How the Covid-19 pandemic has affected foreign developers in Johor

This article first appeared in City & Country, The Edge Malaysia Weekly, on March 15, 2021 - March 21, 2021.
Based on 3Q2020 data, there are about 100,000 units of high-rise residences (condominiums and serviced apartments) in future supply (Photo by Bloomberg)

Based on 3Q2020 data, there are about 100,000 units of high-rise residences (condominiums and serviced apartments) in future supply (Photo by Bloomberg)

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It is no secret that mega develop­ments by foreign developers, particularly from China, were sprouting up in Johor prior to the Covid-19 pandemic. Notable projects include Chinese developer Country Garden’s Danga Bay and Forest City in Iskandar Malaysia. More recently, last September, Iskandar Waterfront Holdings Sdn Bhd announced a partnership with Metallurgical Corp of China Ltd (MCC) to develop a 148-acre commercial plot in Skudai.

In general, the strategies of foreign developers in Johor differ, but  they typically offer products in the higher price range and target mostly foreign buyers from China and even the Middle East, and some local buyers. Property tourism also plays a pivotal role in the buying process, with the developers organising trips to their sales galleries.

During my last visit to Forest City, construction at the US$100 billion (RM413 billion) development on man-made islands was proceeding at a lightning pace, the way it is done in China, and notably speedier than is seen with local projects.  Major components of the development, such as the Forest City Golf Resort, are already taking shape. But with the current global health crisis and lockdowns, delays in construction and international tourism coming to a halt, how will foreign developers in Johor fare in the coming quarters?

“Foreign developers are also adversely affected by the Covid-19 pandemic and the consequential Movement Control Order (MCO). Although we do not have the actual statistics, we believe foreign developers could be more badly affected than local developers, as most of their developments target the foreign market, and are high-end and mainly high-rise,” says KGV International Property Consultants (Johor) Sdn Bhd executive director Samuel Tan in an email interview.

“Owing to the pandemic and MCO, our borders have effectively been closed since March 2020. Property purchases by foreigners plunged and could be as bad as zero sales at the height of the global lockdown in 2Q2020.

“The foreign developers’ main target market is still predominantly foreigners. The travel restriction effectively denies potential buyers the chance to visit the developments and it is challenging to host property roadshows overseas as well.”

KGV International Property Consultants (Johor) Sdn Bhd research manager Tan Wee Tiam concurs and outlines the challenges ahead: “In the next few years immediately post-Covid-19, sales of these projects targeting high-end foreigners will remain slow. As the overall market is likely to be fluid — hence higher-risk, especially for overseas property development — many potential property buyers will wait and see for fear of catching a falling knife.

“Very few will dare to be contrarian and commit to big-ticket items in this volatile market. In other words, these developments will face challenges longer than expected,” says Wee Tiam.

According to the consultants, in a bid to move their projects, foreign developers may have no choice but to tweak their market positioning and strategies. Wee Tiam says: “Instead of heavily relying on overseas buyers, the high-end market and predominantly high-rise developments, they might have to reposition their products at the mid-range to middle-high end, reposition some of their products to low-density developments and refocus on local buyers to move the sales.”


To diversify, think local

It appears that Chinese developers have gradually diversified their target market since the Chinese government started clamping down on capital leakage a few years ago. “Moving forward, we expect they will be repositioning even more on the local market,” notes Samuel.

“To be sustainable, foreign developers will have no choice but to scale down the development intensity. Many should have realised by now that Johor Baru is still not ready for such dense development at a high plot ratio of 4.0 to as high as 8.0 for some cases. Our population and infrastructure are not ready for such high-density developments. Our humble opinion is we [will not be] ready even in the next 10 to 15 years.

“We hope there will be some entering the market post-MCO, [albeit] for different reasons. Some of them will be able to introduce new designs and technology in this industry. Some forms of healthy competition will also bode well for the consumers. A possible area is mass affordable housing, as seen in other countries. If these developers can build such houses at a cheaper cost with better designs and speed, they are certainly welcome guests.”

Meanwhile, consultants suggest that, for foreign developers to thrive in the residential development market in Malaysia, they must think about sustainability. “No development, especially those on a large scale, can be sustainable if the developers do not ‘think local’,” says Samuel.

“The ratio or percentage of the product must have a substantial proportion that is meant for locals. A township that is predominantly planned or positioned for overseas buyers will eventually give rise to problems such as a high proportion of unoccupied units, low population, and other unintended consequences such as social and cultural integration issues.”

The master planning of projects by foreign developers in Johor may also affect their long-term sustainability. “The master planning cannot overwhelmingly focus only on the residential component. It is important to plan for commercial, industrial, hospitality and leisure, and integrate all these components to create a holistic township. It must be able to attract investors, create jobs and draw visitors to the development, or else it will not be sustainable,” says Wee Tiam.

“It is important to consciously [and proactively] plan for integration by having public amenities such as sports facilities, parks, beaches, food courts and other leisure and entertainment facilities to attract the locals.”

