The Far Eastern Economic Review
Issue cover-dated 24th May 2001

Malaysia Eases Up, But No Takers

By Lorien Holland

EDDY CHEN HAS AN UNENVIABLE mission--to drum up international buyers for Malaysia's oversupplied real-estate market. As president of the Real Estate and Housing Developers' Association Malaysia, he is organizing a regional roadshow to highlight his government's recent abolition of many restrictions on property purchases by foreigners, and to encourage new buyers.

The roadshow is planned for Singapore, Brunei, Indonesia and probably Hong Kong. However, don't expect a stampede into the market. Malaysia relaxed its purchasing policies at the end of April to chip away at the glut of unsold apartments, offices and retail space collectively valued at 10% of GDP at the end of 2000. But even with the accompanying list of sweeteners, which includes local mortgages for foreigners and an end to enforced Malay equity in valuable projects, significant risks remain for foreign investors.

First and foremost, fears that Malaysia might be forced to devalue its currency are still bright on the radar screen. Second, Kuala Lumpur's past policy flip-flops on property purchases by foreigners, including a retroactive 100,000 ringgit ($26,315) sales tax introduced temporarily in 1995, make many nervous that the same could happen again. And then there is the fact that property in Malaysia is still a lot more expensive than in neighbouring Thailand and Indonesia, and the chance of fire-sale prices is remote.

"The government is now very keen to be receptive to foreign purchasers," says Chen. "In the past, with all their policy changes and so on, they gave the impression of not being very keen, but that has changed." The reason for the change is that Malaysia, with its export-driven economy, is feeling the pinch from the economic downturn in the United States. It needs foreign capital. Property sales are one way to achieve this--especially when the value of the country's property overhang was close to 30 billion ringgit at the end of last year.

Under the new relaxation, the government's Foreign Investment Committee no longer has to give approval for deals worth less than 20 million ringgit. Previously, approval was required, and the lengthy 6-8 week process put off many potential buyers.

ONCE BITTEN, TWICE SHY

Standard conditions attached to such FIC approvals nearly always included a requirement that the purchaser set up a locally incorporated company with 30% Malay equity ownership. Now, any property purchases above a minimum of 250,000 ringgit and below 20 million ringgit are unfettered, and this includes residential, office and manufacturing space. The changes also loosen restrictions on sales involving Malaysian nationals who are not ethnic Malays.

Along with a separate initiative to waive stamp duty for property bought directly from developers, the measures should bring new property sales this year to around 4 billion ringgit, according to Deputy Finance Minister Chan Kong Choy.

However, the Kuala Lumpur stockmarket was less than impressed with the incentives. Its property index fell by nearly 2% when the measures were announced. Analysts say that foreigners make up less than 2% of the property market and that attracting more investors will be an uphill battle, given uncertainty about the ringgit's peg. Many Singaporeans--once the most enthusiastic investors in Malaysia--had their fingers burned during the policy changes of the mid-1990s, and are not likely to be lured back easily.

In addition, Malaysia's bad loans agency, Danaharta, has not followed the "short, sharp shock" approach to debt recovery and is trying to maintain the value of the property market while slowly addressing the debts incurred during the Asian financial crisis. That creates a stagnant market.

"There really are no bargains here. Prices have stayed up high because no one is being forced to sell, and that means there has just been a dearth of transactions," says an analyst with a foreign bank.

But for Eddy Chen, the main issue is one of long-term credibility. "From what I gather from my discussions with government officials, we've learnt our lesson. It's best to keep policies constant and transparent. Then we can project to foreign purchasers that these policies are here to stay," he says.

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