MPI Market Report – June 2011


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MPI Market Report – June 2011

  1. 1. FACILITAT ING & PROMOT I N G I N VE ST M E N T F O R M A LAY S I A N R E A L E S TAT E | June 2011 issue 13 INVESTOR PREFERENCES The China Report POLICY It’s All a Question of Intention COVER STORY A Vertical City IN A NUTSHELL Growing Retirement Savings SPOTLIGHT Through Property Southern Prosperity GRAPHICALLY SPEAKING SPECIAL REPORT Landed Property Price in 1Q2011p Poised for Growth Compared with 1Q2010A VERTICAL CITYThe transformation of what was once plantation land into one of Kuala Lumpur’s premierhigh-rise residential enclaves offers a development model worthy of emulationWho would have thought that what was by Afiq Syarifuddinpreviously part of a rubber plantationwould one day become a sought-after Figure 1: Map of Mont’Kiarahigh-rise residential address? The taleof Mont’ Kiara’s evolution is one worthyof note, not just because it’s a true blueMalaysian real estate success story, butalso because of the lessons it offersboth developers and property investorsalike.In a period of just 15 years, KualaL u m p u r ’s M o n t ’ K i a r a e n c l a v ehas garnered the respect not justof Malaysians, but also of theinternational community in Malaysia,many of whom make a bee-line to thereto find a place to live. Attracted by theconcept of community living and thedeveloper’s focus on quality of life,their presence has helped turn it into avibrant, desirable place to live and thishas increasingly drawn Malaysians tohigh-rise living in the area.Today, Mont’ Kiara has turned into asuburban township complete withamenities and lifestyle outlets.It is the only suburban townshipthat constitutes primarily high-risedevelopments in Kuala Lumpur. Itsreputation has grown in tandem withits size and it is now considered by manyto be the “Damansara Heights of high-rise living” (Damansara Heights is oneof Malaysia’s premier landed residentialproperty enclaves).(continued next page) Source: Ho Chin Soon Research
  2. 2. COVER STORY 2Figure 2: Existing Condominium Developments in Mont’ Kiara Project Name Developer Gross Floor Subsale Price Asking Rental Rental Completion Area (sq.ft) (RM/sq.ft) (RM/sq.ft) Yield (%) Date Amarin Kiara Amarin Group 4,073-6,141 600 2.89 5.78 Jan-08 Kiaramas Sutera Asia Quest Holding 1,347-4,100 400 3.00 9.00 2004 Hijauan Kiara Bukit Kiara Properties 2,090-3,732 600-800 3.20 6.40 Mar-08 Verve Suites Bukit Kiara Properties 633-1,213 800 6.00 9.00 Ongoing Casa Kiara I Dijaya / Sunway 1,235-4,573 430 2.50 6.98 Apr-06 Flora Murni Tian Gloval 1,615-5,490 455 2.62 6.91 2006 Laman Suria Sunrise Bhd 931-2,147 520 2.50 5.77 Jan-04 Mont’ Kiara Meridin Sunrise Bhd 1,787-4,487 650 2.50 4.62 Jan-09 Mont’ Kiara Damai Sunrise Bhd 2,272-11,000 590 3.00 6.10 Jul-04 Mont’ Kiara Bayu Sunrise Bhd 798-2,300 500 3.00 7.20 Oct-02 La Grande Kiara Nikmat Kuasa 1,961-7,335 456 3.04 8.00 2005Source: MPI Research(from previous page) School, Mont’ Kiara International no longer be affordable to the masses. School, Australian International SchoolM o n t ’ K i a ra c o m p r i s e s m o s t l y and Lycée Français de Kuala Lumpur Therefore it is pertinent that thecondominium developments, with which offer British, American and and proposed new development’s pricing isa some supporting retail and office French curricula. in tandem with the supply and demandcomponents. The residents are, situation.interestingly, made up of 30 different Due to its desirable location andnationalities, of which Japanese good accessibility, Mont’ Kiara On top of strategic location andand Koreans constitute a majority. has experienced healthy capital accessibilities, developers also needMont’ Kiara also hosts a multitude of appreciation over the years. Prices here to put extra weight on the buildingbusinesses located in the office space hover in the region of RM500 to 750 design, facilities and amenities that willand shoplots located around the per square foot and have been rising improve the overall resident’s qualitytownship. steadily due constant demand. The of life. The environment also has to be average rental and yield is RM2.86 psf designed to include amenities suchThe main business hub is known as Plaza and 6.89% respectively. as schools, shopping complexes andMont’ Kiara, where many established parks, as these are necessary to createmulti-national companies have taken T h e r e a r e c u r r e n t l y 1 4 2 , 0 5 9 a self-sustaining enclave that offers aup office space. Other commercial condominium units in the market, convenient and vibrant lifestyle.hotspots are Seni Mont’ Kiara, Solaris reported by the National PropertyMont’ Kiara and Solaris Dutamas. A Information Centre (NAPIC) in the Once the “hardware” is in place thenotable foreign investment in Mont’ Property Market Report 2010. Of note developer of such an enclave would needKiara is Cheung Kong Group’s foray into is the fact that 17,922 units are coming to put in the “software”, which is thethe area with ARA Asia Dragon Fund into the market, further increasing the services, activities and other offeringsthrough One Mont’ Kiara. This retail- supply in Kuala Lumpur alone. that will give residents a lifestyleoffice development is valued at RM321 experience unlike any other. In Mont’million. Although there are concerns of Kiara, for example, even residents’ oversupply in the market, this is a broad- transportation needs are taken care ofThe competitive