August 12, 2016
Singapore and Malaysia signed a Memorandum of Understanding on July 19 to build the High Speed Rail (HSR) linking Singapore and Kuala Lumpur, a long-awaited update on the project that also revealed a more reasonable completion target of 2026.
In my most recent book, Weathering a Property Downturn, I had hazarded a guess that the earliest date for the HSR to begin operations would be the year 2025. Inter-city and international railway projects are never simple and deadlines get postponed all the time. Acquiring land across four Malaysian states, resettling affected families and businesses and, most importantly, the raising of funds for the entire project, will require a few more years, especially if local issues and politics disrupt the timeline.
The project has been repeatedly hailed by both governments as a “game changer” for our economies. Investment advisers are already spouting the economic benefits of the HSR and recommending various types of investments all over Peninsular Malaysia. However, to think that the HSR will change the game for the whole of Peninsular Malaysia, outside of Kuala Lumpur, we have to look deeper.
Dr Qin Yu, an assistant professor with the National University of Singapore, authored a paper titled No County Left Behind? The distributional impact of High-Speed Rail Upgrades in China, in which she concluded that “the reduction of transport costs for people between large cities may divert economic activities from counties to populous urban districts”. The paper, accepted and awaiting publication by the Journal of Economic Geography, also revealed that the major cities that host the terminus stations fare better, while the counties along the route of the high-speed rail saw 3 to 5 per cent declines in annual gross domestic product arising from a reduction of 9 to 11 per cent in fixed asset investment.
If the findings from this study are applicable to the Singapore-Malaysia HSR, we could expect to see the economies of Singapore and Kuala Lumpur expand while the economies around the six intermediate stations shrink: Putrajaya, Seremban, Ayer Keroh, Muar, Batu Pahat and Nusajaya. For the cities and towns such as Port Dickson, Tampin and Kluang, which are bypassed, the economic outlook might even be more dire.
Depending on the price of the HSR tickets, some residents of Kuala Lumpur, Seremban and Malacca may find it ideal to work in Singapore, earning their incomes in Singapore dollars, while returning home every evening to be with their families. This could lead to a further brain drain or skills drain from various Malaysian cities to Singapore.
[Probably why SG supports the project.]
MALAYSIA MY SECOND HOME (MM2H) PROGRAMME
The MM2H programme started in 2002 and 29,814 applicants have been approved since. The current total number of participants could be lower, as there may be double counting in cases of renewals and there could also be dropouts along the way.
In the first four months of this year, approvals were given to 424 applicants, meaning that on an annualised basis we might expect a total of about 1,300 approved applicants this year, or a drop of about 40 per cent from 2015, which itself saw a decline of 28 per cent from 2014.
Compared with Singapore’s objectives of granting Permanent Residency status to 30,000 foreigners and citizenship status to about 15,000 to 25,000 Permanent Residents every year, based on the 2013 Population White Paper, the MM2H programme does not look popular.
Among the approved MM2H applicants are Singaporeans who have applied for the MM2H status to enjoy the privilege of buying cars at a discount for their relatives who reside in Malaysia. Each approved MM2H person is entitled to purchase “one new motor car made or assembled in Malaysia” with an exemption from excise duties, thus saving tens of thousands of ringgit for their families.
The cumulative 29,814 applicants added a mere 0.1 per cent to the 30 million population of Malaysia. Even if all the approved participants choose to reside in Iskandar, they will only fill up 10 per cent of the 300,000 residential units launched in the past five years. I am inclined to conclude that the 13-year-old MM2H programme has negligible impact on both the economy and demand for property.
ISKANDAR’S PROMISE AND LETDOWN
Pundits continue to sing praises about the growth potential of Iskandar. In a drive around Nusajaya last month, we observed that the pace of construction seemed slow, with several projects that were fully sold years ago still under construction. One large billboard proclaimed “Akan Datang” and “Coming Soon” above a construction site hoarding for a luxury condominium project that failed to launch after the 2013 peak of the Iskandar hype. Needless to say, construction has not started.
As for the completed condominiums, banners displaying “For Sale” and “For Rent” are commonplace. A casual count estimates 10 per cent of the apartments are furnished with curtains. A medical centre that was launched with much fanfare was opened for business in late 2015. As of July, no more than a quarter of the clinics in the medical centre have been taken up by specialist doctors.
