Property developers face glut in Malaysia’s Iskandar

Property projects are mushrooming along Malaysia’s shoreline facing Singapore in rather the same way that Shenzhen once took shape along mainland China’s shoreline facing Hong Kong. Indeed, the dynamic driving the Malaysian boom is similar to that which animated Shenzhen: surging costs in the successful city-state are driving factories, offices and residents to relocate to cheaper precincts over the border.

But the idea that the Malaysian developments in Iskandar would satisfy a huge demand for a Singaporean overspill is being tested to its limits. Residential developers — especially those from China — have built too many condominiums too quickly, stoking fears of a glut.

The latest warning came from Lawrence Wong, a board member at the Monetary Authority of Singapore, who said this month there were 336,000 private residential units in the pipeline in the Iskandar development zone of southern Johor, just across from Singapore. This, he said, was more than the total number of private homes in Singapore and would depress prices.

Mr Wong chose to cite a long-term forecast for the number of planned units, but even more modest estimates of units set to be completed in the next three years suggest that limited demand may be stretched. In two developments alone, Danga Bay and Nusajaya, at least 27,000 units are due to be finished by 2018, according to estimates by Asean Confidential, an FT research service.

This compares with an official figure of 38,000 units under construction in the Johor Bahru region — which includes Danga Bay and Nusajaya — while another 48,000 units are planned, according to the National Property Information Centre.

The problem for developers is that sales are already wilting. Country Garden, a giant property developer from China, is building 45 condominium towers offering a total of 9,500 units on the Danga Bay waterfront overlooking Singapore, to be completed by 2017. But the number booked or sold has stalled at around two-thirds since October 2013, when construction began.

The company is trying hard to push sales to Singaporeans, carrying busloads of potential buyers to its site every weekend. But Singaporeans are taking a more cautious view of Iskandar properties amid warnings of a glut and signs of a slowdown in the city-state’s own market.

Another Chinese developer, Guangzhou R&F Properties, has sold only about half of the 1,400 units in the first phase of its Iskandar development. Greenland Group, another Chinese developer, has a further 2,000 units coming on stream, adding to market pressures as unit prices rise close to those in Kuala Lumpur, the Malaysian capital.

Exacerbating concerns about oversupply are tightening regulations on foreign ownership. In late 2013, the government doubled the minimum price at which properties may be sold to foreigners to 1m ringgit ($278,000). A year later, the Johor state government doubled the minimum again for “landed” properties such as houses and bungalows to 2m ringgit, although the minimum for foreigners buying high rise flats and condos stayed at 1m ringgit.

Other measures included an increase in the tax on capital gains from real estate. Additionally, the central bank raised interest rates in July 2014 for the first time in three years on concerns that household debt, which stood at 88 per cent of GDP by the end of last year, was rising out of control.

The combined effect was a slowdown in house price rises nationwide, especially sharp in Johor state (see chart).

Several local developers are scaling back their ambitions. Tropicana, for example, initially planned to build 3,000 units in three phases. It has sold out its 1,100-unit first phase launched back in 2011, but is considering the idea of building a hospital and office tower for its third phase instead of more condos and another mall. Brunfield, another local developer, scrapped its Danga Bay 1,400-unit condo project altogether last year.

But Country Garden is still gung-ho on its plan to reclaim 1,386 hectares of land to build what it calls Forest City in partnership with the sultan of Johor, featuring man-made islands and a football stadium. The project was scaled back by Malaysia’s environment department and has sparked opposition from Singapore, although cross-strait protests at land reclamation by both sides are not uncommon.

Forest City is a long-term project that will not start any time soon. And, so far, Iskandar is no Dubai. But driving along the coast past one developer’s showroom after another, it is hard not to feel that prices have outpaced demand.