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Investment Strategies For Malaysia

Malaysia’s immense attraction as a tourist destination has encouraged large developers to create new resorts in many stunning locations. These, along with some city investments, are offering buyers the opportunity to employ potentially lucrative short, medium and long term investment strategies. Find out below some of the factors that make Malaysia such a promising real estate investment arena.


General Factors

Malaysia’s real estate market has been taking on new dimensions as a result of a major government initiative, the Ninth Plan, which calls for impressive new provisions for the country’s infrastructure. This, along with a growing economy and increased foreign investment, reinforces our analysts’ firm belief in the future success of Malaysia’s property market.

The government positively encourages foreign investment and has relaxed tax and home ownership rules for overseas purchasers. It also allows 100% freehold title within a relatively uncomplicated property purchase procedure.

Magnificent coastal and inland scenery, water sports, golf and many opportunities for sightseeing all make Malaysia a sought after holiday destination. These assets blend well with a vibrant culture and charming, English speaking people while a low cost of living and increased availability of budget flights to Malaysia further encourage a steady flow of homebuyers and tourists.

The amazing growth in Malaysia’s tourist industry is sustaining the real estate sector and has encouraged large developers to create new resorts in key locations. These offer plenty of potentially lucrative off-plan and buy-to-let investment options which are appealing to affluent expatriates from Asian, US and, increasingly, European markets. Chinese investors are particularly active in Malaysia and this trend is expected to grow.

Property purchasers in Malaysia are currently finding lucrative opportunities in coastal areas such as Ferringhi on Penang or Sabah which are proving to be highly popular amongst the most discerning of property buyers. City investment, particularly in the capital, Kuala Lumpur, is booming due to a wave of direct foreign investment from China, the US and the Middle East.

Economic Factors

Malaysia has one of the fastest growing economies in its region and a surge in economic activity (predicted increase in worker numbers to 27.9% by 2013 over a 10 year period) has brought with it a high demand for quality real estate. Successful buy-to-let investments are serving a growing expatriate community employed in and around the city.

Malaysia ranks among the top three Commonwealth countries for the greatest number of tourist arrivals, according to the World Tourism Organisation. Malaysia attracted 20.88 million foreign visitors in 2007, representing a 19% rise on the previous year and setting a new record of 14 billion dollars in revenue - an astonishing achievement for and all good news for today’s investors in tourist resorts seeking strong buy-to-let investment potential.

Real estate in Malaysia is high quality and very low cost, compared with many other locations. Due rate of exchange with the local currency, the ringgit (MYR), property is valued below the euro, dollar and pound sterling. Foreign investors buying into Malaysia are therefore finding their money goes a very long way, all the more so as property per square metre is selling at a fraction of the cost of similar properties in worldwide locations. The relatively low cost of living (eg. petrol is 40p per litre in 2008) is a firm attraction and low buying costs of between 1 and 2.5% of the property value are additional advantages for property investors in Malaysia.

Political Factors

Malaysia has an elected constitutional monarchy and a system of parliamentary democracy with an excellent record. It comprises 13 states as well as two local territories, the capital of Kuala Lumpur and Labuan, each with its own head of state and an elected assembly.

The Malaysian Parliament comprises the Senate (Dewan Negara) and the House of Representatives (Dewan Rakyat). The Senators serve a six-year term, while members of the House of Representatives are elected for a five-year term. Since gaining its independence from Britain on 31 August 1957, Malaysia has held elections every five years or less. The tenth general election was held on 29 November 1999.

Malaysia has experienced little political violence since ethnic rioting in 1969. In late April 2003, Malaysia's Official Human Rights Commission - Suhakam - called for the Internal Security Act to be replaced with laws modeled on Western anti-terrorism legislation.

Today, Malaysia is a prominent member of the Association of Southeast Asian Nations (ASEAN) and is a politically stable country. This makes it an attractive location for foreign investors and benefits the country’s economic growth. Recent government policies have included a relief fund and tax breaks for the tourism sector, liberalisation of foreign investment regulations, and new funds to help traders.

