Why You Shouldn’t Invest In Malaysian Real Estate
Adam Fayed
Managing Director - adamfayed.com - helping expats and high-net-worth individuals
Why you probably shouldn’t invest in Malaysian real estate – that will be the topic of today’s article.
Many expats come to South East Asia, including Malaysia, and a percentage become interested in the local property market.
Whilst there are always positives and negatives associated with every investment, this article will explain some of the reasons why you shouldn’t invest in the Malaysian real estate market.
If you are looking to invest in more productive assets, don’t hesitate to?contact me , email ([email protected] )?or use the WhatsApp function below.
Often there are better real estate markets to consider, and other investments.
This article first appeared on adamfayed.com . Some of the facts might have changed since we wrote it, and nothing written here is formal advice.
For updated guidance, please contact me.
Table of Contents
Introduction
Malaysia is located on the busiest sea route in the world – the Strait of Malacca. This allowed its economy to work well, simply based on where it is located on the map.?
Combine this with capital outflows from the Middle East, sizable oil reserves, business-friendly policies, and the strongest Islamic banking industry in the world. Seems like Malaysia is without doubt one of the best investment destinations in Asia, BUT there are some points that will tell you the opposite side of investments in the country.
Before we delve into that, let us tell you a little about Malaysia, real estate features, investments, restrictions, as well as advantages and disadvantages.
Investors should know that Malaysia is one of the few countries in the region to allow foreign investors to own land, but it comes with many restrictions. We’ll look at some of the restrictions later, but the laws are much simpler than most other countries.
As a result, the Malaysian real estate market presents more possibilities than do the majority of the other Asian real estate markets. The potential to own land not only paves the way for several very different types of investments , such as?houses, development prospects, and so on, but it also paves the way for investments in various?towns and cities.
For instance, in Thailand , the only type of real estate that is available for purchase by foreign buyers is condominium units. Because of this, they are effectively cut off from the access to the small towns. This is due to the fact that there are not many condominiums available in such locations as Khon Kaen and Nakhon Ratchasima.
Buyers of real estate in Malaysia now have more options available to them in terms of cities. Depending on what kind of living situation you prefer, you have the option of purchasing either a typical apartment or a townhouse in Kuala Lumpur. For the most part, things are looking up for the Malaysian?real estate market, but there are still some dark spots.
In terms of employment, employment rates are relatively low across the entirety of Malaysia. Even residents of some of the country’s largest cities believe that the cities have reached their maximum potential. Malaysia also has a growing population, which is another of its characteristics.
The country’s population will grow from more than 33 million in 2023 to over 40 million by 2050, according to Statistics Times . This will help absorb the supply in the long run. The rising middle class will also help. Malaysia plans to become a developed country by 2030 .
Can you invest in Malaysian real estate as a foreign national?
Not only is it possible to own a regular condominium, but you can also own houses, townhouses, and even land. Even so, not all concerns?are as easy to solve. There are a few restrictions and peculiarities, and land can be divided into a number of distinct categories.
To begin, all foreign nationals who intend to acquire Malaysian real estate?are subject to a stipulation that there be a minimum purchase. The objective is to make it possible for foreign buyers to participate in the middle-to-high-end market while putting a constraint in place?so they could not?drive up the prices of homes and?that they?stay?within the price range a?typical Malaysian could afford.?
There is a minimum purchase price that must be met for foreigners who are looking to acquire?Malaysian real estate. This price differs depending on the kind of property being purchased , its location, and its current condition.
The bare minimum that must be met varies from state to state, and in some of those states, the cost goes up depending on whether or not you’re purchasing an apartment or a piece of land with the property.
In Malaysia, the minimum purchase requirement is 1 million ringgit (about 229,410.5 US dollars as of the time this article was updated). However, the price is 2 million ringgit in the state of Selangor, and foreign nationals?are only permitted to buy land in communities that have entrance gates. In the time since the last price adjustment , this cost has been increased on multiple occasions.
Furthermore, foreign nationals?are not permitted to purchase land that is reserved exclusively for Bumiputera, which is Malay for people of Malay ethnicity who practice Islam. Foreigners?are also not allowable to attain ownership of?the majority of agricultural land or properties that the government has designated as having a low or medium valuation?for housing.
How much are taxes for Malaysian real estate?
The high rates of taxation in Malaysia are one of the country’s major drawbacks for real estate investment . The rental income tax in the country is progressive, up to 30%.
The real property gains tax (RPGT) payable on any gains made on the sale of real estate is quite high at 30% if you have owned the property for a mere three years or less, whether you’re a citizen or a foreign national.
The RPGT for citizens and non-citizens vary when the sale of the Malaysian real estate takes place in the fourth year, fifth year, and above.
If you’re a citizen in the country, you will no longer have to pay a real property gains tax once the property you’re selling has been with you for more than five years prior to the disposal.
On the other hand, foreign individuals are subject to a property?gains tax rate of?10% if they have owned the real estate?for more than five years before putting it up for sale.?
