A raft of measures unveiled recently to cool Malaysia’s booming housing market will likely prompt investors to buy into commercial properties and other assets for better returns in the Southeast Asian country.
Housing prices in Malaysia began accelerating in 2010 and rose nearly 12% in 2012, almost double the rate of increase in 2000, according to official data from National Property Information Center, also known as NAPIC. The spike in price was in part fueled by a rush of foreign capital from advanced economies as low interest back home dimmed prospects of higher returns. Steady economic growth, a stable political system and the rising income level of a growing middle-class population raised Malaysia’s appeal as a favored investment destination.
In response to rising housing costs–in part due to speculative investments–the government has raised taxes on property sales, while the central bank stepped in to temper a growth in mortgages. Last month, Malaysia stepped up its efforts and raised the real property gains tax to 30% for sales of assets within the first three years of purchase, up from 15% within the first two years previously. The government is also raising the minimum price of property that can be purchased by foreigners to 1 million ringgit ($311,200) from 500,000 ringgit. Both measures will take effect at the beginning of 2014.
For now, the impact of the measures on home prices is unclear. Analysts and real estate agents say the measures are likely to slow the rise in value.
“We believe the set of cooling measures will push investors to commercial properties in Malaysia that could potentially offer better returns than residential properties,” said Sarkunan Subramaniam, Kuala Lumpur-based managing director at global property consultancy firm Knight Frank.
Mr. Subramaniam says commercial assets, including office space, could potentially offer yields of up to 7%, compared with 3% to 4% for residential properties.
Malaysia’s moves follows similar efforts in other parts of Asia to ease surging property prices. In Indonesia, the central bank announced new mortgage regulation to raise the minimum down payment for additional property purchases.
Bank Negara Malaysia banned property developers from absorbing interest rates from housing loans during construction periods. In November 2010, the central bank said banks could lend up to 70% of a property’s value for the third purchase. It was up to 90% before that.
Previous measures appeared to have worked. NAPIC’s housing index showed that rate of price increase slowed to 7.8% in the second quarter from 10.7% in the first three months of the year.
“From foreign investors point of view, Malaysia’s [overall] property market is still attractive to North Asians and Singaporeans,” said Previndran Singhe, chief executive officer of real estate agency Zerin Properties. “Serious long-term investors looking for yields will probably consider Malaysian commercial properties, which can still generate yields of 6-8% compared to about 4% in Singapore,” he noted.
Real estate agents say many prospective buyers would prefer to wait and watch the impact from the measures before committing to a purchase. The fence-sitting will also be guided in part by the new lending rules.
“The first-time buyers would be hit the most but in the long run, the measures don’t address fundamentals behind the increase in prices as demand continue to outstrip supply in places such as Kuala Lumpur,” said Zerin’s Mr. Previndran.
Serious buyers are likely to remain undeterred by the recent measures, property analysts and agents say, as unemployment remains low on the back of resilient economic expansion. The government expects gross domestic product to grow between 5.0% and 5.5% in 2014–faster than the 4.5%-5.0% expected this year–thanks to robust domestic demand and better exports.
The latest minimum price of property for foreign buyers is still low compared to other countries, says Chris Hahn, a director at property consultant Jones Lang LaSalle.
Mr. Hahn noted that most transactions by foreigners have been in excess of 1 million ringgit even before the fresh curbs were announced, and property prices in Malaysia remain attractive to foreign investors, who mainly come from Singapore, Hong Kong, China and Japan where residential prices in their home markets are much higher.
“Real estate is an asset class that appeals to many companies and individuals as it has proven effective in preserving wealth either as a consumption or investment good,” says Mr. Hahn.