edge that Mont’ Kiara based phenomenon and occurs only in through a shuttle service that takeshas is its location which is 8km away specific pockets in Kuala Lumpur City them to major shopping areas in thefrom the bustling city centre of Kuala Centre where branding, positioning and vicinity. Exciting activities in the form ofLumpur and proximity to exciting planning are ambiguous. In this respect, a weekend bazaar offer the opportunitytownships with various amenities. Mont’Kiara has been way ahead of the for community shopping and familyAccessibility to Mont’ Kiara from rest right from its inception, thanks outings, while the nearby commercialPetaling Jaya and Bangsar is convenient to the smart strategies employed by precincts hold out the taste ofthrough the SPRINT Expressway and Sunrise Berhad, the developer that was vibrant entertainment and dining outthe North-South Expressway’s Jalan instrumental for first carving a vertical experiences.Duta exit.The area also boasts excellent city out of plantation land.infrastructure and easy access to the Mont’Kiara appears to have avoidedrecreational facilities of nearby Bukit It is little wonder why investors are being marred by oversupply and slowKiara. attracted to Mont’ Kiara. Key factors take-up, a fact that developers of high- for a successful property market can rise enclaves would want to take noteInternational schools have also found be determined through the saleability of. Its secret lies in ensuring a winningtheir way into this township to serve and offer price. However, once the initial formula right from the start and inand cater for the educational needs of developer price has reached a certain sustaining the formula for the longthe residents’ children. For instance, threshold, the asking price would then term.Mont’ Kiara has Garden International only attract the upper-tier market and
  3. 3. SPOTLIGHT 3SOUTHERN depend on individual ‘qua’ (energy areas), and there are altogether ninePROSPERITY ‘quas’. PQ: How does Feng Shui affect property values? Prof. Choo: We can see over time how some properties or areas thrive while others stagnate.Human factors undoubtedly play a role, but Feng Shuiby S.Sulocana also has influence in enhancing harmonyProfessor Joe Choo is not what you and value of the property. For instance,expect of a feng shui expert. The first auction properties are often shied awaything that startles you upon making from as they are associated with badProf Choo’s acquaintance is the fact energy. People are looking at all thesethat this feng shui master is in fact a factors and more when purchasingfeng shui mistress. And a petite, pretty properties these days. There are manyone to boot. All thoughts of greying, factors that contribute to the value of follows the wife’s ‘qua”. Feng Shui is allbearded sages ruling the feng shui world property such as location, design and about finding the equilibrium of the Yinfly out of the window the minute she developer. Feng Shui is just one part of and Yang. In this case, Yang is the malebegins to speak. She is witty, charming it and not the sole contributing factor. and Ying is the female. Male attractsand chatty, and very modern in her the energy, while female contains theoutlook to life. She has the ability to PQ: From a Feng Shui perspective, energy.make one feel totally at ease in her what are the upcoming areas in Greatercompany within minutes of meeting Kuala Lumpur? PQ: How do developers in Malaysiaher. Prof. Choo: The Seri Kembangan incorporate Feng Shui into their area in the south of the Klang Valley. developments?The diminutive President of the According to the ‘qua’, south is good for Prof. Choo: It depends on how intenselyMalaysian Institute of Geomancy the next two years and this area will they want to adhere to the principles.Sciences was recently awarded a see positive growth for the next two The principles are best incorporatedProfessorship by the Shanghai Jiao years. Capitaland and YTL have gone from inception to completion. ThisTong University in China. She works into Seri Kembangan. The Klang Valley is includes the design and structure of thewith some notable listed companies prosperous because it is intertwined by building, drainage, energy substation,in Malaysia and acts as consultant to the Gombak and Klang rivers. The KLCC water tank, sewerage pond, landscapingvarious development projects. She area will continue to be robust as it is features and flow of the road.also contributes articles on Real Estate positioned at the concave of the rivers.Feng Shui for a number of publications One of the residential projects thatin Malaysia. According to Feng Shui principles, if has fully incorporated the principles is the river embraces the land (‘concave’), Mitrajaya Berhad’s C180° condominiumProperty Quotient (PQ) caught up with the energy will be collected. On the project in Cheras. I worked with theher recently to learn about how feng opposite side (‘convex’), the energy is architects to draw up plans for theshui has begun to influence real estate dispersed. We can see the effects on the project.practices in Malaysia. fertility of the soil. The vegetation on . the concave side is greener and lusher PQ: What is the property outlook forPQ: What is Feng Shui and why do compared to the convex side. year 2011?people place great emphasis in adhering Prof. Choo: The southern part ofto its principles? PQ: What are the basic Feng Shui Malaysia, which is Johor will be doingProf. Choo: Feng Shui literally means principles to consider when purchasing well. Property prices in Johor, especiallywind and water. The whole idea of Feng properties? the high-end and commercial properties,Shui revolves around conserving Live Qi Prof. Choo: The Flow of the river. will see a consistent and steady growth.