What new initiatives is MPI involved in?
THARMALINGAM: As far as the new initiatives for MPI are concerned, we are moving away from the basic selling of houses to foreign interests. We are moving toward a situation where we are allowing our developers to deal with foreign interests coming into Malaysia in green field ventures, joint ventures, investment, or trading in the real estate arena. MPI has a very narrow focus. We are only interested in bringing foreign direct investment into real estate in Malaysia, which is why we are looking at both the business-to-consumer segment and the business-to-business segment. They're both inter-related. However, one is involved in a real estate platform, which is very small, and the other involves larger investment opportunities. We have seen in Malaysia in the last year that we are on the radar of investors. This is due more by accident than by design because of what happened in Japan and Thailand, as well as the fact that the other ASEAN nations are still in various stages of development and Malaysia is seen as a safe haven. Malaysia is viewed as a place where investors can put money in and there is opportunity for long-term investment.
One of MPI’s objectives is to promote global awareness of real estate investment opportunities in Malaysia. What are the best opportunities in Malaysia’s real estate sector? What challenges have you encountered in promoting them?
THARMALINGAM: In promoting real estate abroad, one of the issues we have is that we have a large landmass and a small population. Because we only have 28m people in the country, we are not able to consume our own investments. Therefore, we need foreign direct investment to come in and in order to do that we need to make it attractive to investors. MPI's role in this area has been primarily to promote the opportunities available in Malaysia. The residential sector of our real estate market is of course a given, because we have an extensive range of opportunities for investors. This year, I would say that the retail, healthcare, and education sectors are the most viable. With our open policy on having foreign universities setup campuses in Malaysia, we are seeing a range of regional students from Korea all the way to Indonesia, India, and China coming here to study. When they come to study, they stay for at least three to four years and often the parents or grandparents follow them and in some cases they setup home. Because they are familiar with Malaysia, many of them buy real estate here or invest in real estate here. On the healthcare situation, Malaysian healthcare is second to none; however, it is very underrated. Many people consider Singapore and Bangkok as healthcare centers and they are indeed very efficient and are of good quality; however, I must tell you that 60% of the doctors in Singapore are Malaysian. We have the same equipment and the same quality of service here, but our cost is about one third of Singapore. Even Singaporeans are now coming to Malaysia for healthcare and in total we have about a half million foreign healthcare visitors, a majority of whom are from Indonesia. There are people who come across from Sumatra just for a cough and cold by boat. They spend the entire day in Melaka and Penang, treat their children, spend, shop, eat, and then take the boat back in the evening. It's like a holiday. Also, in retail, Malaysia has no restrictions, no taxes, and no entry barriers for foreign retailers to open shop in Malaysia. Particularly in the last two years, we've seen UNIQLO from Japan and H & M from Europe open their first stores in Malaysia. We also have Singaporean retailers here as well as Malaysia's own group of retailers. Then there are the hypermarkets growing very rapidly, like Tesco and Carrefour for example. Therefore, on the retail side, there's a lot of change in the market place and these new retailers can do a great deal of business in Malaysia. The secret for them is that they need to be in property locations where there are many people. The land prices in such areas are slightly more expensive than buying in areas that have nobody there. However, it is proven that they make money in those areas should they make the additional investment.
How would you describe competition among regional real estate markets for foreign investment?
THARMALINGAM: Our local market is very similar to Australia. If you look at our charts for the last thirty years, our property prices have gone up by about 5% to 6 % per annum. Moody's considers Malaysia as one of the most stable in South East Asia. To a large extent it's because of our delivery system on real estate. It is also because of the fact that we use the Australian Torrens system of land ownership, which is very transparent and extremely efficient in delivering an ownership title to someone who buys property here. We're the only country in South East Asia where foreign investors can buy freehold real estate. You can't do that in Singapore, Indonesia, The Philippines, Thailand, or Vietnam. In Cambodia, you must marry a local girl in order to be able to own real estate. These restrictions throughout other parts of South East Asia make Malaysia very affordable and a valuable destination for people to invest in real estate. Transparency of ownership is a major factor in foreign direct investment and Malaysia certainly offers such transparency.
The government is considering raising the minimum floor price of houses foreigners are allowed to buy from 500,000 Ringgit to 1m Ringgit in an effort to control the rise in property prices. What impact would this have on the ability to attract more foreign investment?
THARMALINGAM: When the minister made that statement, he was flying a kite to see public response. The 1m and above segment relates to a few cities, namely Penang, Kuala Lumpur proper and parts of Johor, specifically those close to Singapore. In the rest of the country, the average ownership pattern is between 300,000 Ringgit, to 600,000 Ringgit. Such statements are knee-jerk reactions to a vocal minority saying that they can no longer afford to buy houses in Kuala Lumpur. The truth is that not everybody can afford to live in the best areas of the city. But when there are complaints, the minister has to respond. I don't think it will happen because the 500,000 Ringgit limit was only raised in 2007. Therefore, it is too soon to raise it to 1m Ringgit. The numbers, according to our National Property Information Center, don’t show that there's been a surge of purchases by foreigners, as in Singapore, or Hong Kong. In Malaysia, foreigners only own 2% of the total residential property in the country.
