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By Wen Xin Lim

The Potential of Chinese Investment in Malaysia's Johor Bahru

Dec. 15, 2016  |     |  0 comments


Bloomberg reported in November 2016 that Chinese developers were spearheading the USD 100 billion Chinese-made project in Johor Bahru, a city at the southern tip of Malaysia and bordering Singapore, to turn it into the next Shenzhen.


In March 2016, China overtook Singapore as the largest investor in the special economic zone of Iskandar Malaysia, situated in Johor Bahru. At least five Chinese developers are currently building new homes in the Iskandar zone; among which Country Garden’s mega Forest City project alone “covers over 1,300 hectares on four man-made islands with an estimated investment of RM 175.8 billion (USD 40 billion) over the next 20 years.” This project located on reclaimed land near to Singapore’s northern Tuas shoreline and next to the Second Link bridge that connects Singapore and the Malaysian state of Johor, left many flabbergasted as it is estimated to house 700,000 people on an area three times the size of Singapore. Before Forest City, Country Garden embarked on its first flagship project at Johor’s Danga Bay in 2013, which the project has sold all its 9,539 apartments.


Yet, Country Garden is not the only Chinese developer that is vying for business opportunities in the border city. Bloomberg also reported that:


China state-owned Greenland Group is building office towers, apartments and shops on 128 acres in Tebrau, about 20 minutes from the city center. Guangzhou R&F Properties Co. has begun construction on the first phase of Princess Cove, with about 3,000 homes.


The astounding rate of development in Johor over the past few years has been backed by the central government, state government and the state’s monarch.


Following the implementation of the “Malaysia My Second Home” (MM2H) program by the government in 2002, foreigners are allowed to live in Malaysia on a long-stay visa of up to 10 years. As of June 2016, Malaysia has approved 30,194 applicants under MM2H. PRC Chinese alone took up 24 percent of the total share of all applicants. On a year-over-year basis, PRC Chinese applicants witnessed more than 110 percent growth in 2016, the fastest growing group among all nationalities.


Chinese property developers are quick to ride on the bandwagon, by including benefits under the MM2H policy into their marketing pitches. It was reported that most buyers of the Forest City project are existing customers of these developers back in China. Some are looking for a retirement home in Malaysia, while others are eyeing the Iskandar project due to its proximity to Singapore.


In conjunction with the Iskandar project, the Johor state government has started to invest in Senai International Airport to expand its logistics network and international connectivity so as to boost tourist arrivals and people-to-people exchange. Senai Airport was the fastest-growing of Malaysia’s eight largest airports in 2015, recording 11 percent passenger growth. On May 29, 2016, Air Asia launched its first direct flight from Johor, Malaysia to Guangzhou, China. This was the first time Senai Airport hosted a direct international flight to mainland China. It is planning to introduce more direct flights to Chinese cities, and Shanghai and Beijing may be next. The well-planned network and infrastructure facilities could be great selling points to Chinese businessmen who are planning to invest in Johor Bahru (see Figure 1). It is noted that:


Strategically located in Iskandar Malaysia, Senai International Airport enjoys close proximity to modern port facilities of Port of Tanjung Pelepas and Johor Port. The airport is well linked to the nation's major highways and railway network which spans across Peninsular Malaysia.


Figure 1. Senai Airport in Iskandar Malaysia Plan

Source: Senai Airport webpage. Retrieved from http://www.senaiairport.com/Corporate/About-Us/Introduction


On top of air connections, Malaysia’s proposals to develop the North-South High-Speed Rail and the Johor Bahru-Singapore Rapid Transit System are said to be key catalysts to propel the development of Iskandar.


Apart from the welcoming policy by the central and state governments, the mammoth Iskandar project has also received significant support from the local royal family. Chinese developers have been buying billions of dollars of land from the Sultan of Johor for the real estate development in the Iskandar region. In fact, Country Garden’s Forest City is a joint venture project — Country Garden Pacific View (CGPV) — between Country Garden and Esplanade Danga 88, an associate company of Kumpulan Prasarana Rakyat Johor (KPRJ). Country Garden holds a 66 percent stake of CGPV and Esplanade Danga 88 holds the remaining share (see Figure 2). As Esplanade Danga 88 is largely owned by the Sultan of Johor, it effectively makes Forest City a joint venture between Country Garden and the Sultan.


Figure 2. Forest City Shareholders

Source: Malaysiakini. Retrieved from http://www.kinibiz.com/story/issues/95623/the-case-of-forest-city-and-the-johor-sultan.html


Local residents started to notice the influx of Chinese developers in 2014. Their presence could not go unnoticed when more construction works started in 2015. Banners with Chinese slogans were hung at various construction sites and Chinese construction workers were seen more frequently. Also, there were rumours that the giant replica of the Sultan’s crown installed just in front of Johor’s royal palace in 2015 was a “gift” from the Chinese developers to the Sultan in exchange of the land.


