Iskandar Malaysia - Going Down?

Iskandar Malaysia is Only Going One Way – Down

By Guest Contributor . 29 January 2015 . Guest Post, Money Management

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Just like the California Gold Rush of 1849, investors, both local and foreign have been flocking in droves in the past three years to the region of Iskandar Malaysia to purchase property. Now, the party is over and the fat lady is clearing her throat.

In the past three years, it seemed like nothing could stop the Iskandar train. Malaysia’s richest man Robert Kuok, Australian billionaire Lang Walker, Valencia’s adopted son Peter Lim, and a host of other big players had invested huge sums of money in the region.

Kuok had purchased RM198.72 million worth of land last year for a mixed-development project. Walker had bet more than RM2.68 billion on Iskandar Malaysia to become a boomtown, constructing the “largest master-planned urban project ever undertaken in Southeast Asia”. As for Lim, his considerable influence can be felt everywhere in the area that’s roughly three times the size of its neighbour, Singapore. The businessman has his fingers in many Iskandar Malaysia-baked pies, including a premium security business, a medical hub, and the motorsports city.

It’s no wonder that many investors, especially from Singapore, have made a play in the region in the past half a decade, snapping up properties the moment they become available, eagerly anticipating the welcome flood of talents looking for a job and a place to stay. Unfortunately though, the supposed flood is turning out to be a trickle and the weather forecast is only promising more doom and gloom in the near future.

Too many investors, too few inhabitants

When you drive around Iskandar Malaysia, it’s not uncommon to see swathes of empty apartments with no one living inside. Therein lies perhaps the main issue with the region – the lack of a critical mass of people, especially locals, staying in the area.

In the beginning, the majority of property purchases were made by foreigners, particularly Singaporeans, who were seduced by the attractive price tags. After all, they are used to paying princely six-figure sums for a shoebox, so owning a house a few times bigger than their HDB flats for a cheaper price is incredibly enticing.

Unfortunately, the property cooling measures announced in Malaysia’s Budget 2014 have thrown a spanner in the plans of many of these potential investors. Since the beginning of the year, foreigners can only purchase property worth at least RM1 million, have to pay more in Real Property Gains Tax (RPGT), and must contend with a 2% property levy. These moves have whittled the number of potential property investors in Iskandar.

Couple this with the glut of housing development projects being launched by big Chinese developers such as Country Garden and Guangzhou R&F and you’re looking at the classic problem of unchecked growth – supply outrunning demand.

It’s a problem occurring not just in Iskandar but all across Malaysia. A 2014 Property Industry Survey conducted in the first half of this year by the Real Estate and Housing Developers’ Association Malaysia makes for depressing reading.

• Less than half of the 10,189 units launched in the first half this year were sold
• 90% of developers in Malaysia experienced a slowdown in property sales
• More than half of local buyers had problems getting financing for property purchases

If Malaysians already have issues trying to buy homes that cost below RM1 million, it’s even less likely that they would be able to afford the high-end properties in Iskandar. At the moment, the resale market is practically non-existent.

In Iskandar, purchase bookings have been reportedly down at least 20% and the outlook for 2015 is just as pessimistic.

Too many empty houses, too few businesses

A thriving business and social hub requires a careful mix of houses and businesses. The equation seems simple on paper – investments create jobs, jobs attract workers, workers need a place to stay. Reality, however, is far more complicated and the master planners and authorities in Iskandar are only starting to realise how difficult it can be.

A disproportionate amount of investments has been poured into housing while forays into businesses have been lagging behind. The only industry keeping pace so far is manufacturing. With many housing projects set to be complete in the next few years, analysts are wondering whether there will be enough rental demand from incoming workers to fill up these completed homes. If there aren’t, current property owners will be fighting over scraps and it’s a race to the bottom of the barrel.

What makes the situation difficult to read is the lack of transparency from the Iskandar Regional Development Authority (IRDA), who only releases quarterly figures on monetary investment but not job creation or population growth. The only projection is that Iskandar Malaysia is estimated to have 3.17 million people by 2025, of which 66% is of working age.

The rest is anyone’s guess.

Too little information, too many possible vagaries

Former Minister Mentor Lee Kuan Yew said in his book One Man’s View of the World, “Let’s wait and see how Iskandar develops. This is an economic field of cooperation in which, you must remember, we are putting investments on Malaysian soil. And at the stroke of a pen, they can take it over.”

His words are beginning to ring true, with the new property measures instituted this year. Previously, property developers were rolling out the red carpet for buyers – Country Garden even chartered several buses to bring hundreds of interested investors to the carnival launch of their new properties. Today, the party atmosphere is gone.