In fact Malaysia is amongst Asia’s leaders in terms of attracting interest from foreign investors, most of whom are from the Middle East. They see it as a viable and attractive emerging market with high medium term growth potential, within an economy that recorded a GDP expansion in the third quarter of 2007 of 6.3%. Analysts believe the current political and economic situation will positively and directly affect the real estate market in Malaysia.

Natural Factors

Close proximity to Australia, Bali and Singapore attracts increasing numbers of tourists from these countries as well as significant amounts of direct foreign investment from China, Japan and the United States.

Malaysia is well served by budget UK flights with some prices starting at only £285. In addition, Malaysia is connected by low cost regional flights by Air Asia from major S.E. Asian cities, creating easy access for a growing influx of visitors.

English is widely spoken, making a property investment in Malaysia a transparent procedure while all property sale agreements are written clearly in English. In addition, English language newspapers, radio and television are available everywhere, making a move here almost like home from home.

A wonderful climate awaits holiday makers, re-settlers and investors alike. The country is generally warm throughout the year with temperatures ranging from 21° to 32°C in the lowlands that are ideal for the average holiday maker seeking a warm and sunny climate.

In addition to the climate, many visitors come to Malaysia to enjoy its exotic culture and a rich culinary experience including satay, noodles, nasi lemak, rendand and roti canal, all of which are spicy and full of aromatic flavour. A warm, friendly population, a peaceful society and a pro-British environment make for a highly attractive destination. Superb golf and other sports facilities add to Malaysia’s appeal and, while the country is renowned for its beautiful landscapes, it is fast emerging as South-East Asia's premier golfing destination with some 200 quality golf courses on offer. Many of these courses are designed to top international standards and are equipped with all modern amenities along with corresponding resort developments.

Malaysia is also a famous angling location and some of the country’s rivers and seas hold prime game fish, including marlin, sailfish, tuna, barracuda, amberjack and dorado. Inland, fishermen hunt for the prized red mahseer or ‘kelah’, a powerful freshwater fish to be found in clear water, fast-flowing rivers such as those in Endau-Rompin Park. World class diving exploring rich coral beds and beautiful aquatic life provide some memorable diving opportunities.

Logistical Factors

Malaysia is easy and cheap to reach with 25 flights arriving per week from the UK, starting at only £285. Malaysia is also well served by low cost regional flights on Air Asia to major S.E. Asian cities.

Most visitors arrive in Malaysia by air via the main gateway at Kuala Lumpur International Airport (KLIA) at Sepang in the state of Selangor. The rest of the country, including Sabah, Sarawak and the Federal Territory of Labuan in East Malaysia, is well served by 14 domestic airports and airstrips.

Air services in Malaysia are on the increase, in line with demand to accommodate a growing number of visitors. Kuala Lumpur-based Air Asia has committed to increasing its fleet by another fifty 180-seat Airbus A320 jets and has also launched a new long-haul, low-cost airline - Air Asia X. A revised cost structure has enabled the airline to charge fares as low as 39 ringgit from Kuala Lumpur to Penang compared to 40 ringgit for the bus trip. A car journey over the same distance will set you back double at 80 ringgit, including tolls and petrol.

Malaysia’s major airports are located at: the new Kuala Lumpur International Airport (KUL), Kuala Lumpur-Subang (SZB), Penang, Johor Bahru, Kota Kinabalu, Kuching and Langkawi.

Today there are many flights to choose from, departing from airports all over the UK. Below are links from your nearest airport to Malaysia.

UK airports and regions:

London Area: Gatwick, Heathrow, London City

SW and Wales: Bristol, Cardiff, Exeter

Midlands: Birmingham

East Anglia: Norwich

Northeast: Durham Tees Valley Airport, Humberside, Newcastle

Northwest: Isle of Man, Manchester

Yorkshire: Leeds/Bradford

Scotland: Aberdeen, Edinburgh, Glasgow, Inverness

Northern Ireland: Belfast City, Belfast International

Irish Republic: Cork, Dublin, Shannon

Channel Islands: Guernsey, Jersey Apt


Airlines operating services to Malaysia include KLM, Qatar Airways, Sri Lankan Airlines, Kuwait Airways, Emirates, Gulf Air, Cathay Pacific and Malaysia Airlines and these link many European destinations with Malaysia.

Remember that an International Airport Departure Tax is payable of MYR40 (€8.81).