In an interview with Johor’s Sultan Ibrahim Sultan Iskandar in March 2015 just before his coronation, he opined that the spill over from Forest City could be big as it would help to boost employment and the local transportation system. He said that Greenland Danga Bay, Country Garden Danga Bay, and R&F Tanjung Puteri were all catalysts for Johor’s development, and Johor should refuse the reputation of being the backyard of Singapore:


We have an open-door policy; every reliable investor is welcome to invest in Johor. It will be insane to tell investors not to come to Johor. The spill over effect will benefit the people. Forest City will create over 250,000 jobs for Johoreans. Via this investment, I am creating opportunities for retailers and upgrading our transport system, among others. The government, too, will benefit.


How Sustainable is the Iskandar Project?


Can Johor Bahru truly become a replica of Shenzhen? How sustainable is the Iskandar project?


The National Property Information Centre indicated in its 2014 annual report that there were 719,421 residential units in Johor as of the end of 2014. Property projects mushrooming along Malaysia’s coastline facing Singapore are thus likely to be in over-supply, with Forest City alone adding more than 320,000 homes in Iskandar.


With the current 3.6 million population in Johor, there has been talk about a glut in high-rise property units in Johor Bahru. Bloomberg reported that:


The influx has contributed to a drop of almost one-third in the value of residential sales in the state last year, with some developers offering discounts of 20 percent or more. Average resale prices per square foot for high-rise flats in JB fell 10 percent last year, according to property consultant CH Williams Talhar & Wong.


With the looming oversupply, there is a possibility that some developers could abandon their projects or put them on hiatus if their funds run dry before buyers start coming in. While this is a remote possibility now in Iskandar, it is not something new in Johor. In 2012, Datuk Ahmad Zahri Jamil, Chairman of the State Local Government and Housing Committee said that there were 12 abandoned developments comprising of over 4,616 residential units in Johor. Also, there had been cases where private apartments in Johor were abandoned in poor condition after a few years due to poor management.


Besides the concern of oversupply, it is also important to note that Iskandar Malaysia is a long-term project that will take at least 15 to 20 years to be fully complete. Judging from the current development in Johor, it is reasonable to say that it will take time for Iskandar to become a self-contained and self-sufficient city. In the short run, it is difficult for such a megaproject to turn profitable. Empty houses, shop lots, office buildings, and factories need to be filled up before it can become another metropolis in Malaysia.


Just like the author of the best-selling book, “What’s the Big Deal with Iskandar,” Ryan Khoo opined,  “savvy investors should invest for capital gains in the medium- to long-term, especially since most of the catalyst projects are underway and, as each of them progresses, the market will receive a boost in the years to come.”


Since the new RM 1 million (USD 225,000) limit for foreign property purchases came into effect in 2014, investors should be selective in choosing the property types to invest in. Instead of high-rise residential units, gated landed property with a good environment could be a better store of value.


Can Johor Bahru be the next Shenzhen?


Some have opined that the Johor state has great potential due to its healthy economic performance and proximity to Singapore. Johor’s GDP growth accelerated from 4.7 percent in 2013 to 6.5 percent in 2014, accounting for 9.3 percent of Malaysia’s national GDP, according to the Department of Statistics. It is the fourth-biggest contributor to the national economy after Selangor, Kuala Lumpur and Sarawak. In 2015, Johor attracted more manufacturing investment than any other state in Malaysia, according to the Malaysian Investment Development Authority. Approved investments increased by 47 percent to RM 31.1 billion (USD 7.7 billion). In term of investment opportunities, the potential in Johor is hugely varied, ranging from petrochemicals to industrial manufacturing, education, health care, and tourism.


However, Johor Bahru and Shenzhen have clear differences in their competitive advantages, population sizes, and social patterns. While China was once renowned as the world’s factory with competitive advantages in cheap labour, a large population of over a billion and a homogenous society, Malaysia is a relatively small multiracial nation with only a population of 30 million. In fact, the prosperity of Shenzhen, the hinterland of Hong Kong, was driven by the “floating population” from other Chinese provinces which helped boost Shenzhen’s manufacturing sector. With more Southeast Asian countries such as Vietnam and Cambodia now rising to replace China as new manufacturing hubs, it will take plenty of effort for Johor Bahru to stand out as the next Shenzhen in the short run. Also, it will be interesting to observe how this project with its influx of Chinese into Malaysia will impact racial sensitivities in Malaysia.

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