(Energy), using the understanding of Properties that are positioned on theits behaviour and response to wind and concave of the river will prosper. In the northern part of Malaysia, Penangwater. will see rapid growth and prices are When purchasing residential property moving upwards parallel to the KlangThere are four aspects to Feng Shui, the back portion of the house needs Valley. In the Klang Valley, the areasnamely Harmony, Money, Health and to be higher than the entrance. This that will see an increase in activity andAdvancement. These aspects impact a will ensure the prosperity of the unit growth are those in the southern partperson’s needs at various times of their does not flow out of the property. The such as Sri Kembangan, Sungai Besi andlife. More and more people now have position of the entrance depends on the understanding on Feng Shui and individual ‘qua’. The ‘qua’ is determinedits disconnect from religion. They are by the date of birth of the individuals.more receptive to incorporating Feng The position of the main entranceShui principles as a means to enrich and follows the ‘qua’ of the man of the house If you would like to know more about Feng Shui, kindlyenhance their lives. Feng Shui principles and the master bedroom and kitchen contact Prof. Joe Choo:
  4. 4. SPECIAL REPORT 4 POISED FOR Figure 3: Tourist Arrivals and Receipts to Malaysia, 2001-2010 Receipts GROWTH Tourist Arrivals (RM’ million) (in’ million) 60,000 30 The Malaysian hospitality industry is growing on the back 50,000 25 of increasing tourism and MICE 40,000 20 activities 30,000 15 20,000 10 10,000 5 0 0by S.Sulocana 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Malaysia’s Hospitality Industry isflourishing thanks to the ‘Malaysia Truly Legend: Receipts (LHS) Arrivals (RHS)Asia’ campaigns carried out around the Source: Tourism Malaysiaglobe by Tourism Malaysia. The industryis experiencing additions in the form of The tourism industry in Malaysia Several big names entered thehotels and hospitality-related services continues to show resilience despite the hospitality industry last cater for an increasing number of global economic crisis. The total receipts DoubleTree by Hilton made its markbusiness travelers, as well as the tourism in 2010 increased to RM56.50 billion by opening a 540-room hotel in theand Meeting-Incentives- Conventions- compared with RM53.37 billion in 2009. Kuala Lumpur city centre and BanjaranExhibitions (MICE) industry segments. Total receipts have been experiencing Hotsprings resort by local hotel a steady 10-year compounded annual operator Sunway City Berhad openedTourism Malaysia is also actively growth rate of 13%. 25 luxury villas.promoting the MICE segment to markMalaysia as the preferred destination Tourism Malaysia figures show there Notable brands that will be coming onto hold such events. Malaysia’s unique were 2,367 hotels and 168,497 rooms stream are The Regent, Hyatt and Stselling proposition is its strategic in the country as at the end of 2010. Regis. The Regent will be entering thelocation as the hub of the Asia Pacific As at March 2011 there were 215 four- market in 2011 with a 250-room hotelregion, its sophisticated facilities and star and five-star hotels in Malaysia, of complemented by 102 luxury residentialthe lower cost compared with the rest which 60 hotels offering 23,129 rooms apartments in Kuala Lumpur city centre.of the region. are located in the Klang Valley area. Hyatt Hotels & Resorts, which currentlyThe hospitality industry appears to be The average hotel occupancy rate in operates two hotels in Malaysia, willflourishing in Kuala Lumpur, Johor Baru, 2010 was fairly stable, standing at 60% be growing its brand to have biggerPenang, Kota Kinabalu and Langkawi. in 2010. The average room rate for three, representation in popular tourist citiesA total of 24.6 million tourists entered four and five-star and budget hotels in Malaysia namely Penang, Malacca,Malaysia in 2010, marking an increase of hovered around RM160, RM224, RM365 Langkawi and Johor Bahru. Hyatt4.2% year-on-year compared with 23.6 and RM100 respectively. currently manages the 330-room Hyattmillion in 2009. Regency Kuantan in Pahang and theFigure 4: Number of Hotels and Rooms Supply in Malaysia, 2001-2010 288-room Hyatt Regency Kinabalu in Sabah. The hotel chain owners are also No. of rooms No. of hotels (in ‘000) anticipating the opening of Grand Hyatt (in ‘000) hotel located in the Golden Triangle in 180 2.6 2013. The hotel will offer 412 rooms, 2.4 bringing the total inventory of Hyatt to 150 1,030 rooms. 2.2 120 2.0 St. Regis by Starwood Hotels and Resort 90 1.8 Group will be entering the industry in 2014, setting a new benchmark in 1.6 60 terms of room rates. Located in KL 1.4 Sentral, the primary transportation 30 1.2 hub in Kuala Lumpur, hotel rates are expected to hover around RM1,000. The 0 1.0 development will include a 208-room 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 hotel and 160 units of apartments.Legend: Supply of Rooms (LHS) Supply of Hotels (RHS) (continued next page)Source: Tourism Malaysia