The Malaysian Peninsular and East Malaysia are also easily accessed via sea ports. Located just outside the capital city of Kuala Lumpur (KL) on the west coast of the Peninsular, Port Klang is Malaysia’s largest modern sea port. It is also a major shipping and cargo terminal with excellent harbour facilities. Other major ports are located on the islands of Penang and Langkawi in the north of the Peninsular, at Johor to the south, at Kuantan on the East Coast and at Kota Kinabalu in Sabah.

FerryLink operates a car ferry service from Changi Point in Singapore to Tanjung Belungkor on the southern coastline of the Peninsular, which is the gateway to the popular beach resort of Desaru. There are four daily trips on weekdays and eight daily trips on weekends. For reservations, please call 02-545 3600 (Changi Point) or 07-252 7408 (Bandar Penawar, Johor).

Short Term Investment Strategy

Key Opportunity

As a fast growing tourist economy, Malaysia has much to offer investors looking to profit from short term off-plan investment opportunities. Growing tourist numbers, up 19% in 2008 from the previous year, and an ongoing influx of foreign investment into Malaysia bring buoyancy to the real estate market. Overseas buyers are further encouraged by a reliable and expanding property and tourist arena.

Low off-plan prices, strong returns on investment and high rental yields for owners of re-assigned contracts are all reasons behind the current success of Malaysia as a short term property investment location. An increasing number of visitors are buying into apartment complexes in the major holiday hotspots, safe in a strong belief in the Malaysian government’s commitment to further economic growth and stability.

Malaysia is well served by international airports with good transport links to and from resorts and cities. The never-ending expansion of budget priced airlines within the region provides low-cost, no-frills air transport to the international tourists.

Malaysia offers investors the type of all-purpose, self-contained holiday resort option so popular in the current overseas property and holiday marketplace. Easy to maintain, new properties on secure communities within easy reach of the beach and on-site resort facilities are firm favourites, enabling short-term investors to achieve their off-plan contract re-assignment within a relatively short period of time.

IPIN often has access to interesting pre-release prices, allowing its members to take full advantage of below market prices as well as high capital appreciation over the construction period.

Timescale

Investors in off-plan developments factor in between 18 and 24 months for construction from reservation to completion stages. Short term investors normally look to profit from a carefully selected, promising market, selling on their unit to mid or long term investors approximately 14 to18 months after making their initial reservation, regardless of whether or not the project is yet completed.

Of course, the earlier the investment is made, the greater the investment returns. As importantly by entering the project at the earliest possible stage, investors get the best choice of units which will always be first to attract buyers in the future.

Level of Complexity

Short term strategies offer the lowest level of complexity as the purchase has not yet been officially made; therefore, no property taxes or maintenance or management charges are due. This is a simple capital investment, often with no need to proceed to Purchase Contract, or make any mortgage finance arrangements. Remember to check with the developer if there are any charges made to “flip”, or reassign your contract, and at what stage you are permitted to do so, before you proceed

Risk Assessment

All investors must carefully assess the particular project and units in which they wish to invest. In many cases a wide range of other projects will be under construction and a choice will need to be made. A decision will need to be based on how a particular development or project will outshine its competitors in terms of appearance, location, on-site facilities and the unit itself. Investors will also need to consider issues such as the number of other units available within the particular development, predicted demand as well as competition for the type of property they wish to invest in.

To curb risk, a short-term investor should normally seek to buy the best possible unit, ie. a corner unit, a penthouse or ground floor unit with a private garden, which will always sell in preference to a standard first floor unit.

Investors need to be clear how their exit strategy is to run. How will the unit be marketed and by whom? How much will the selling agents charge in commission? Should a buyer not be found prior to completion of the property, investors must be confident they can cover payment to completion of the unit and adapt their strategy if necessary. IPIN offers a substantial Investor Care package, which adds significantly to investors’ chances of a successful exit.

Short term “flip” investments are undoubtedly more risky than longer term strategies, but, with careful research and planning in place, off-plan purchase in well located Malaysian resort projects offers a sound investment with lucrative returns.

