Considering Johor as an investment place?

Considering Johor as an investment place?

These days, investing in Iskandar seems to be a very hot topic. Whenever I hold my talks or training, there will definitely be some people who will ask for my views of the location as well as whether they should buy a unit there.

In recent months, many Singaporeans are warming up to the idea of owning a unit there. Considering how expensive Singapore properties have become, some Singaporeans, as well as Singapore residents, are more open to staying in Johor where housing costs are much lower, and commuting to Singapore for work and play. However, before you jump onto the Iskandar bandwagon, you should be mindful that, despite the proximity, Johor’s property market is very different from the Singapore market. Even though units there can go for as little as RM500,000 (about SGD200,000), buyers face several potential risks. So what are some of these risks?

1. Untested resale market.

Had anyone bought a unit in Iskandar back in 2009/2010, he would likely be sitting on good profits right. These days, new property launches are easily priced at 50% to 100% more.

Nonetheless, it is important for us to remember that profits are only realised when we sell the unit. As long as the unit is unsold, any increase in valuation will remain as paper profits. Although some properties in Iskandar are currently sitting on healthy paper profits, whether they can find buyers for those units remain to be seen. Even if owners are able to find a buyer from the resale market, any profits could be affected by the next factor.

2. Currency (or Exchange Rate) Risks.

For domestic Malaysian buyers, the issue of currency risk is not really a concern. In comparison, Singapore investors who wish to convert their profits from Malaysian Ringgit back to Singapore Dollar would be susceptible to fluctuations in exchange rates between the two countries. Singapore investors who own properties in Iskandar would want the Malaysian currency to strengthen (and not weaken) over time, so that profits in Singapore dollars would be more after conversion.

At present, RM1 is approximately the equivalent of SGD0.40. From Figure 1, it can be seen that the Malaysian Ringgit has been weakening against the Singapore Dollar over the last few years and the chart seems to suggest that this trend could potentially carry on. While this trend may be good for Singaporeans who are looking to buy, it works against those who are looking to sell as the value of their profits, in Singapore dollar, is gradually being eroded.

3. The Iskandar real estate market is not as transparent as Singapore.

As an investor, you can find information on the Singapore real estate market quite easily online. Unfortunately, this is not the same for Iskandar and the Malaysian real estate market is not as transparent as what many Singaporean property investors are used to. Adding to the lack of transparency, there are also political risks. In the last Malaysian election in 2008, the ruling party UMNO garnered just slightly more than 50% of the popular votes and failed to win the two-thirds supermajority in the Malaysian parliament needed to pass amendments to the Malaysian Constitution. With the next Malaysian election looming, the political climate is highly uncertain. In the event that a new political party comes into power, it is possible that Malaysia’s new political masters would want to review some of the standing policies as well as arrangements pertaining to the Iskandar development. Hence, such political uncertainty could pose potential risks and uncertainty to Singaporeans who have bought units there.

4. Untested rental market.

Some investors, whom I have spoken to, told me they are prepared to hold onto their Iskandar units for the long-term by renting them out. However, what some of them may not realise is that the rental market in Iskandar is currently untested and the amount of rental returns is still questionable. In addition, even if there is rental demand, it could be volatile during the initial stage. This is because many developments would be completed about the same time and that, in turn, could result in excess housing supply. With the sizable supply, tenants would be spoilt for choice and it is foreseeable that it would take a while for rental prices to eventually stabilise.

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