Some developers in Iskandar have dropped prices to move leftover apartments, adding downward pressure on valuations. Buyers who took deferred payment plans and paid down less than 10 per cent of purchase prices are walking away from their investments. Some investors have gone further, requesting developers to refund their downpayments by citing the inability to secure mortgages as the banks have tightened up on loans to foreigners.
The situation with commercial and industrial properties is similar. While millions of square feet of commercial and industrial space are completed and waiting for tenants, several high-profile projects have never broken ground.
We have scant information about the value of investments into Iskandar, in particular, how much went into businesses and factories that will create jobs. Of the much quoted RM202 billion (S$67.8 billion) invested into Iskandar between 2006 and March this year, how much was for the reclamation of land and for the purchase of land by developers? How much was due to the sales of strata-titled apartments, SOHOs, offices and industrial space by the same developers? What about the value of investments that have been withdrawn?
"...what would really ease investors' fears is a more accurate picture, based on hard data.
Unlike in Singapore, property developers in Iskandar are not required to disclose sales or rental updates. Often, they simply refuse to reveal how many units they have sold at their launches, so it can be hard to estimate the success of their projects.
Even macroeconomic data is difficult to come by. The Iskandar Regional Development Authority releases quarterly figures on investment in the region but not data on job creation or population growth. All analysts have to go on is an estimate that Iskandar's population, now at 1.6 million, will rise to three million by 2025.
In such a market, there is little to prevent property players from making promises that might not be sustainable - and would-be buyers from being led astray."
Malaysia held promise until over-development and overhyped promises propelled property valuations into the stratosphere, especially when Iskandar prices matched those in prime Kuala Lumpur districts. Investments from Singapore are unlikely to improve given the slump in trade, manufacturing and financial services in the Republic while corporate default risks are rising.
I am eager to be the first to upgrade my call on Malaysian properties to a “Buy”. However, against an uncertain political climate and economic outlook in the country, which could depress real estate valuations or further weaken the ringgit versus the Singapore dollar, my call on Malaysian real estate is an “Avoid” for now.
ABOUT THE AUTHOR: Ku Swee Yong is a licensed real estate agent and the CEO of Century 21 Singapore. His fourth book “Weathering a Property Downturn” is available in the bookstores.
Interesting hypothesis of how the HSR will shift economic activities to the disadvantage of outlying towns and cities.
The implied impact of this is that investing in outlying property for capital gains (price appreciation) is therefore iffy because growth in those outlying areas will be negatively affected by the HSR.
However, the price of homes in the outlying areas may not be ONLY affected by the economic growth of the area. If more of those working and (previously) living in the city, decide that a move to the suburbs because of the HSR is viable, that may cause demand to rise and prices to go up.
BUT, this is not to say that I do not agree that investing in Iskandar is risky. I agree with the conclusion and the recommendation to avoid Iskandar property investment.
The problem with Iskandar is more fundamental: there is a glut of homes, an over-supply. In 2014, it was estimated that there were 118,000 homes under construction, and another 168,000 planned. In comparison, Singapore with 5.3m people (or 3.5m resident population) have about 50,000 homes under construction - 67,000 in 2014, with 6000 planned.
Johor's population is 3.5 million. They do not need 290,000 new homes, in the next few years.
But that's the point. They intend for these homes to be sold to foreigners! Except, as the writer pointed out, their MM2H programme has a cumulative total of less than 30,000 approved applicants since 2002. And they don't need the 290,000 new homes in Iskandar. Even if they needed a new home, there are too many in Iskandar.
So why are they building so many new homes in Iskandar?
Look to China. Most of the developers or at least one partner in the joint ventures are Chinese construction/development companies. Fresh from building Ghost Cities (Google that), in China, these developers need new mega-projects to keep going and going and going.
There is a suspicion that part of China's incredible economic growth is made up of meaningless and unneeded infrastructure work, like building homes that no one wants (leading to Ghost Cities - where the population is a small fraction of the capacity of the city).