The business dealings in the Iskandar region, notably the sale of 116 acres of prime land to Chinese developers Guangzhou R&F for RM4.5 billion, have also ruffled a few feathers. Smaller local developers are being squeezed out of the market thanks to a new bill that gave the monarch sweeping executive powers and sentiments on the ground have been unfavourable of late.

One of the biggest developers in Malaysia, UEM Sunrise, is already reconsidering its business holdings in Iskandar and the company’s CEO has mentioned that it will “reduce its dependency on Iskandar, where it has approximately 60% of its total land bank”.

The suspension of Forest City, a mixed-use development on four reclaimed lands, since the middle of this year has also been a big blow.

Rocky politics, lack of comprehensive information, and more pull-outs from big players will only further shake investor confidence, evidenced by the slowdown of growth in the Iskandar region.

Is Iskandar too big to fail?

There is one thing going for Iskandar – the RM150 billion worth of investments from influential people in the region, which is a huge sum of money to just go to waste.

The Kuala Lumpur-Singapore High Speed Rail project, slated to be completed by 2020, might also be a catalyst for growth in Iskandar since one of the proposed stops is in Nusajaya, which is within the Iskandar Malaysia region. That, however, is far off into the future.

If you’re thinking about buying a house in Iskandar to stay in during the weekends and the holidays, you have a wealth of places to choose from right now. However, if you’re considering investing in Iskandar Malaysia, do so with caution, due diligence, and with an exit strategy, if any, that is at least two decades down the road. The train is definitely slowing down. Whether it’s permanently stopping remains to be seen.

DrWealth is ASEAN’s leading site on personal finance, offering you free mobile and desktop software to help you track, model, and plan all your finances as well as robust and well-researched articles on all areas of personal finance. Start your financial journey with us!

Sources: The Straits Times, Property Guru, MyPaper, The Star

Human Nature, Not China That Causes Volatility

Nobel Laureate Robert Shiller says human nature, not China, explains market volatility

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BY ROBERT SHILLER  August 25, 2015 at 3:41 PM EDT

We asked Nobel Laureate Robert Shiller to help make sense of the U.S.’s volatile stock market. Photo by Spencer Platt/Getty Images

Editor’s Note: U.S. stocks rallied today after a turbulent week. The Dow Jones Industrial Average fell more than 1,000 points, before recovering briefly and eventually settling at a loss of 588 points for the day. On Friday, the Dow had lost 531 points.

We asked Nobel Laureate Robert Shiller to help make sense of the U.S.’s volatile stock market. While a number of economists and investors point to China’s slowing economy to explain the volatility, Shiller does not. What we saw, he argues, was the bursting of a speculative bubble.

Shiller, a Sterling Professor of Economics at Yale University, predicted the most recent housing bubble burst and developed the CAPE Index, which measures the price of a stock to its earnings over a 10-year period. Shiller has written widely on financial markets, macroeconomics and behavioral economics, most recently in his new book “Phishing for Phools.”

— Kristen Doerer, Making Sen$e Editor

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What happened to U.S. stocks in the past week?

I would say that we saw the bursting of a speculative bubble, as it has been defined in much discourse and which has happened many times in history. But one must remember that the word “bubble,” if taken as a metaphor, can be misleading. A speculative bubble does not burst irrevocably or all at once as a soap bubble does. It may go on in a number of steps down, interrupted by upswings. I would say that a speculative bubble rises upon investor enthusiasm, and when it becomes too big, many people begin to have their doubts and contemplate selling, but don’t have clarity enough to actually do it. But when they see the market dropping, they begin to fear that others have the same doubts, and so many of them hurry up, trying to sell before the others do. So, the downswing can be surprisingly fast, recalling the bursting of a bubble, even if it is not quite as sudden as that.

Is this a reaction to what’s happening in China? If so, why?

I cannot imagine the news from China could provide a rational explanation for the drop in world markets. The news from China is too subtle, not that dramatic and sudden. But the story has been put forth by the news media as if it were suddenly extremely important, as part of a general pattern of news media and investor advice hype. In our new book “Phishing for Phools: The Economics of Manipulation and Deception,” George Akerlof and I use the word phishing more broadly than usual to describe such behavior. A phool is someone, who may be highly intelligent, but who does not see that he or she is a phish. A lot of people who bid up stock prices to such high levels were phools.

For those of our readers who don’t know your CAPE Index, can you explain what it measures and its importance?