In Malaysia, the stated objective of the RPGT is to put an end to speculative purchasing behavior among investors with a short-term investment horizon. Cambodia is the sole exception among the majority of countries in the region, which generally have comparable tax estimates.
There is also an annual property tax , but it differs from municipality to municipality as it is identified by local councils. In general, though, you can expect to pay about 4% of the Malaysian real estate’s rental value per year.
In addition, you must pay an annual rental cancellation tax, which is usually less than 100 ringgit.
If you buy an apartment in a condominium or belong to a land community, they will likely have an annual maintenance fee as well. They vary greatly by location, equipment, density, and standards, but usually hover around 4 ringgit per square foot.
Is it safe to buy Malaysian real estate?
The land registration system in Malaysia is widely regarded as being among the most secure and thoroughly documented in all of Asia. This is something that applies to land plots as well as condos, so it is highly unlikely that the government will give you any trouble for it.
Therefore, any issues or things that should be watched out for will be those that originate from a real estate?development firm or builder, as seems to be the case in about?every real estate market all over the world.
You are not going to run into any problems if you make your purchase from a respected firm. A warranty or guarantee is included with all brand-new home purchases and leases. The developer is obligated to construct the project in conformity with the specifications outlined in the sales contract, as well as comply with any warranties that may be provided.
It is generally considered to be a positive indicator of a company’s robust reputation for the company to be listed on the Bursa Malaysia, which is the country’s stock exchange.
When a company wants to be listed, it must first fulfill certain funding commitments, such as having a certain amount of capital, and it must also acknowledge that it is accountable to its shareholders. They are not going to suddenly run into financial difficulties when they are only a third of the way through the venture.
Why you shouldn’t invest in Malaysian Real Estate: The real risks for investing
Investing in Malaysia, whether it be stocks or real estate , at first glance seems to an ordinary average investor to be a rather risky business. In most cases, the reality is that risk is simply what investors perceive, not what actually happens in the market.
The bottom line is that foreign investments are no different from domestic ones, but each jurisdiction has its own certain rules and nuances, which, if you are aware of them, will allow you to protect yourself from potential losses.
Of course, investing in overseas property is perhaps one of the most popular and reliable forms of investment. But for today, few people have doubts about the investment attractiveness of the Asian real estate market .
It’s true, investors are not always able to make an analysis and take into account all possible risks from future transactions. When buying real estate abroad, your main source of information will be a real estate agent and there is no guarantee that such a specialist will have a special certificate or license for this type of activity.
Therefore, it is important to prepare in advance and protect yourself as much as possible before heading to your new prospective home. After analyzing the real estate market abroad, we prepared a guide and introduced the most common mistakes that every second buyer makes. As a result, you should exercise extreme caution and pay attention to the following tips, which are guaranteed to be of great assistance to you.
Early purchase planning
How does a planned acquisition work?
Lack of a pre-planned investment plan is one of the biggest mistakes you make when buying a home abroad. Finding a home after forming the right investment strategy is the right way to go.
Many investors make the mistake of buying a house solely because they consider it a successful deal in advance, but later, when the euphoria passes, they begin to think about how the new purchase can fit into their life from a financial point of view.
Make up the maximum number of requests for a future purchase. This will allow you to acquire the ideal option from an investment and financial point of view.
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Quick profit expectations
What’s wrong with this mindset?
Making quick profits is a misconception among investors. Getting rich quick on real estate is just a myth. It is important to understand that real estate investing is a long-term project .
Dumping prices
How does it happen?
A common practice is to dump the cost per object by different agents. On average, in 3 to 4 different agencies, the cost of a house can differ by 10 to 30 thousand.
Another feature that affects the price can be the fact that in many markets, local agents do not set a price for the object at all, preferring to first assess the client and his solvency.
In such a situation, the right decision would be to analyze the cost per square meter in advance. This will give a clear understanding of where the real price is, and where there is simply twisted stuffing.
Currency exchange risk
What risks are tied to currencies?
Given the currency risk, it is important to understand how volatile the currency of a given country is (in this case of Malaysia), the location of the intended purchase, and the motivation behind the transaction.
Commodity-based countries have strong currencies if the price of their commodities is high in the world.
The lack of a hard currency causes volatility in more dramatic cycles. The main aspect of international investment is diversification, including currency diversification.
During the Asian financial crisis , the Malaysian ringgit fell 41.3 percent and the Thai baht fell 76.4 percent against the Singapore dollar in just seven months from June 1997 to January 1998. If you were to buy Malaysian real estate or Thai property, you would have lost an enormous amount of foreign exchange, in addition to the falling prices of your foreign property.
Political, economic and legal risks
How do they affect your investment choices?
The choice of jurisdiction for investment is one of the important points when planning a future purchase.?
It is important at the initial stage to understand whether the country has a strong leadership with a stable government or there are problems with corruption and bureaucracy.?
Perhaps the country is periodically plagued by political unrest or a coup d’état. If something like this happens, what will you do with your real estate? From an economic point of view, it is also important to understand how stable the economy and financial situation in the country is.?