Return

Estimated returns of up to 14-15% per annum are being achieved on well located off-plan projects. Shrewd investors have the opportunity to reach the highest figures possible by selecting prime resorts at pre-release pricing levels, allowing investment at below market value. An earlier than normal reservation of course affords the maximum possible returns on investment on any given project.

By reserving at pre-release stage, investors profit from discounted prices and, in many cases, these are subject to successful planning applications, allowing for additional pricing uplift. Reservations on this type of IPIN recommended project allow for full refunds if necessary and secure escrow accounts are in place to protect investors’ funds.

Financing

The short term investment strategy is purely based on capital outlay as mortgages cannot generally be raised against property that is not yet built. In order to cover all eventualities, investors MUST be confident they can complete the purchase if necessary, even if using a buy to flip strategy.

Payment terms will vary; good projects often offer terms of as little as 20% initial payment with stage payments of 40% to final completion. This system allows short term investors to operate their strategy with minimum capital outlay and it can be assumed that they will have exited the strategy, at the latest by the time the final payment is due.

If necessary, IPIN can help its investors arrange equity release from their existing property to fund the initial capital payments, which could later be covered by a mortgage once the construction period is completed.

Taxation

Purchasing a property contract and then re-selling prior to completion is a tax-efficient way to invest in property. IPIN always recommends research into any double taxation treaties in place between Malaysia and the investor’s country of residence.

Medium to Long Term Investment Strategy

Key Opportunity

A growing infrastructure under the provisions of Malaysia’s Ninth Plan is precipitating unprecedented growth in the real estate sector. A strong rate of economic development, including increased foreign investment, reinforces our analysts’ firm belief in the future success of Malaysia’s property market. The country is successfully attracting investors and tourists alike, all seeking an exotic Asian holiday destination where high standards, a rich culture and stunning natural beauty all combine to make a perfect holiday destination.

The Malaysian property market offers a strong mid range investment opportunity to international property purchasers seeking reasonably priced real estate with sustainable growth potential in both the residential and tourism sectors. Malaysia boasts two primary property markets that are particularly attractive to overseas buyers: the area around the capital's central business district and the resort properties in areas such as Ferringhi on Penang or Sabah.

An already robust tourism sector is now spawning a secondary holiday home market, further boosting the strength of the property market and opening up many new investment opportunities to property purchasers in Malaysia.

Timescale

Average construction time on IPIN Global recommended Malaysian projects, from project sales release to completion of construction, is approximately one year. Mid to long term investors look to hold onto their units after construction, normally for at least 18 months from initial reservation, either to rent it out and/or benefit from capital appreciation upon eventual resale. Many long term investors wish to generate significant and reliable rental income over a period of time as sustained rental returns are their main focus, followed by eventual gains through high steady capital appreciation.

Growth is expected to continue to be strong over the next 5 years, notably in the area around the capital's central business district and the resort properties in areas such as Ferringhi on Penang or Sabah. The longer investors are able to leave capital in their purchase, the higher their potential returns will be. With tourist levels high and on the increase, the buy-to-let market allows investors to reap in solid capital growth from their properties.

IPIN strongly recommends consulting with an IPIN advisor to discuss your particular mid to long-term investment strategy in Malaysia, to ensure your chosen option best suits your needs.

Level of Complexity

In the case of off-plan purchase, full payment for the property needs to be completed at various stages of construction, prior to final completion of the purchase. In some cases, developer’s finance can be arranged for up to 70% of the property value and most investors raise alternative finance or inject their own capital investment over the stage payment periods.

For mid to long term investors, all costs will be applicable amounting to around 1 - 2.5% of the purchase price, while ongoing costs such as maintenance, community fees and utility bills will also need to be factored into the strategy finance plan. Bear in mind it’s advisable to open a bank account in Malaysia in order to pay for the property’s utilities and other ongoing expenses.

Some good arrangements are often to be made with property management and rental companies that are often conveniently based on or near the site. These ensure that such ongoing costs are covered and that your unit is rented out regularly. Maintaining a property abroad can therefore become no more complex than an investment closer to home.

Key Risks

A medium to long term investment strategy entails much lower financial risk than a short term plan which relies on finding a buyer within a very short time frame. Provided the right investment is made on a quality, well located project with multiple facilities, establishing a rental market and eventually a buyer for your investment should not be difficult. However, as with any investment, patience and money is sometimes required until the end user is found.