CAPE stands for Cyclically-Adjusted Price-Earnings. It is a modification of the traditional price-earnings ratio to smooth out the cyclical or irregular jumps in earnings that occur from time to time. My colleague John Campbell of Harvard University and I developed it in the late 1980s, after we discovered that it really does help forecast long-term returns on investments, if not short term. We found that when CAPE was high, stock market investments don’t do well over the next 10 years or so.

What was you CAPE index today, and what does that number suggest? Are we seeing the deflation of a bubble?

In July, the CAPE index stood at 27, higher than at any time around 1929, 2000 and 2007. As of Monday, August 24, the CAPE ratio stood at 24. That is still quite high by historical standards. The average CAPE from the years 1881 to 2014 was only 17. This means that the stock market is still pricing quite high and likely to disappoint long-term investors, even if we cannot say what it will do tomorrow or next week.

What would you tell everyday investors who are suddenly seeing their life savings fall?

It is an occasion to look over their portfolio carefully, to see that it is properly diversified. If the portfolio is heavily into stocks, this might be the time when one has the emotional energy to take a careful look at it and maybe adjust the exposure down. I believe that it is important even for investors with only modest portfolios to seek out the help of a financial adviser. I would ask friends to recommend an adviser, who have had experience with someone who is trustworthy. In one’s portfolio there may be subtleties, and not just about speculative bubbles, including as well such things as taxes or retirement or estate planning that one can easily miss.

Is there any way to tell what will happen next?

The future is always uncertain. No one can forecast what will happen to the stock market tomorrow.

Is there anything else that you think we should be paying attention to or should know?

I have since 1989 been calculating a Stock Market Valuation Confidence Index that you can find on the Yale School of Management website.

I ask participants in my surveys, both individual and institutional investors, whether they think that the stock market is too low, too high or about right. The confidence index is the six-month average of the percent of them who do not think it is too high. As of last month, the index is at its lowest since around the time of the big 2000 to 2003 stock market crash. So, we can see that people indeed have been extremely doubtful lately about the market. It is only just now that many of them are selling. Why did they continue to hold if they were so doubtful? That must have something to do with human psychology and human nature. Most of us postpone considering difficult decisions until we think there is a sudden emergency.

Bear Market Beckons!

while I cannot foresee a global recession next year, events in the last week indicated so. Emerging market and Asia x Japan indices have broken below my key support levels. So did Europe. It indicates that we could see a further 25-40% decline. I have reduced my equity exposure from 55% to 35% in the last few days and I will further reduce it to 20% within a week. I cannot afford to see my hard work of making 20% over1.5 years turn into a loss.

Worrying Signs For Emerging Markets Equities

Asian Crisis Part 2 Coming?

In the last three months, the nascent recovery of emerging market equities, namely Russia, China and Brazil has been smashed to smithereens. Commodity exporting countries like Malaysia, Indonesia, Brazil, Russia, Australia are hit by China's steep slowdown. China is wobbling on the back of mounting bad debts, property bubble and now stock bubble bursting. The Chinese economy is built on the back of infrastructure and government spending. I believe many projects in China incurred debt costs of 8 - 12% p.a. while the return on investment is around 4 - 8%. This means that the Chinese banks will definitely wobble under the weight of mounting NPLs.

A strengthening USD or CNY devaluation will trigger another round of devaluation of emerging currencies vs the USD. Many emerging countries' corporates that issued USD denominated debts to enjoy cheaper rates could face distress. 

State of the Stock Markets

My asset allocation is now down to 55% stocks, 45% bonds / cash. I am not adding too much risk even with this correction because there are few signs of a strong recovery. One particular data that troubled me was that revenue from US and EU listed companies have fallen yoy by 6%. This is an ominous sign that earnings may fall in future.

My model shows no more than 6.6% return for global stocks for the next 12 months. I can easily achieve this by buying a high yield bond. The S&P500 is a sell, with -0.3% expected return in a year.

European equities are expected to return 6.8%, slightly better than the US due to lower valuations.

Asia x Japan and Emerging Markets have between 11 and 12% return. But the technicals are a nightmare. So I'm staying out for now.

HSCEI is a BUY with 18% return but the technical trends have turned south. So I'm maintaining just a small weight.

Indian equities I have downgraded to NEUTRAL. it has been a great bet. I made 8.8% return but I decided to cut by half.

Brazil is a SELL because ROE has plunged. Russia is a BUY with 15.9% return but the technicals are are bad.

Japanese equities are a STRONG BUY. Average valuations but strong growth.

Mining and energy are SELL. ROE plunged.