Legal systems vary from country to country. Foreign buyers can face a difficult legal battle or any kind of legal dispute such as complaints against developers, disputes with real estate agents or contractors, missing rent, or evacuating tenants.
Market risk
What does it mean?
The issue of market risk is that when choosing a property abroad, it is important to understand how the real estate market works in a given country. In simple words, if you have decided to buy Malaysian real estate, it is important to analyze the buyers and landlords of the Malaysian real estate market.?
What is it for? If you decide to sell your home, it will be easier for you to understand who is the target audience for your property.?
Another important point is monitoring the market with high shares of leveraged funds , if economic problems arise, you will immediately see that sellers are quickly dumping real estate and withdrawing their money, thus creating an excess supply of real estate abroad.
Project risk
What uncertainties are involved with the project?
When buying real estate abroad, it is important to find out at what stage of construction the project is, how many square meters have already been sold and its geographic location.?
It is also important to understand from what source the construction project is financed – own funds, a bank loan or funds received from the sale of ready-made objects.?
At any time, such financing may stop, for example, the bank decides to refuse for some reason to allocate funds and the developer will be left with an unfinished project. It is strongly recommended to consider all of these risks before buying and then compare them with your tolerance levels and overall investment goals .
Risk of expropriation
What is expropriation?
There are two types of expropriation – indirect and direct. A government that enters and seizes every private property under the flag of “incomprehensible reform” is very close to the outright expropriation you can get.?
On the other hand, a government that increases property taxes eight-fold to the point where half the country can no longer afford to own their home is an indirect form of expropriation that happens all the time.
In general, the risks of investing abroad can be reduced to several main risks that can be easily eliminated or taken into account in your transaction, subject to timely assistance and qualified support from specialists. Keep in mind that people in the largest markets get rich enough by investing in real estate or starting a business there, and none of these risks affects most of them.
It is a bad idea to invest in real estate in Malaysia right now. Why?
At the moment we are still experiencing some of the most turbulent times in history. As you probably can guess, we’re talking about the effects of the COVID-19 crisis and the Movement Control Ordinance (MCO) that followed.?
The government has taken steps since the MCO went into effect on March 18, 2020, with a number of initiatives that could be catalysts for funding. The current economic climate has likely influenced how many people in Malaysia overestimate their personal finance goals.
So, if this year you were intending to accumulate several assets in Malaysia, we will help you to understand what is going on and in which destination you should move as an investor.?
In the primary sector, approved investments have all but disappeared, falling to 3 million ringgit ($ 691,244.40) in 2020, down 91 percent year on year. This sector includes mining, plantation and commodity production, as well as agriculture.
Economists expect the total year of approved investments to fall to 100 billion ringgit ($ 23,041,480,000) from 211 billion ringgit ($ 48,617,522,800) in 2019, given the continuing uncertainty and risks associated with COVID-19 and the related Movement Control Order.
According to the Malaysian Investment Development Authority (MIDA), Malaysia’s total approved investment in manufacturing, services and the primary sector reached 64.8 billion ringgit ($ 14,930,879,040) between January and June 2020, despite numerous obstacles in the global market.
Domestically, the five states, Sabah, Selangor, Penang, Kuala Lumpur, and Johor, contributed 47.1 billion ringgit ($ 10,852,537,080), or 72.6%, to most of the investment received.
With some bargain hunting options emerging in Malaysia’s still weak real estate market, there has been a renewed surge of interest in Malaysian real estate from international property investors.?
The government agreed to lower criteria for high-rise buildings in urban areas for foreigners in Malaysia following the introduction of the 2020 budget. However, only the Federal Territory of Kuala Lumpur, and not the governments of other states, actually adhere to this statement.
Two years later into 2022, approved investments for the primary sector edged up to 15.50 billion ringgit from 14.65 billion ringgit for the period from January to September 2022 vs 2021, according to MIDA.
The improvement shows investor confidence, but the country is still ways to go to complete economic recovery after the COVID-19 crisis.
Investing in properties located in central areas such as Selangor or KL can lead to good capital gains and good returns. This is due to Malaysia’s robust economic growth , relatively young working population and growing infrastructure connectivity in Malaysia, including high-speed rail links in the near future with Singapore.
However, when looking for Malaysian real estate to buy, foreign investors planning to invest in property in Malaysia should be aware of certain restrictions and conditions that apply to them. Explore before you dig.
Overall, investors can now restructure their portfolios to handle some of the risk. In the meantime, those with leverage can take advantage of the lower (undervalued) price homes on the market. Are you able to withstand various shocks (for example, falling property prices), but are you able to hold out until prices recover ? Or maybe you are someone who doesn’t want to sell in the next 3, 5 or 10 years?
If that’s all of the above, then yes, now is a great time for you to play a real estate game.
You see, nowadays developers are not only increasing the value of their unsold property to make it more attractive, asking prices are dropping, and this is helping to create the conditions for financing.
Thanks to the Bank Negara Malaysia’s (BNM) Overnight Policy Rate (OPR) cut, interest rates will be very lenient compared to 8% to 9% or double-digit rates in the past. BNM is the country’s central bank.
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