Iskandar, in Malaysia, where corruption is still a big problem, may be "ripe" for these Chinese Developers. Particularly as Malaysia had plans for Iskandar ("Field of Dreams" plans: "build it, and they will come") which slotted in nicely with the Chinese Developers'.
In another piece by this writer in Jan last year, he pointed out that Singapore would have about 150,000 new homes by 2017, and this supply would be enough to cope with demand up to 2030 - assuming an increase of 1.3m in population!
The 290,000 new homes in Johor can easiy accommodate more than 1.3m increase in population. But that's not going to happen in 5 to 10 or perhaps not even 15 years.
Of course, there will be investors who say, "but I'm buying for investment! I will rent out the place", without realising, that even if just 20% of buyers are "investors" seeking to rent out their property, that's almost 60,000 property on the rental market. Also, renters become de facto residents of the area. So if there are no reason to live there, why would you rent?
So I agree that one should avoid Iskandar. But it would not be dependent on the political climate. Or even the general economic climate. You will need to see the specifics of Iskandar and what is its economic relevance. For now, it seemed doomed to be a "sister city" to Ordos Kangbashi.]
[Afternote: A few bullish "investors" attempted to debunk or deride Ku's article. Or just tried to make their sales pitch:
Invest in properties that Sporeans truly love but 99% cannot afford back home. Like bungalows with big land areas. It will cost at least S$20m or more for each of those, but still a small fraction in Iskandar. Use it as a holiday home if no tenant for the time being, as prices of land even in JB are moving up pretty fast with all the investments fr China's developers such that developers in general are no longer building these type of bungalows. Rich Johoreans n "poor" Sporeans love to live in these detached houses with ample lands, thus continue to bid up the prices now and in future.On the one hand, I do sympathise with these property agents. They are facing hard times with the "cooling measures" still in place (and unlikely to be lifted any time soon). Article below.
But on the other hand, they are trying to make money selling non-viable "investments" to people who do not know better and who probably cannot afford it!]
The new normal in property taxation
AUG 3, 2016
Plenty of people are asking when the Government will reduce or remove the Additional Buyer's Stamp Duty, but perhaps the real question is whether it will do so at all, given recent comments that suggest the slew of stamp duties and taxes on property may be here to stay.
Investors, developers and others in the property industry seem to have conditioned themselves to believe that the Additional Buyers' Stamp Duty (ABSD) is a temporary measure as part of a broader effort to cool the property market.
Introduced in 2011, it imposes an additional stamp duty of 7 per cent to 10 per cent for Singaporeans buying their second or subsequent properties. Foreigners pay more.
With home prices falling, vacancy rates rising and unsold inventory looming, many believe that the ABSD could be lifted soon.
But what if it never gets lifted?
Far-fetched? Maybe not, given certain comments made by Deputy Prime Minister Tharman Shanmugaratnam at a recent tax symposium in China.
His comments on having a tax system that promotes inclusive growth are all the more significant, given the times. While Singapore faces slower growth, which can handicap tax collection, funding requirements are not going to ease, given our ageing population.
The Government expects a primary Budget deficit of close to $5 billion for this financial year on the back of higher expenditure to counter the flagging economy, up from last year's deficit of $4.2 billion.
It will, of course, look at the ways and means of collecting taxes - as long as the tax does not discourage or reduce economic activity - but what is inevitable is that the wealthier will likely fork out more in the years to come, noted CIMB economist Song Seng Wun.
The scope for higher income tax is limited as it can discourage multinational corporations and global talent from living and working here. In other words, it can hamper innovation and growth.
At the same time, consumption taxes, such as the goods and services tax, have been acknowledged by policymakers as regressive, meaning they take a larger percentage of income from low-income earners than high-income ones.
The abolishing of estate duty in 2008 means there are very few wealth taxes left.
One is the tax on cars - including road tax based on engine size and the tiered Additional Registration Fee structure which increases with a car's open market value.
Then, there is tax on property.
Property taxes, one of the few wealth taxes in place, are "the most efficient tax, or the least damaging to income growth", Mr Tharman said in his remarks at the G-20 High Level Tax Symposium.
However, they must be progressive, providing allowance for properties of low value and higher tax rates for properties of high value, he said.