Samuel says: “There are still opportunities for foreign develop­ers, but gone are the days when developments would sell well just by having grand showrooms [with some perks thrown in]. Hopefully, all stakeholders in the market [the authorities, developers, investors, buyers] have learnt a lesson or two, and we all can work together towards making Iskandar Malaysia a better place and even more attractive for both foreigners and locals.

“The pandemic and its consequential impact on the housing industry offer an opportunity for all developers, including foreign and other stakeholders, to take a hard look to improve the industry,” says Samuel.


The master planning of projects by foreign developers in Johor may also affect their long-term sustainability (Photo by Bloomberg)

Bettering the outlook with assisted agencies

Consultants highlight the repercussions of the pandemic, which include delays in delivering new phases. “Most projects in Malaysia were delayed in 2020. Construction progress slowed down as a consequence. In fact, very few developers launched new projects, especially high-rise ones even prior to the pandemic. Foreign developers are no exception,” says Wee Tiam.

Samuel says: “Many foreign companies have delayed the launch of new phases and focused only on clearing their unsold units in the past two years.

“The challenge now is for those who have launched their serviced apartment projects and sold part of them but the projects have now stalled and are in various construction stages. It is not possible to proceed further because of the inability to reach a certain sales threshold. The earlier buyers have been left to languish.

“We are aware that some of these developers are exploring the idea of converting some of the unsold units for alternate use, such as hotels. In such cases, it would be prudent for the developers to negotiate with the buyers and authorities to reconfigure the project to ensure delivery. Abandoned projects are not only an eyesore but [can] manifest economic and social problems later if left unattended over the longer term.”

Developments by foreign companies in Johor are mostly in the form of high-end, high-rise units, and this particular segment in Johor has been grappling with the mismatch in supply and demand for many years.

“In Johor, there is little mismatch between supply and demand for landed properties. The demand for mid-range and affordable landed properties remains strong. The mismatch is in high-rise properties — based on 3Q2020 data, there are close to 100,000 units of high-rise residences (condominiums and serviced apartments) in future supply. Of that figure, about one-third is under construction and two-thirds have obtained approval but have not commenced construction,” says Samuel.

“In view of current market conditions, we expect many of these high-rise developments to be either delayed or cancelled. To move sales, some developers have converted  serviced apartments into low-rise landed properties or for alternate use such as hotels.”

Looking ahead, high-rise residences in Johor will be under pressure for the next few years, say the consultants. “Having said that, we must be cognisant of the fact that land is a scarce resource. Despite the current oversupply of high-rise residences, it is a long-term trend to go high-rise, owing to high land cost and increasing acceptance of such gated-and-guarded communities among the younger generation,” says Wee Tiam.

“We believe the blanket freeze on the development of serviced apartments in Johor requires a relook. The government should consider allowing them to be developed in certain localities where they are popular among buyers. These apartments can be priced within a more affordable range to cater for the needs of selected groups. Higher land costs in such areas simply negate the possibility of developing affordable landed properties.”

According to the consultants, a few things could be done to alleviate the situation. “Perhaps the government can build a comprehensive, transparent and easily accessible database. Housing developments of the future should be data-driven to ensure accurate products and timing of launch,” suggests Samuel. “It should also incorporate input from all stakeholders, that is, residents, professionals, developers and others, in our cities’ and towns’ master planning.

“Standardising the planning guidelines for commercial and residential developments by adopting plot ratio, instead of using plot ratio for commercial development and density (that is, unit per acre) for residential … This is the main reason that most developers build serviced apartments on commercial land, but they are actually regular condominiums with no services provided. This is a planning loophole,” Wee Tiam points out.

“In view of Johor Baru’s relatively lower population base and current provision of infrastructure, there is an urgent need to curb high-rise residential development with an excessively high plot ratio.”

In addition, the consultants believe the government should allow income tax deduction for housing loan interest payment. “Cap the incentive for the first property purchase. It encourages such activity and helps reduce the burden of first-time purchasers,” says Wee Tiam. “Do away with the real property gains tax if the owner owns the property for more than five years. Taxing long-term investors is detrimental to property investment and is contrary to the very initial and core purpose of curbing speculation.”

Samuel says: “A revision of certain planning policies is needed. For instance, while noble, requiring low-cost housing in the development of a small residential apartment scheme is really unrealistic. A certain amount of flexibility must be adopted. Alternatively, in lieu of low-cost components, developers can be given the option of contributing towards other social housing.

“Certain foreign developers can be seen as disruptors in the housing industry. They can introduce technologies and designs that are more efficient and desirable. Some may pose a challenge to local developers in terms of speed and costing, resulting in cheaper house prices.

“Quite controversial is their ability to attract foreign buyers into our property market. Really, if these buyers are permitted to buy selected property types, they should be welcomed. Such buyers should be seen as foreign investors bringing funds into our system. Of course, adequate mechanisms must be set to prevent them from competing with local buyers in the priority segment of the housing market.”