I'm still very cautious on Shanghai. I'm at NEUTRAL. While I'm definitely bearish on Shenzhen due to valuation concerns.

Finally, I've downgraded Tech from STRONG BUY to NEUTRAL. I have cut my Henderson Global Tech by half. I made 20% in 8 months. 

Why Not More People Are Wealthy

My wife and I own six properties. This excludes other real estate related investments like private equity, co-ownership of land and investments in hotel rooms.

As we progress, we can understand why many people do not own more than three properties. Here are the reasons:

1. Property investments require lots of administrative work. We are looking for tenants for two of our places in London. The void periods are usually around a month but they can be stressful periods. The solution is to find good managing agents when you own properties abroad.

2. Never ending negotiations with banks. Because we leverage on our properties, we have to constantly fill in forms, talk to bankers to refinance our properties.

3. Negotiations with tenants directly. The ones we own in Singapore, we negotiate with our tenants directly, which means we have to chase them, motivate them to pay rent on time.

4. Lack of knowledge. It is not easy finding properties that outperform the general market. We tend NOT to buy prime properties, because the yields are too low and we could be in cashflow trouble. We look for up and coming areas so that the rental yields will at least give us neutral cashflow after paying our mortgages.

But the rewards are plentiful. We are sitting on around SGD5m of assets and around SGD2m of equity just on real estate alone. Including other financial assets, our combined networth is around SGD3 - 4m. The power of leverage allows an asset that appreciates by 4 - 5% yearly to magnify into 25 - 35% IRR after gearing. We practically double our money every two to three years.

Our next challenge is now to increase our cashflow. We can do it through cashflow from operations, where we increase our rents gradually. We can also do it through CF Financing. We can take some money out from our equity. This can be recurring. I must say that the UK and Australia are more investor friendly than Singapore though.

Investing and succeeding as a property investor is not easy. Holding down full time jobs, our property investments are like our third job. Eventually one of us has to quit our full time jobs to do this. After another three to five years, we will be free, God willing.

You see, rewards of investing goes to those who persist and work hard. 

Where To Next?

I've completed my 5th acquisition. I've achieved around 10 - 15% returns per year from stocks, unit trusts and bonds for last 2 years. What do I do next?

Global stock market returns are not going to be great. I calculate only 3% upside next 12 months. Valuations are slightly above median because of the US. Earnings growth are slowing down. Yield curves in many countries are inflated or flat, indicating very slow economic growth ahead.

So what do I do next?

Well, in terms of stock investment cycle we are probably almost on the 70 - 80th minute of a soccer game. Early 2017 is where I foresee the economy goes into a recession or a drastic slowdown. Some bubbles may pop, especially real estate in Asia.

I won't be making any more investments in real estate until the US starts to hike rates several times. The UK will probably start to hike in Dec 15 or early 16. UK properties is one to be careful of now because:

1. Supply coming on stream from 2018 onwards. I expect equilibrium of London demand supply from that year onward, assuming all that the government promised, of speeding up the approval process for new permits come true.

2. Removal of mortgage interest tax deductions from 2020 onward. This will cause professional landlords, those with more than 10 properties think twice about expanding their portfolio. They will either need to park their properties in a company or slowly sell down their portfolio. If they park their real estate in a company, they may continue to enjoy the tax shelter, but upon selling the property, they will be taxed 50% of capital gains vs 28% of the increase from Apr 15 if parked under personal names. The tax will kick in before the shareholders can dividend back the profits. The other way is to sell the company but not the property. But capital gains might be taxed at 28%, which is the same as if held under individual names. However, the potential buyers of companies which hold properties shrink drastically. It may affect the resale value, which will culminate as a form of tax any way.

3. Gradual rate hikes will affect profitability of Buy To Let business.

Residential property investments is slowly being curbed in countries where citizens complain of lack of affordability. I've just mentioned the curbs on UK properties. Australian investors have to contend with ARPA. Singapore investors have plenty of stamp duties and TDSR to contend with.

Perhaps the best option is to go for commercial properties but that has its own risk as well. Unless we buy shops for F&B businesses, or have supermarkets or banks as tenants, demand for retail space is falling due to the internet retailing taking away traditional businesses.

Industrial and office properties are even more difficult. Offices are very sensitive to economic cycles. In a recession, many companies can be dissolved. Rents can plummet by 20 - 50%. Industrial property tenants are very price sensitive and can easily move their goods to another cheaper premise.

I may think of storage spaces or serviced apartments as well.

The next 10 years, in order to make money from real estate, will require a lo of creativity because technology will cause a lot of disruptions.