They must also "distinguish between primary or owner-occupied residences, which should be taxed less, and investment properties", he added.
The structure of property taxes is simple. To anchor Singaporeans to Singapore, home ownership is encouraged. Property tax for owner-occupied homes is 4 per cent of the annual value. For investment residential properties, the tax is levied at 10 per cent of the annual value, which is the gross annual rent the property can achieve.
There is also a role for taxes on property transactions, such as through stamp duties, Mr Tharman said. "(These) have been especially useful in the Asian context, where speculation in the property market is almost a habit. (They) can be varied depending on the state of the property cycle.
"But they are also an essential part of the permanent landscape of taxes - always distinguishing purchases for owner-occupation from those for investment."
He called them "a better way to collect tax than income taxes, with less harm to growth, and more likely to encourage an economic culture conducive to innovation and entrepreneurship".
In response to a query from The Straits Times whether this means the ABSD - or other taxes that apply to investment property and not owner-occupied real estate - is here to stay, a Finance Ministry spokesman said that stamp duties on property transactions are "already a permanent feature of Singapore's tax system".
Under the current regime, all property acquisitions are subject to a BSD of 3 per cent. On top of this, the ABSD was introduced in 2011 as part of measures to stabilise the property market, the spokesman said. "Whether the ABSD remains, and at what rates and coverage, will depend on the Government's assessment of the state of the property market."
The sums collected can be substantial. In 2014, the Government assessed for private homes $920.1 million in ABSD, $619.7 million in BSD and $30.5 million in Seller's Stamp Duty. A further $4.05 billion in property tax was collected in the 2014/2015 financial year.
In deeming taxes on property and property transactions as likely to cause less harm to growth than income taxes, Mr Tharman probably also had in mind the illiquid and economically less productive nature of property investments.
Even after the recent downturn in home prices, Singapore households have $840 billion of their capital tied up in residential property - or 209 per cent of gross domestic product, a recent Maybank-Kim Eng report noted. It wondered "if this is a poor allocation of capital, which can be channelled to more economically productive uses".
While there are no publicly available figures for those who own more than one home, an iProperty survey in 2012 put the figure at nearly three in 10, out of a sample that was largely executives in the 26 to 40 age group.
Another reason the Government could seek to draw Singaporeans away from their obsession with investing in property is that it reduces the amount of disposable income in the economy.
Maybank-Kim Eng calculations suggested that housing costs made up 20 per cent of household spending in 2012 to 2013, up from 13 per cent in 2002 to 2003.
So, it appears that the ABSD and the Seller's Stamp Duty that is payable if a property is sold within four years are here to stay, along with policies like the Total Debt Servicing Ratio (TDSR), which limits how much an individual can borrow.
While the extent of the duties can be tweaked, this does not seem likely for at least another year. The market is quite healthy, with unsold stock coming down in line with a cutback in supply, while housing affordability is more under control.
The Government seems to be retaining the cooling measures in their current form, at least until there are changes to interest rates.
With interest rates so low, many people are putting money into real estate, to a point where yields are compressed. If the Government tweaks measures now and prompts people to start buying, the fear is that when interest rates rise, these buyers may be unable to service their loans and forced to default.
"Not so long ago, that was how the sub-prime crisis started," said Mr Desmond Sim, CBRE research head for Singapore and South-east Asia, although he noted that the TDSR has largely arrested the risk of over-geared buyers.
Indeed, Monetary Authority of Singapore managing director Ravi Menon said last week that "there is still some way to go... It will take time for household balance sheets to strengthen and become more resilient to interest rate and income shocks".
The days of investing in property for a quick buck are truly over, it seems. If nothing else, the gradual fall in values and the Seller's Stamp Duty will cool speculative fervour.
Leverage is no longer generous. While the loan-to-value limit for those with no mortgage is 80 per cent, this goes down to 50 per cent for those getting a second mortgage and 40 per cent for those getting third and subsequent loans.
As immigration tightens, there are fewer expatriates to rent and buy in the secondary market, while holding costs are up as properties are taxed even when vacant.
Instead of asking when the ABSD will be lifted then, investors should tot up these additional costs and ask themselves: Is a property play still worthwhile?
Welcome to the new normal in property taxation.