  5. 5. SPECIAL REPORT 5Figure 5: Recently Opened Establishment, 2010 Opening in 2010 Hotel No. of Rooms/ Location Completion Rating Facilities Date Banjaran Hotsprings 6 25 units Perak Jan-10 G City Club Hotel 5 180 rooms Kuala Lumpur Mar-10 Shah Alam Convention Centre n/a 208,000 sq.ft Selangor Apr-10 Fraser Place (Serviced Apartment) 5 215 units KLCC May-10 The Philea Resort & Spa 6 201 units Malacca May-10 DoubleTree by Hilton 5 540 rooms, Kuala Lumpur Aug-10 20,000 sq.ft (meeting space) TOTAL 720 rooms / 441 unitsSource: MyCEB(from previous page) be expanding its routes in the coming years. Currently, Tune Hotels andThe need for branded budget hotels Grand Paradise Hotels are the onlyin Malaysia has also increased over two branded budget hotel chains inthe years, due to cheap travel offered Malaysia. The chains operate nine andby low cost carriers (LCC), Air Asia and two hotels respectively in various statesFireFly. The rapid expansion of local in Malaysia.and international routes has alsocontributed to the growth of budget Malaysia’s hospitality industry has atravelers and even business travellers long term growth potential, judginglooking for economical fares. by its resilience despite the global economic turmoil and global pandemicThe LCCs have become a transit mode outbreaks. An important point toto other destinations. Air Asia has note is that the hospitality industry isexpanded its routes to 78 destinations investor-friendly, with no restrictionsaround the world, including the on foreigners owning any type ofrecent additions of Seoul, Paris and hospitality asset. At present, 58%Christchurch. Firefly, on the other hand, of four and five-star hotels in Kuala DoubleTree by Hiltonflies to 18 destinations and will Lumpur are owned by foreign entities.Figure 6: Incoming Supply of Rooms/ Facilities until 2016 New Development Hotel No. of Rooms/ Location Expected Rating Facilities Completion Date The Regent 5 236 rooms KLCC 2011 The Regent Residence 5 115 units KLCC 2011 Allson Capital Hotel 4 236 rooms Kuala Lumpur 2011 Pullman 5 515 units Kuala Lumpur 2011 Impiana Hotel (extension) 4 180 rooms KLCC 2011 (existing 335 rooms) Fraser Residence n/a n/a Kuala Lumpur 2012 Traders Hotel 4 286 rooms Johor Bahru 2012 Grand Hyatt 5 450 rooms KLCC 2013 St. Regis Hotel 6 200 rooms, Kuala Lumpur 2014 32,300 sq.ft (meeting space) MATRADE Convention Centre n/a 1 million sq.ft Kuala Lumpur 2014 W Hotel 5 150 rooms Kuala Lumpur 2016 TOTAL 1,765 rooms / 115 unitsSource: MyCEB, MPI Research
  6. 6. INVESTOR PREFERENCES 6THE CHINAREPORTMalaysia-China diplomatic and trade Tianjinrelations are on a strengtheningmomentum with a timely visit from Beijing Bohai RimPremier Wen Jiabao to Kuala Lumpur,April this year Chengdu Shanghai Yangtze Delta Chongqing Guangzhouby Chan Tze Wee Pearl RiverIn terms of bilateral transactions, China Deltais Malaysia’s largest trading partner,second largest export destination Source: www.chinasuccessstories.comand largest source of import in 2010.Malaysia has also been China’s largest real estate sector? The obvious companies in Malaysia will bring alongtrading partner in ASEAN for three beneficiary is increased investments an increased demand for housing,consecutive years since 2008. Despite in corporate real estate. Using Huawei amenities and other services associatedthe global economic crisis, Malaysia’s Technologies’ presence in Malaysia as with serving the business community.export to China registered double digit a case study, Huawei is the country’sgrowth of 14.5% valued at RM80.60 largest Chinese investor since entering Malaysian real estate potential to thebillion in 2010. During Premier Wen’s the Malaysian market in April 2001, as Chinese investorvisit on 29th April, a total of eight tracked by the Malaysian Investmentagreements and MoUs were signed Development Authority (MIDA). With one of the world’s fastest growingbetween Malaysia and China. The list The MoU signed on assistance to insurance markets, China’s insuranceincludes: help Malaysia train 10,000 telecom premium totaled RMB 1,452.8 billion professionals in the next five years, and this market is expected to become• Agreement on Expanding and making Malaysia one of the few global the world’s fourth largest insurance Deepening Economic and Trade human resource centers for Huawei. market by 2018. By February 2011, Cooperation between Malaysia and This would be followed by plans to Chinese insurers have total assets China develop a Malaysian training centre to under management (AUM) of RMB5.2• Agreement between Malaysia and fulfill the training initiative. Currently, trillion. The China Insurance Regulatory China on Framework Agreement Huawei has 645 employees in Malaysia, Commission (CIRC) issued a September to Facilitate Mutual Recognition where close to 10% are Chinese nationals 2010 circular (“CIRC Circular 79”) that in Academic Higher Education Taken from a wider view, this is but one explicitly permits China’s insurance Qualifications. of 120 companies with Chinese interest companies to invest their assets in• Joint-Venture Agreement between across various industries operating in private equity. The allowed investments Smelter Asia Sdn Bhd and Aluminium Malaysia as of 2011. Suffice to say, the may be either direct or indirect, making Corporation of China Limited expanding presence of international China’s insurance companies potential (CHALCO) equity investors in onshore companies• MoU between Beijing Foreign Studies as well as limited partners in onshore University and Universiti