Looking to the East

Sabah’s property market has been facing some tough times, but the Malaysian state could still prove to be a worthy location for property investors. 
It’s home to lush jungles and thriving wildlife but it seems the property market on Malaysia’s easternmost state, Sabah, isn’t doing as well as its nature. Since the introduction of more stringent lending conditions and the increase in the Goods and Services Tax (GST) in April, the market has been at a standstill since the beginning of 2015. Almost no new developments have been announced – especially in the landed property segment, and most transactions are from the sale of second hand properties and balance units of projects that are currently under construction. 
Industry observers believe that the situation is likely to improve if lending rules are relaxed. Concerned about spiralling household debt, Bank Negara Malaysia had put in place measures that ban pre-approved loans by housing developers as well as impose stricter guidelines on borrowers’ aggregate credit repayments. These measures have made it harder for banks to approve housing loans and subsequently led to a decline in demand. 
Compared to previous years, there has been an estimated decrease of 50% in sales across all segments, from the lower end to the luxury market. Due to difficulties in obtaining loans, the higher end of the market, namely properties upwards of RM800,000, is taking the biggest hit. Low to medium priced properties costing up to RM800,000 continue to see a healthy demand, but the supply of these property types does not match up. In a property fair in the state earlier this year, only five out of the more than 70 properties that were exhibited cost below RM300,000. 
It seems the decline didn’t just happen this year, but has actually been gradually taking hold throughout 2014. 8926 transactions were recorded that year at a total value of RM 4.36 billion, 2% lower than the figures in 2013. Four out of five properties were priced below RM 500,000, and only 6.7% passed the RM 1 million mark. 
It’s not all doom and gloom, however. The dramatic weakening of the Malaysian ringgit this year has definitely piqued foreign buyer interest, particularly for luxury properties priced at more than RM1000 per square foot, and those in prime locations in or near the city centre. Official statistics are also singing a different tune from what’s observed on the ground – according to the National Property Information Centre, the drop in the number of residential property transactions in the first quarter of 2015 was almost indiscernible, going from 1298 to 1286. In fact, the overall value of transactions during the same period even saw an increase from RM 409 million to RM 426.3 million. Although the implementation of 6% GST could be a deterrent to buyers, it also provides an upside: it increases construction costs, thereby limiting the extent to which property prices can fall.   
Despite the doldrums, Sabah’s capital, Kota Kinabalu, continues to have many things going for it. Major projects such as the Imago shopping mall, The Loft apartments, Oceanus waterfront mall and Gleneagles private hospital are transforming the southern corridor of the city, injecting life and driving interest into it. Well connected and accessible, the city has Sepangar Port in the north, Kota Kinabalu International Airport (KKIA) in the south, and the South China Sea to its west. It is a tourist paradise; KKIA reported a 6.9 million passenger count in 2013, and remains the second busiest airport in Malaysia. Hotel occupancy rates are currently at 92%.
Also spurring development and potentially pushing property prices up is Kota Kinabalu’s increasing population, which is estimated to exceed one million by 2020. New residents are coming from Borneo as well as regionally, attracted by Sabah’s growing oil and gas industry – a segment that is expected to create more than 23,000 jobs. Foreign investment currently makes up less than 5% of the transactions. The low percentage is far from negative; rather, it more likely shows how much more untapped potential there is for foreign investments to help propel the market forward.  
Some industry watchers are of the belief that the current downturn is a temporary one and that the market will quickly bounce back next year as the more lenient measures announced during this year’s budget take effect. These include more affordable housing coupled with loan and financing schemes for the low income groups and civil servants, which will likely spur the market and induce a growth in the relevant segments. Based on historical records, a conservative estimate of population growth in Kota Kinabalu is expected to be at 2.42%, or 11,000 people per annum. With an average household size of 5.5 people, this works out to an annual demand for 2000 residential properties just based on the local population alone.
The Malaysia My Second Home (MM2H) scheme is also a force to be reckoned with. Implemented with the aim of attracting expats, it allows foreigners to live in the country with a long-stay visa for up to 10 years, as long as certain financial and medical requirements are met. 
As previously mentioned, no noteworthy landed developments are currently in the pipeline in the city due to rising land costs and a scarcity of land. There are, however, an estimated 4318 condominium units in the pipeline that will be released over the next three years. Units near the KKIA, University Malaysia Sabah, and the hotspots for commercial and touristy developments are likely to see the most movement.