To what extent are investors from the Middle East contributing to the growth of Malaysia’s real estate sector?
THARMALINGAM: The contributions from the Middle East are growing substantially. We've been courting money from the Middle East for more than 20 years and we've not had much success despite Malaysia being a majority Muslim nation. I think it's because the investment opportunities for them were larger in the more established Western markets like London, New York, Europe, and Australia. Recently, in the last two years, they have had significant inroads into Malaysia as they see Malaysia as the center for investment in South East Asia. Malaysia has always been a trading nation. If you look back on history, parts of Malaysia have always been occupied; we were occupied by the Dutch, the Portuguese, and the English for trade between India and China. Today, we have a sizable Chinese population of 6.2m; and there are 3.2m Indians living in Malaysia dating back 150 years. The 3 races together are able to provide linkages between India, China, and Indonesia, which contribute to 45% of the World's population. Malaysia is a good center for business, logistics and for services within the region. We are also an English speaking country with excellent infrastructure, very good education and great universities. Further, we have exceptional hospitals and 5 star hotels, like The Grand Hyatt, The Four Seasons and St. Regis. We are cheaper than Singapore and there is also room for expansion. For all of these reasons the Middle East investors are slowly coming here. They first came as tourists to Asia after 9/11 because they were not welcome in the West. After they came as tourists, they went back to their home countries and said to themselves that Asia is a good place to invest. We've therefore had waves of Middle Eastern investors coming here since then. We first saw investors from Kuwait, then Bahrain, then the Iranians, then Bangladesh and Pakistan; first, in residential housing, now in major investments. The Emir of Qatar owns 50% of the largest shopping mall in the city, for which he paid nearly 1 billion Ringgit ($326m). He has expanded his investment in Malaysia since then. Mubadala is the biggest investor in the Kuala Lumpur International Financial Center and they are moving into other parts of the city as well. The current investment in Malaysia from the Middle East is approximately $2 billion and rising.
What geographic areas are currently most interesting to you?
THARMALINGAM: In terms of real estate in the Asia-Pacific region, Malaysia is low-hanging fruit. Almost all of the money we are seeking is in Japan, Korea, China, Hong Kong, Singapore, Indonesia, India and parts of the Middle East. We have very strong relationships with Saudi Arabia, Kuwait and Abu Dhabi. With these countries alone we think we can attract major investors into Malaysia. Koreans represent a sizable population living here, living in Malaysia. In fact, we have a Korean village in Kuala Lumpur which has 13,000 Koreans in total. The Koreans have proven to make sizable investments in offices, commercial investments, retail, and supermarkets. From Japan, we are looking for investment in retirement homes. Also, many Japanese and Koreans want to come here during winter; they buy homes where they can spend 6 months of the year in Malaysia and then go back to Korea or Japan for the remaining half of the year. The Chinese have just discovered Singapore; they are large investors there. Due to proximity, they're also coming into Malaysia. We've just had two Chinese investors put $250m into Iskandar because they see the Singapore-Iskandar region as the Hong Kong-Shenzhen of ASEAN. We've seen investors coming from Indonesia who suddenly realize that Malaysia has opportunities for them to relocate some of their industries into Malaysia. We've had investors coming in from India. Indian investors already own $4 billion worth of industrial real estate. They're not in retail, they're not in commercial offices, but they're in industry. They own one of the largest textile mills in Malaysia. They also own the electricity transformer which is to say that 60% of the country's transformer program is in their hands. They also own 2 hotels in Langkawi. These represent some of the short-term results we've seen over the last three years because of Malaysia’s position at the center of the two elephants in the district: India and China, which are growing so rapidly.
How significant is the role of infrastructure to attracting investment in real estate?
THARMALINGAM: Infrastructure is key. If you don't have connectivity, you don't have investment. In Yangon, Myanmar they have a real problem where it's going to take them 20 years to get the infrastructure right and the country is larger than Malaysia. Malaysia's infrastructure is excellent. We are very good at building roads, and highways. You can drive from Singapore to Thailand on a six-lane highway. We have 15 airports and so we can fly anywhere in the region from Malaysia. Our Malaysian Airlines and our Air Asia serve 19 countries in the region. Therefore, connectivity is not a problem. If you want a hub, you are only 1 hour away from Singapore and 1.5 hours away from Bangkok, where then you have connectivity to countries that Malaysia doesn't serve, such as Russia and parts of the US. We feel that Malaysia's role is one of a flexible services center for the region.