Malaya on Malaysia is the Country of private equity funds or “RMB funds”. Jointly Establishing Chinese Studies Honour in the upcoming The aggregate investment in any one Centre 8th China-ASEAN Expo held private equity fund may not exceed 20%• MoU Resolving Traffic Congestion in of the fund’s total offering size. Penang between the state annually in Nanning, Guangxi. government and Beijing Urban Industry clusters to be featured With this, up to 10% of the RMB5.2 Construction Group Co. Ltd in the Malaysia Pavilion include trillion assets are allowed to invest• MoU on MSC Malaysia Human Property Development, Food & in real estate. For some context, real Capital Development Programme estate investment by Chinese insurers in ICT Industry between Multimedia Beverages, Health & Wellness, stood at RMB40 billion at end 2009, Corporation Sdn Bhd (Mdec) and Building Materials and a less than 10% of the RMB520 billion Dream Catcher Consulting Sdn Bhd strong representation from permitted as at February 2011. with Huawei Technologies (M) Sdn all government offices with a Bhd presence in China.How does this bode for the Malaysian (continued next page)
  7. 7. INVESTOR PREFERENCES 7 Malaysia 6,187,400 6,000,000 3,000,000 1,000,000 500,000 200,000 Figure 7: Chinese Diaspora Source: WSJ Research, The Shao Center at Ohio University, CIA World Factbook(from previous page)With the Chinese insurance market’s Factboxwidening investment horizon as an The many angles of potential Chinese interest into Malaysian real estate:example of further liberal steps by theChinese government, Malaysian players • Shanghai’s high concentration of Malaysians offers the opportunity of targeting inbound investments must tapping into an accessible database as well leveraging on Shanghai’scontinue positioning and lobbying for extensive business networksChina’s attention and beyond. • Hong Kong’s corporate community includes China mainland companies thatAside from the immediate advantage have larger exposure to foreign markets by virtue of being listed in Hongo f g e o g ra p h i c a l p r ox i m i t y a n d Kongbenefits conferred by being part of theChina-ASEAN Free Trade Agreement, • The Pearl River Delta Region is made up of China’s southern coastal citiesenhancing the current government-to- and provinces. Familiarity with Malaysia is highest in this part of China.government relations between Malaysiaand China is crucial to continue creating • Malaysia is the 4th largest population within the Chinese diaspora aroundbuy-in from Chinese conglomerates and the world (Wall Street Journal, July 2010).investors alike. Over the course of 2011,the Malaysia-China engagement looks tosolidify with further official visits such unique to the Chinese target market is promising growth prospects of otheras the minister of industry and trade’s higher enquiries for themed properties South East Asian countries. Perhapsreturn visit to Shanghai in December, such as golf villas and beachfront a larger aspiration would be to fit intofollowing the Deputy Prime Minister’s properties. Kuala Lumpur, Penang and a China + 1 strategy where Malaysiavisit in March. Kota Kinabalu are the immediate areas features as the complementary regional of interest. office to China for global investorsOn the homebuyer level, increasing expanding into Asia Pacific.enquiries on Malaysian real estate On the construction and developmentopportunities have been recorded from front, Chinese companies are enquiringQ2 2011. Some attribute this to Premier on the prospects of development orWen’s recent visit as recognition of equity joint ventures with credibleChina’s closer ties with Malaysia. Malaysian parties. At this stage ofVarious forms of enquiries have infancy, most investor questions are stillemerged. Chinese real estate agents focused on supplementing their initialare testing the viability of promoting market research stages – understandingprime Malaysian properties to their local Malaysia’s real estate outlook, Upcoming MPI China Market Events are open forclients in 1st tier cities. growth prospects and clarification of participation from Malaysian developers and real estate government regulations. companies. Please contact MPI for further information.Similar to the requirements ofmost foreign real estate buyers in In the long run, Malaysia’s favourable • September 2011: Malaysia PropertyMalaysia, the sought after formats are position within the ASEAN countries and Showcase, Shanghaicondominiums within the range of 500 its outward looking policies will need to • October 2011: China-ASEAN Expo,– 2,000sq.ft. An additional criteria more remain highly competitive against the Malaysia Pavilion, Nanning
