, as Singapore Investors Find Out

Bianca Mascarenhas|CNBC Asia-Pacific
Monday, 16 Jul 2012 | 11:09 PM ET

Singaporean Deepak Gurnani has spent the past couple of years trying to recover an investment gone wrong in Malaysia. The 51-year-old businessman spent $66,000 on a property in the popular beach destination Port Dickson, Malaysia in 1993. It functioned as a fuss-free home away from home until two years ago, when the developer defaulted on the payment of the property’s maintenance fees.

Malaysia skyline
Getty Images
Malaysia skyline

“This resulted in Coco Bay Condominium’s Management chasing us for recovery,” says Gurnani, who now pays RM400 ($126) every quarter as maintenance and another RM150 for water, quit rent and property tax every quarter. All expenses considered, Gurnani has lost an estimated $150,000 and is expected to salvage only $30,000 of the holding cost, if he is lucky.

Gurnani is one of a rising number of Singaporeans who have been burnt investing in real estate in Malaysia. In a recently reported case, 129 disgruntled investors, which included some Singaporeans, of Nexus Residence – a luxury development in Sabah – took local developer Karambunai Corp into arbitration for not paying almost one year in arrears on its “lease back” rental payments due to them.

Faced with skyrocketing property prices in Singapore, property investors have turned to Malaysia’s real estate for opportunities in recent years.

Singapore’s property prices have surged to an all-time high in 2011, according to the Private Property Index compiled by Urban Redevelopment Authority, the local body that governs land planning. The average price of a luxury property in Singapore was valued around US$2,518 per sq. foot, according to the 2011 Wealth Report , published by property consultant Knightfrank. This makes properties in Malaysia approximately five to six times cheaper in comparison.

The rising value of the Singapore dollar, which currently exchanges for about 2.5 Malaysian ringgits, also means that Singaporeans get more bang for their buck. The Singapore dollar has risen almost three percent against Malaysia’s currency since the start of the year.

“There has been an increase in Singaporeans investing in Malaysian property over the past 5 years due to high property prices in Singapore and the favorable exchange rate,” says Khalil Adis, Singapore Editor for Property Report.

According to the Southeast Asia property website www.property-report.com, China, Singapore, Japan and South Korea are said to be the biggest foreign investors in the Malaysian property market, with Singaporeans the biggest buyers in the state of Nusajaya, Johor, just across the border.

Government incentives also help explain a trend in the rising number of Singaporeans buying Malaysian property. According to Eric Chan, Deputy Managing Director of property developer Eastern & Oriental Berhad, the government’s “Malaysia My Second Home (MM2H) program” that grants foreigners easy entry via a renewable Social Visit Pass, with a multiple-entry visa that is valid for 10 years, has made Malaysian property attractive to Singapore investors.

“Added to this mix is Malaysia’s friendly lending terms, which are also extended to foreigners and if conditions are met, margins of financing can be as high as 90 percent,” Chan said.

Despite the incentives, risks remain for those property investors who do not carry out enough research before investing in Malaysian property, analysts say.

They add that a lack of transparency in the Malaysian real estate market is one of the key risks faced by foreign investors. According to the 2012 Global Real Estate Transparency Index, a proprietary Jones Lang LaSalle survey, Malaysia ranks 23rd on the index, ten spots lower than Singapore.

The index ranks countries in terms of the ease of comparison of occupancy costs, the ability to provide more options for strategic action (such as the execution of sale and leasebacks) and the efficiency of transactions.

News that the Malaysia government is contemplating raising the minimum property purchase price for foreign investors from RM500, 000 to RM1 million, in the lead up to elections next year, could also be a risk factor, analysts say. The move may win over voters, especially by young middle-class Malaysians who have been burdened by fast rising home prices, but could reduce the lure of Malaysia as a venue for affordable property market.

Location, Reputation Are Key

What seems to determine successful investment in Malaysian property as such largely revolves around the location and the credibility of the developer, experts say.

“A reputable developer and good location is the mantra in property investment and it is no different in Malaysia. Research therefore, is imperative in buying a property,” Chan, said.

For projects where these criteria are met, it is not uncommon for purchasers to enjoy capital appreciation of close to 30 percent upon completion, he added.

Kuala Lumpur (KL), Penang and Iskandar, which is part of the southern state of Johor, rank among the top hot locations for investment in Malaysia for foreign investors.

Locations like Malacca, on the other hand, are likely to see very low returns on their investment. David Neubronner, Head of Residential Project Sales, of Jones Lang LaSalle told CNBC that “KL being the capital city and key business center would have a much wider appeal, more potential and possibly better returns on investments in the medium to long term.”

On the other hand, Malacca is a historical town and appeals more to locals. “The type of options and opportunities are also more restrictive and I suspect much of the buying interest is hinged more on sentiments than investment,” said Neubronner.

Local investors looking to invest in Malaysian property need to tread more carefully, says Gurnani.

He says that living in Singapore tends to give investors a false sense of security and makes them more prone to invest without thinking about the particular risks involved in overseas property markets.

“Malaysia is one place where I will never put money again,” he said

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