We're reaching equilibrium. By 2020, our housing prices and our demand sector will stabilize. If it stabilizes, then we could end up like Australia, where instead of building 100,000 homes per year, we only build 5,000 to 20,000, depending on demand. The affordability factor is very high, our construction costs are low, and we are still the cheapest investment option in Asia.
The real estate market of Malaysia has had growth on average of 5.3% over the past 20 years. What are you projections for future growth?
THARMALINGAM: We've had very strong growth, as you know, 5.3% for the last 20 years. The future looks very good mainly because we have a larger range of invest-able options available. We believe that the foreign direct investment into Malaysia will spur greater connectivity. Affordable housing is a major factor in Malaysia. We have 4m homes that people can live in, meaning homes made of brick and tile, with electricity, water, telephones and sewer services. That represents about 16m Malaysians living in their own homes. This means as far as home ownership is concerned, Malaysia is probably the highest in Asia, except Singapore, which has a housing level of 90%. We have a population of approximately 30m, with 16m of the population already living in their own quality homes that are comparable to anything else in Asia, meaning we have about 50% home ownership. In fact, we don’t need to construct 4m more homes because 50% of the population is below 25 and they can't afford to buy a house anyway. We need to service about another 1.5m homes. We're reaching equilibrium. By 2020, our housing prices and our demand sector will stabilize. If it stabilizes, then we could end up like Australia, where instead of building 100,000 homes per year, we only build 5,000 to 20,000, depending on demand. The affordability factor is very high, our construction costs are low, and we are still the cheapest investment option in Asia.
CIMB Group recently stated, “Election risks remain the key reason for our more cautious outlook and neutral weighting on Malaysia.” Other analysts have suggested caution towards any investment into Malaysia until after the elections. What is your reaction to such claims?
THARMALINGAM: I don't understand the caution really. This is not our first election; this is our 13th election. Except for one incident in 1969, which is over 40 years ago, our elections have been pretty open, pretty transparent, and pretty effective. Like other maturing Asian economies, we are finally reaching a two-party state. There are some minor issues with regards to our party development, but it's not as if we’re about to go into an Arab Spring type of event. It will be a very normal event. There is of course a great deal of excitement surrounding the elections because the younger generation is coming out to vote and they are used to a different kind of lifestyle; they're used to the iPads, the older generation is not. The dinosaurs are still in control but the younger generations are coming up and saying that those in control must address their issues. Therefore, there is this interesting dichotomy, but it will be a very peaceful transition. No government in Malaysia can afford a major tsunami in an election purely because everybody loses. For example, I own my own house and I cannot imagine if anything happened to my home value purely because of unrest. Almost every Malaysian would surely not do anything to upset that very fragile ownership pattern. As I mentioned, 60% of Malaysians own their own homes. The last thing we want to do is to create a tsunami and I don't think it will happen. Malaysia is one of the few countries in South East Asia where you do not need to go through a metal detector to go to a shopping center, an office or a hotel. How many countries in South East Asia can you say that about? The reason for this is because we have a very efficient police force that detects early deviations of any kind and nips them in the bud. We never allow a situation to grow out of control. In that context, we've been trained by the best. I think MI5 trains Malaysian police, so we are well protected from any kind of social unrest.
How is MPI different from other similar organizations?
THARMALINGAM: MPI was setup as a public-private partnership. Primarily it's meant to serve as a bridge between the government, the private sector, and the foreign investor. At the time of MPI’s creation, part of the rationale for creating such an organization was because governments tend to be too bureaucratic. When a foreign investor comes to Malaysia for an investment opportunity and goes to the Malaysian Investment Development Authority, the first reaction is, no matter what business they want to do, they need real estate; they need either housing, offices, factories or land. They are then sent to the local councils, which are also bureaucratic and by the time they come to a decision as to where to allocate a special resource, the opportunity may be lost. MPI was thus created to make the investment paradigm for foreigners as seamless as possible. We are setup under the Economic Planning Unit, under the Prime Minister of Malaysia. We have access to all government departments and we are seen as a government agency. The private sector however sees MPI as a body that helps them interact with foreign investors. We also deal with the captains of industry in construction, development, ownership, health, universities and hospitality. All of them acknowledge that we perform a function and because of this we have access to all of them as well. At any one time we may have up to 20 people of a delegation coming to talk to us first before they talk to anybody else. We then introduce them to the third party. There are no restrictions on MPI to look after them either through a government agency or through a government-linked company. Someone who comes to us can choose the best fit for them. That is a unique proposition. The only agency that has a similar setup is in Singapore, it is called the Investment Economic Bureau. The Singapore Investment Economic Bureau serves the same function as MPI for companies coming into Singapore. Our model is based on theirs, but we have expanded it here to include both the government and the private sector.