  8. 8. POLICY 8IT’S ALL A chasing the property was not the In one case [1], the Courts held that expectation of profit by sale. the gains arising from the disposal ofQUESTION OF the land were subject to RPGT. It was So how does one distinguish between commented that the evidence showedINTENTION a property held as trading stock or that the property was the only property investment? The Malaysian Courts have bought and kept by the taxpayer for decided in a number of recent cases that investment. There was no evidenceS. Saravana Kumar discusses the the distinction simply depends on the to show that the taxpayer had beendistinction between income tax and intention of the taxpayer. dealing in land before they acquired thereal property gains tax property. In fact, there was no evidence The Courts have held that the mere to show that the taxpayer had other realisation of investment is not income transactions in property before. There under the ordinary concepts and usages was also no evidence to show that the of mankind. However, profits arising taxpayer was a developer before the from the sale of any property acquired transaction. The purchase of the said for the purpose of trading are subject property was the only transactionIn property transactions, profits to income tax. In these circumstances, carried out by the taxpayer. In thosederived upon disposal of a property by the focal point of enquiry by the Courts circumstances, the Courts held thata taxpayer are subject to income tax or is the dominant purpose for which it could not be said that dealing inreal property gains tax. This distinction the particular property was originally land was the principal activity of thedepends on the taxpayer’s intention to acquired.It is encouraging that the taxpayer.hold the parcel of property either as a Courts have commented that the meretrading stock or as an investment. presence of an intention to sell property Similarly, the Courts had also held that at a profit at some future date is not of where a taxpayer takes no serious effortIt is important to identify this intention itself, sufficient to cause the profit to to obtain a loan facility from a financialas the tax treatment between the be taxable if the dominant motive in institution and has no capabilities totwo types of property is different and purchasing the property was not the develop land [2], such land is held to bedisputes can occur between the taxman expectation of profit by sale. the taxpayer’s investment. The gains areand taxpayer about the nature of the then subjected to RPGT.The mere factprofits derived upon disposal of the The Courts are guided by the badges of that a taxpayer made a gain becauseproperty. trade as the criteria for distinguishing the land was near the main road or a between profits subject to income tax good location does not automaticallyAny profits arising from disposal of a and those subject to RPGT. The main make the gain liable to income tax. Intrading stock are subject to income badges of trade are the dominant another interesting case [3], it was heldtax at the rate of 25%. Meanwhile, any purpose of acquiring the property, that the taxpayer had invested in thegains arising from the realisation of an subject matter of transactions, property by reason of its proximity to ainvestment are subject to real property period of ownership, frequency of nearby town. The value of the taxpayer’sgains tax (RPGT) at the rate of 5%, if it transactions, circumstances for sale, land merely appreciated in the coursewas owned for a period of less than 5 motive or intention of taxpayer and of time due to the development of theyears. If the investment was owned for methods of sale. surrounding areas.a period of more than 5 years, it is notsubject to RPGT. On the other hand, trading requires an The factors highlighted above were not intention to trade. The question to be seen by the Courts as factors alluding toSo how does one distinguish between asked is whether that intention existed trading but rather investment. In thisa property held as trading stock or at the time of the acquisition of the regard, it is crucial that a taxpayer isinvestment? The Malaysian Courts have property. Was the property acquired aware of the potential tax implicationdecided in a number of recent cases that with the intention of disposing of it at a in managing his tax affairs prudently.the distinction simply depends on the profit, or was it acquired as a permanentintention of the taxpayer. investment? [1] ALF Properties Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2005] 3 CLJ 936The Courts have held that the mere Often, it is necessary to ask further [2] Au How Cheong Sdn Bhd v Ketua Pengarah Hasilrealisation of investment is not income questions: an investment may be sold Dalam Negeri (No.R(3)(1)-14-02-2006under the ordinary concepts and usages in order to acquire another investment [3] E v Comptroller-General of Inland Revenue (1950-of mankind. However, profits arising thought to be more satisfactory and 1985) MSTC 106from the sale of any property acquired that does not involve an operation offor the purpose of trading are subject trade notwithstanding whether the Next issue: What are the factors thatto income tax.In these circumstances, first investment is sold at a profit or at allude to trading?the focal point of enquiry by the Courts a the dominant purpose for whichthe particular property was originally The Courts have held that a purpose S. Saravana Kumar is a tax lawyer with Leeacquired. It is encouraging that the so qualified and suspended does not Hishammuddin Allen & Gledhill. He holds a Master ofCourts have commented that the mere amount to an intention to trade. At Laws in Taxation from the London School of Economics.presence of an intention to sell property best, it is a mere contemplation until He appears regularly in court for various tax andat a profit at some future date is not of the materials necessary to a decision on customs disputes. Saravana also advises on tax advisoryitself, sufficient to cause the profit to be the commercial merits are available and & planning, tax audit & investigation, transfer pricingtaxable if the dominant motive in pur- have resulted in such a decision. and international tax aspects.