Malaysia's popularity as a growing tourist destination bodes very well for buy-to-let investors. This of course translates to an increase in buyers and renters on the one hand, but brings with it intensified competition on the other.

Bank Guarantees are commonly given by developers in Malaysia and IPIN approved projects will always be protected by local or overseas bank guarantees.

By appointing independent legal representation, the client can be sure that all the necessary paperwork is in place before signing the purchase contract. IPIN ensures recommended legal services are always offered independently from project developers, therefore exclusively representing the client’s interest at all times.

Property ownership in Malaysia is sold freehold, leaving no room for ownership disputes.

Return

Mid to long term investors expect to see capital returns of around 7-15% per annum based on the fact that their properties are located in popular resorts or areas of high demand.

The best rental yields are possibly available in the commercial property sector or KLCC serviced apartments, with returns of 8% not being unusual. It is possible to invest in “tenanted” residential or commercial properties with guaranteed yields of 8%-10% available. We also suggest looking at off-plan commercial premises that will net yields well into double figures, while a number of hotels are available with gross yields in excess of 17%.

Many discerning investors not only choose property in prime locations, but also buy at pre-release pricing levels, allowing investment at well below market value. An earlier than normal purchase not only secures the best unit, but also maximises future returns.

Increased worldwide exposure of Malaysia’s holiday hotspots will also have a positive effect on the tourism market, bringing with it a further boom in the real estate arena and inevitable price increases.

Financing

Some off-plan developments in Malaysia offer finance options and installment plans. The charges applicable vary according to developer and repayments are usually indexed. Sometimes the developer can often offer the most competitive finance options to investors and these are certainly worth considering when looking at mortgage alternatives to those from their own countries.

As a foreigner, you are normally allowed to borrow up to 70% and in most cases Malaysian banks are more than willing to finance your purchase. Loans are granted on the proviso that the property value is RM 250,000 or more. There is no upper limit to the cost of properties that may be purchased by overseas purchasers of property in Malaysia. The current base lending rate is 6.8% per annum (end 2006). Loans are for a maximum period of 45 years or up to age 75, whichever is earlier

If necessary, IPIN can help its investors arrange equity release from their existing property to fund the initial capital payments, which could later be covered by a mortgage once the construction period is completed.

Taxation

Capital Gains Tax: In April 2007, capital gains tax was abolished in Malaysia.

Stamp Duty: Since the 2008 budget, Stamp Duty for the Land Title Transfer for properties costing less than RM250,000 was halved. This benefit is applicable for the purchase of one house for the entire financial year of 2008.

Price Stamp

Stamp Duty in 2007

Stamp Duty in 2008

RM250,000 RM4,500 RM2,250 (-50%)
RM150,000 RM2,000 RM1,000 (-50%)
RM350,000 RM6,000 RM6,000 (unchanged)


(Based on the current rate of 1% for first RM100,000 and 2% for RM100,001 to RM1,000,000)
This situation is prompting property developers to provide more properties at below the price of RM250,000 in order to entice buyers. However, new home buyers face two main stamp duties, for title transfer and the bank loan facility agreement.

Inheritance Tax: There is no inheritance tax charged in Malaysia.

Other Taxes:

There is no VAT in Malaysia, but a Government Sales Tax (GST) of 5% is charged on hotel and restaurant bills and on professional bills such as lawyers’ bills.

Non-residents are liable to pay tax, without reliefs, on money earned in Malaysia. Rates are 22.4% on monthly income of USD 1,500 and 25.1% on USD 6,00 per month.

Property tax, a local tax based on the annual rental value of your property, is payable in two installments annually. It is usually levied at approximately 6% for residential lettings.

Quit rent is a local tax levied on all landed properties and payable annually at a rate of 1 sen (US$0.003) to 2 sen (US$0.006) per square foot - RM1 = 100 sen (cents). The Quit Rent liability generally totals less than RM100 (USD31) per year.

Once a retiree has been out of the UK for the prescribed period, offshore investments become free of UK tax and are not taxed by the Malaysian tax authority. In fact, several people have calculated that their living expenses within Malaysia are far less then their tax savings, making it, in effect, almost cost free to live there.




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