  9. 9. IN THE NUTSHELL 9GROWING Figure 8: Total Assets in US$ trillion and Annualised Growth in Asset of Top 20 Funds, 2010 (Split by Fund Domicile)RETIREMENT Total Asset (US$’ trillion) Annualised GrowthSAVINGS 1.6 (%) 50THROUGH 1.4 40.6 40PROPERTY 1.2 1.0 30 0.8Asian pension funds are becoming 0.6 20incresingly enamoured of real 12.8 14.0 14.7 11.7 11.8 0.4estate as a long term investment 5.0 6.3 10 0.2 3.5 3.6option 0 0 Netherlands Singapore Denmark Malaysia S. Africa Canada Korea China Japan USA Legend: Total Assets in USD trillion (LHS)by Hazrul Izwan & A.Lalitha Annualised Growth Rate (RHS)A pension fund is generally the biggest “player in the investment world, ahead Source: Towers Watsonof mutual funds, insurance companies,currency reserves, sovereign wealth asset growth of 12.4%. China’s Nationalfunds, hedge funds, or private equity. Social Security Fund has shown Major demographicOver the past decade, the total assets of tremendous growth of 40.6%, followed changes in Asia will see Asianpension funds globally have increased by Denmark (14.7%), Singapore (14.0%), pension funds reassessingmore than 75%, from US$17 trillion in Canada (12.8%), Malaysia (11.8%) and their current conservative2001 to over US$30 trillion in 2010. Korea (11.7%). asset allocations. IncreasedTowers Watson estimates that the In many countries, particularly the levels of real estate in theirTop 20 pension funds worldwide developed nations of the West, the portfolios offer an importantcontributed more than 13% to the real estate sector has generally been asset class for Asian pensionmarket. From 2004 to 2009, this sector considered to be an attractive assethas undergone an average annualised class for long term investment. In the funds to achieve portfolio diversification and meet theirFigure 9: Top 20 Pension Funds significantly increasing future liabilities in an effective risk- Rank Fund Country Total Asset (US$ million) adjusted manner” 1 Government Pension Investment Japan 1,315,071 Professor Graeme Newell, 2 Government Pension Fund-Global Norway 475,859 University of Western Sydney 3 ABP Netherlands 299,873 4 National Pension Korea 234,946 early 70s, pension funds began investing 5 Federal Retirement Thrift USA 234,404 in real estate, predominantly in the 6 California Public Employees USA 198,765 office, retail and industrial sectors. Over 7 Local Government Officials Japan 164,510 the last 40 years, more than a hundred 8 California State Teachers USA 130,461 billion dollars have been injected into 9 New York State Common USA 125,692 the property market through a number 10 PFWZ Netherlands 123,390 of investment modes such as direct 11 Central Provident Fund Singapore 122,497 acquisition, real estate investment 12 Canada Pension Canada 122,067 trust (REITs), unlisted real estate funds 13 Florida State Board USA 114,663 and joint-ventures. 14 National Social Security China 113,716 15 Pension Fund Association Japan 113,364 In Asia, however, real estate has not 16 ATP Denmark 111,887 traditionally made up a significant level 17 New York City Retirement USA 111,669 in most portfolios. Asian pension funds 18 GEPF South Africa 110,976 focus mainly on domestic low-yield 19 Employees Provident Fund Malaysia 109,002 assets, particularly fixed income and 20 General Motors USA 99,200 equities.Source: Towers Watson (continued next page)
  10. 10. IN THE NUTSHELL 10 “ (from previous page) in an effective risk-adjusted manner,” he explained in a report on the significance The exposure level in Asian pension of real estate in Asian pension funds. funds is typically lower than in US, With greater Canada, UK and Australia. Japan, which Colliers International (HK) Ltd regional institutional involvement in has the world’s largest pension fund, director David Faulkner said, “With direct real estate allocates less than 2% to real estate greater institutional involvement in investment in Asia, more investments. direct real estate investment in Asia, more income producing properties are income producing properties This scenario appears to be changing, now being traded.” are now being traded” however, as more and more Asian pension funds look for new asset Recent years have witnessed intense David Faulkner, classes in a search of good and stable reform efforts in pension funds around Colliers International (HK) Ltd yields. Real estate is increasingly being the globe. Malaysia’s largest pension considered as one such asset class that fund, the Employee Provident Fund Recently, EPF and Singapore’s offers safe diversification with stable (EPF) has also stepped up to increase Guocoland entered into 20-80 joint- yield. the asset allocation for real estate. venture agreement to develop a US$2.6 Figure 10: EPF’s Gross Investment Income in 2010 billion mixed-use development which is Money Market expected to be completed in 2015. Instrument 2.9% Since early last year, EPF has been Property & Equities 45.5% revealing its top equity investments Miscellaneous in Bursa Malaysia on a quarterly basis. Income 0.5% This is to promote greater transparency and to reassure its members that the US$ 8.02 investments are being undertaken in the interest of growing their retirement billion Malaysian Government savings and in accordance with investment and corporate governance best practices. Securities 22.1% EPF has shares in property development Loans & Bonds 29.2% and property-related companies such as Malaysian Building Society BerhadSource: Employees Provident Fund (EPF) (67.25%), Malaysian ResourcesUniversity of Western Sydney professor “Currently, the pension fund has less Corporation Berhad (41.78%), WCTof property investment Graeme Newell than 2% of its total accumulated funds Berhad (21.33%), Sime Darby Berhadsaid major demographic changes in Asia [amounting to US$ 140 billion] invested (15.29%), SP Setia Berhad (14.86%) andwill see Asian pension funds reassessing in properties. However, it has a IJM Corporation Berhad (14.67%).their current conservative asset strategic asset allocation target of 5%allocations. for properties,” said EPF deputy chief In order to create a vibrant domestic executive officer for investment Shahril property market, EPF has pledged to“Increased levels of real estate in their Ridza Ridzuan. continuously increase its real estateportfolios offer an important asset exposure. Although EPF’s fund size isclass for Asian pension funds to achieve Local properties owned by the EPF smaller compared with pension fundsportfolio diversification and meet their include Sogo Shopping Complex, Wisma in Europe and US, it is more proactive insignificantly increasing future liabilities KFC, MAS Academy, Block A (Plaza implementing its real estate strategy. Sentral) and Gurney Resort Hotel. EPF “ is also involved in a mixed development EPF reported that its property and greenfield project at the 3,000-acre miscellaneous income last year rose Rubber Research Institute Malaysia 17% to USD34.4 million in 2010 from Currently, the pension land in Sungai Buloh which it acquired US$29.3 million in the preceding year. As fund has less than 2% of its for close to US$1 billion. such, total gross investment income in 2010 reached US$8.02 billion compared total accumulated funds While aggressively exploring the with US$5.74 billion in 2009. invested in properties. domestic market, the EPF is also However, it has a strategic increasing its exposure overseas and is Moving forward, Malaysian pension asset allocation target of 5% actively seeking investable properties funds can adapt to increase their in Singapore, Australia and the United exposure and stimulate the property for properties” Kingdom. market by establishing clear real estate risk management procedures, Shahril Ridza Ridzuan, Its international investment strategy particularly in terms of a risk-sharing Employees Provident Fund (EPF) includes the acquisition of London strategy that includes joint-ventures properties The Fleet Street, One and co-investment with other major Sheldon Square and Portman Square for pension funds, sovereign wealth funds US$789 million in August 2010. and real estate investors.
  11. 11. GRAPHICALLY SPEAKING 11LANDED PROPERTY PRICE IN 1Q2011pCOMPARED TO 1Q2010 PENANG KUALA LUMPUR • Island: +5% • Central: +7% • Seberang Perai: +3% • North: +9% • South: +17% SELANGOR • Petaling: +12% • Kelang: +5% • Gombak: +8% JOHOR • Hulu Langat: +12% • Johor Bahru: -4% • Batu Pahat: +5% • Muar: +1% • Kluang: -4% • Segamat: +11%CAPITAL APPRECIATION FOR VARIOUS HOTSPOTS IN KLANGVALLEY, PENANG AND JOHOR KLANG VALLEY PENANG JOHOR Bandar Utama +23.3% Greenlane +12.3% Bdr. Baru Permas Jaya +9.5% Bandar Sri Damansara +21.8% Sungai Dua +11.6% Taman Daya +8.8% Bangsar +12.9% Pulau Tikus +10.7% Taman Perling +8.3%Source: NAPIC, CBRE, Raine & Horne, KGV-LSH, MPI ResearchNote: All analysis is based on •Capital appreciation as at 1Q 2011p compared with 1Q 2010 •Selected housing schemes •p = Preliminary data
  12. 12. 12ABOUT USMalaysia Property Incorporated is a Government initiative setup under the Economic Planning Unit to drive investments inreal estate into Malaysia.As the first port-of-call for real estate investment queries,Malaysia Property Inc. connects interested parties throughan extensive network of government agencies, private sectorcompanies, real estate firms, business councils and real estate-related associations.MPI has two core objectives; to create international awarenessand to establish connections between foreign interests andMalaysian real estate industry players, ultimately contributingto real estate investments into the country.For further information andup-to-date tracking of Malaysian real estate data, visit:www.malaysiapropertyinc.comFor further enquiry, write Disclamer: This report contains information that is publicly-available and has been relied on by Malaysia Property Incorporated on the basis that it is accurate and complete. MPI is not liable if the case proves to be otherwise. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and the same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed.