Northern exposure

A direct service to Shanghai is also in the pipeline, which will make Senai the third airport in Malaysia to have a direct link with China’s financial hub. In anticipation of this, Senai Airport Terminal Services (SATS) is expanding the airport’s waiting area to improve passenger comfort.

Senai International Airport has been a major beneficiary of the development of Iskandar Malaysia since the latter’s establishment 13 years ago. Over the last 10 years, the airport has seen an average annual passenger throughput growth of 16.8%, from 1.32 million passengers in 2009.

However, the special economic corridor is currently at a crossroads.

It has been well documented that the region is at risk of turning into a ghost town, as huge property developments have not attracted the commensurate level of economic activities.

To put it bluntly, the income growth of the local population does not seem to have caught up with the impressive physical developments in the region. Many commercial and residential properties are deserted during weekdays, a sign that economic activity is less than robust.

With only about six years to go before Iskandar Malaysia is deemed to have reached maturity, what needs to be done to ensure a more equitable growth so that it can become a metropolis of global standing?

Iskandar Regional Development Authority (IRDA) CEO Ismail Ibrahim says the agency is working with all stakeholders to continue to create more opportunities for the local population to participate in so that they can share in the prosperity created in the region.

“In order for the locals to have good jobs with high salaries, they must be involved in jobs that are commensurate with their talents, with their level of education and whatnot. We are doing that, together with other agencies.

“These are by way of creating opportunities for people to enter education establishments, to upskill themselves, so that they will be able to reenter the job market,” says Ismail.

The fact that Johor has the largest property overhang in the country — RM14.4 billion ($4.8 billion) worth of unsold properties — shows that the income level of the local population does not match the price level of the properties being offered.

Based on the projected population of three million by 2025 and a family size of 4.1, Iskandar Malaysia will need 1.2 million residential properties, says Ismail. At present, the housing stock in Iskandar Malaysia hovers around 700,000.

“But at the same time, we are faced with this situation of surplus. So, if you try to match this figure, in other words, the supply of houses that is in the market now does not meet the demand that is growing. So, this is the issue that we must tackle,” Ismail says.

While the property overhang is also prevalent throughout the country, the situation in Johor, especially within Iskandar Malaysia, is the worst, based on the number of unsold units and their total value.

Indeed, the economic corridor has been receiving huge amounts of investments in the promoted sectors of manufacturing, logistics, healthcare, financial and business services, tourism and creative industries but these are dwarfed by investments in the property development sector.

According to IRDA’s statistics, investments in the property development sector made up almost half of the RM302 billion worth of investments that have been committed so far. The sum is much higher than investments committed to manufacturing (23.8%), logistics (2.8%), tourism (2.6%), healthcare (1.5%), education (1.1%), financial and business services (0.7%) and creative industries (0.5%).

Ismail has repeatedly said that property development is not a promoted sector within Iskandar Malaysia. However, the situation is so prevalent that he cannot ignore the potential impact it might have on the overall health of the region’s economy.

He says IRDA is working with the Johor government and developers to understand the real issue — the mismatch between supply and demand in terms of pricing and products — plaguing the property sector in the state.

“So, if developers are genuine, in terms of the development of residential units, they must be able to understand the level of purchase. So, unless and until we address this issue, you will have a surplus of housing stock, especially the higher-end products,” he says.

The issue of brain drain has also thrown a spanner in the works as top talent move to the Klang Valley or to more developed countries such as Singapore and Australia in search of better opportunities.

How can Iskandar Malaysia pull itself out of this quagmire? Ismail says the region’s growth and development, or its key success factor, is not dependent on one single item or component. Therefore, tackling the issue of how to attract quality investments, which create high-paying jobs that could keep local talent in the country and the economy thriving must be approached in a holistic manner, he adds.

“I think both Singapore and Malaysia, especially Iskandar Malaysia, have come to terms on many things. From Singapore’s point of view, it cannot remain as it is now or be better unless it involves its neighbour, because it is dependent on Malaysia.

“We, at the same time, are looking at Singapore as a hub that is able to assist us in the growth that we want to see happen in Iskandar Malaysia. It is a combination of cooperation and competition — leveraging each other’s strengths,” says Ismail, adding that losing talent to Singapore, even as Malaysia strives to develop high-value industries, is a fact that the country has to accept in its development process.

What can and needs to be done is to keep attracting Singaporean companies or MNCs operating in Singapore to Malaysia and, specifically, the Iskandar region, he says.

This is currently being done, with Singapore being the second-largest source of investment in Iskandar Malaysia after China.

With the average income in Johor still lower than that in Kuala Lumpur and Selangor, however, the question is whether the jobs created in Iskandar Malaysia are well-paying ones.

Nevertheless, investors globally have noticed Iskandar Malaysia and, hopefully, they will bring with them high-paying jobs. For instance, Dyson has a research, design and development centre in Senai that employs 1,200 workers, of which 80% are Malaysians.

These local talent are mostly engineers who test Dyson’s home care and beauty appliances for durability. Partnering with local electronic manufacturing services companies, Dyson has been producing high-quality appliances in Johor since 2003.

Besides that, India’s largest pharmaceutical company, Biocon, has been operating in the Southern Industrial and Logistics Cluster (SiLC) in Iskandar Puteri since October 2010, producing insulin for international markets.

Iskandar Malaysia is also becoming the location of choice for global companies to set up their regional logistics hubs, owing to the availability of land and relatively lower land costs, good infrastructure and strategic location in the middle of the EastWest trade route.

In Senai International Airport’s free industrial zone, BMW operates its 700,000 sq ft Asia-Pacific parts distribution centre, which supports more than 20 countries in the region. DHL has a Global Centre of Excellence in Medini.

Having said that, a lot more needs to be done to attract quality investments to the region.

One of the areas that IRDA is keen to pursue is the development of the airport itself. Ismail believes that the airport has the potential to handle up to 17 million passengers annually as well as develop its surrounding areas into a bustling industrial hub.

“Senai International Airport has huge potential, not only for passenger traffic but also for cargo, as well as maintenance, repair and overhaul. There are many MRO operators in Singapore and we can offer the space in Senai for them to expand and still be close to Singapore,” he says.

In 2018, Senai International Airport, which is owned and operated by SATS, a part of MMC Corp, received 3.5 million passengers, a y-o-y growth of 13%. SATS is confident that the airport will reach full capacity by year-end.

MMC Corp is developing an integrated industrial zone known as Senai Airport City (SAC) on 2,718 acres adjacent to the airport. According to MMC Corp’s website, SAC caters for MRO, general and high-tech manufacturing and logistics

Changing priorities?

The Iskandar Malaysia initiative was spearheaded by Khazanah Nasional after the federal government asked the sovereign wealth fund to come up with a blueprint. Khazanah and its investee companies hold large tracts in Iskandar Malaysia.

Over the years, Khazanah, through its development arm Iskandar Investment (IIB), has made catalytic investments in Iskandar Malaysia, including EduCity, Medini City, Legoland Malaysia Resort and Iskandar Malaysia Studios (IMS).

Sadly, some of these catalytic investments either seem to be struggling or have failed outright. Earlier this year, Pinewood Studios decided to part ways with IMS while BioXcell, a biotechnology park deve loped by UEM Sunrise, has been put under receivership.

There is also talk that the sovereign wealth fund is looking at selling some of its tourism and hospitality assets in the region. Legoland Malaysia Resort, built at a cost of RM754 million, is said to be one such asset.

Ismail agrees that there could be a change of direction in Khazanah’s involvement in Iskandar Malaysia, in that the sovereign fund may have been asked by the new federal government to be more prudent.

“For Khazanah and other agencies involved in Iskandar Malaysia, perhaps the directive or mandate given is to spend wisely, to make sure that every ringgit that you spend will benefit the country.

“There has to be very clear key performance indicators to indicate that there is a return on your investments. If this is not forthcoming, then you might as well cut your losses. I have full trust in agencies like Khazanah, that whatever decisions they make, it is for the benefit of the nation,” he says.

For example, the mutual separation between Pinewood Studios and IMS will bring benefit to the latter, as it will have the freedom to market itself as a preferred film production base to moviemakers around the world, says Ismail.

Responding to The Edge Malaysia’s questions regarding its investments in Iskandar Malaysia on Aug 29, IIB says its main focus is to deliver sustainable returns to its shareholders and stakeholders as well as to develop the promoted sectors in Iskandar Malaysia.

“We are also actively promoting the digital transformation agenda in Iskandar Puteri through collaborative projects with international and reputable partners such as KT Corp of South Korea for the Virtual Reality Centre of Excellence and DHL for the DHL-IIB Global Centre of Excellence.

“We hope that through these projects, we can move closer to realising our mission to position Iskandar Malaysia as a sustainable conurbation of international standing,” says IIB via email. IIB will continue to invest in EduCity as part of efforts to enhance the latter as an educational destination.

IIB is also supporting entrepreneurship and start-ups via IskandarSpace, a co-working and start-up community space in Medini.

Local companies growing along with Iskandar Malaysia

Although Iskandar Malaysia is still a long way from becoming a metropolis of global standing, it cannot be denied that the region’s development has helped grow the local economy and industries in Johor.

ATA IMS, an electronics manufacturing services company based in Johor Baru, is one such example. Founded by James Foo, the company operates from several facilities — totalling more than one million sq ft of factory floor — in Johor Baru. According to Foo, ATA IMS is expanding into the Internet of Things and the smart-home sector, producing radio frequency and Bluetooth-enabled parts.

ATA IMS has the capacity to assemble more than 800,000 printed circuit boards a month and produces more than 200,000 battery packs. It can also produce 20 million plastic parts monthly.

“The development of Iskandar Malaysia has helped the growth of ATA IMS, as the development of Pasir Gudang Port and Port of Tanjung Pelepas allows imports of materials directly into Johor. We no longer have to rely on Singapore,” says Foo.

Between 2006 and 2018, ATA IMS (previously known as Denko Industrial Corp) saw revenue grow from RM116.9 million to RM2.91 billion. Its profit before tax also increased from RM1.62 million to RM152.5 million.

In 2017, Denko bought Integrated Manufacturing Solutions from Foo and Fong Chiu Wan in a RM1.19 billion all-shares deal to create ATA IMS.

The growing demand for factories and warehouses has prompted the development of many industrial parks within Iskandar Malaysia. Among the companies that have benefited from the demand is AME Development.

Starting off as an industrial builder in 2011, AME ventured into the development of industrial parks by developing a small section called i-Park @ SiLC in SiLC. Eight years later, AME has developed three industrial parks in Iskandar Malaysia. The latest project is i-Park @ Senai Airport City. AME managing director Kelvin Lee Chai says 80% of Phase 1 of the park is occupied by investors and about 65% of Phase 2 is tenanted.

Companies at i-Park @ SAC make products such as contact lenses, biodegradable plastic resins, electrical and electronic goods as well as precision plastics. Of the 189 acres earmarked for i-Park @ SAC, 112 acres have been developed, says Lee.

While 13 years is a long time, it may be too short a time to turn a vast region of more than 2,000ha into a global metropolis. China, with its huge population and economic might, took 20 years to make Shenzhen, a fishing village, into an industrial hub before turning it into the global technology hub it is today.

Come 2025, however, will Iskandar Malaysia reach the same level of development as Singapore or even the Klang Valley?

Kamarul Azhar is an assistant editor, Capital Markets & Companies, at The Edge Malaysia

Property overhang dominates Iskandar Malaysia narrative

During a visit by The Edge Malaysia to one of UEM Sunrise’s show units in Estuari Gardens in Puteri Harbour, Iskandar Malaysia, a representative of the property developer said the unit had been purchased by someone from China.

“The buyer decided to buy the unit lock, stock and barrel, including all the furniture and decorations you see here,” said the sales and marketing executive. “Of course, we charged for the extra items.”

As this writer and a photographer were leaving, the representative greeted the owner of the unit next door, a South Korean doctor, who has made the unit his holiday home.

The listing price of the units starts from RM1.99 million ($656,757), which translates into RM524 per sq ft.

Later, during a lunch meeting with one of the main state actors in Johor, The Edge Malaysia was informed that a unit at Estuari Gardens had been put up for auction for about a year.

From the listing price of RM1.78 million, the unit is now being auctioned off with a reserve price of around RM780,000.

“Nobody wants to buy the unit, even after its starting price had been slashed by RM1 million. The situation is really that bad,” says an executive with a Johor government-linked companies.

It is telling that the units with contrasting fates are within the same development. Many of the high-end property developments in Iskandar Malaysia were planned and launched between 2012 and 2016, when the region’s property market was at its peak.

Many of the launches had been targeted at foreign buyers, especially those from Singapore and China.

However, the market came to a screeching halt in 2017 when China imposed restrictions on the amount of money its citizens could convert into a foreign currency — to a maximum of US$50,000 per person per year.

As at end-June, RM14.4 billion worth of properties had been left unsold in Johor, the highest in the country. This situation has prompted the state’s branch of the Real Estate and Housing Developers’ Association (Rehda) to call for the government to intervene to revive the market.

“The building and development industry is the fourth-largest economic driver in Malaysia. The industry is stimulating around 120 other trades. What we are concerned about is that the authorities and the stakeholders are not holding hands to come up with a solution to the problem,” branch chairman Steve Chong Yoon On told the media early last month.

Quoting data from the Construction Industry Development Board (CIDB), he said construction contracts awarded by the private sector had dropped to an estimated RM62.6 billion this year from RM206 billion in 2016. Most of the construction jobs involved property development.

“If this figure drops further, the next thing you will see is a lot of unemployment, the economy will slow down and foreign investments will drop. Our rates will drop, so this is something that we don’t want to see,” said Chong at the press conference on Aug 6 at Rehda Johor’s office in Johor Baru.

While the property industry is not promoted in Iskandar Malaysia, Iskandar Regional Development Authority CEO Ismail Ibrahim says he is concerned about the situation. The developments in the property market will have an impact on the growth of Iskandar Malaysia, he says.

Ismail says he has been talking with all stakeholders, including the state government and the property developers on how to revive the property market. One of the ways he suggests is for some properties to be subdivided into two, so that cheaper units can be sold.

“For now, we are working with specific groups of developers to perhaps revisit the units that have been built, with the possibility of breaking them down. Let’s say a unit of 1,000 sq ft [is being sold] at RM600,000. It is beyond the affordability of most people. What if the unit is broken into two units of 500 sq ft each? It might not meet the policy [requirement] of the day because the policy says it [a house] has to be no less than 700 sq ft, for instance.

“But these are modern types of units. At 500 sq ft, you have all the facilities and the younger generation does not need big houses,” he says, adding that in cities such as Hong Kong, Singapore and Macau, 500 sq ft units are the norm.

Nevertheless, Ismail says at the end of the day, the most sustainable way to address the property overhang is to increase the people’s average income, and developers must ensure that what they are selling meets the demands of the market.

At Rehda Johor, members are asking the state government to relax the bumiputera release mechanism and quota system. Johor has some of the most stringent bumiputera quota policies when it comes to properties. All property developments have to set aside 40% of the units available for bumiputera buyers.

According to Chong, a property developer can apply for unsold bumiputera units to be released only when no bumiputera buyer is registered after a certain period. As long as there are prospective bumiputera buyers registered for the project, the developer cannot release the units into the market.

He said a study done by Universiti Teknologi Malaysia found that only 20% of the bumiputera units in Johor have been taken up.

“The release mechanism is very rigid. The units cannot be released within at least 12 months, and then there are also requirements as to how many advertisements can be made during the period. I think the government can do away with these trivial things.

“We are not questioning the bumiputera privilege, but we are saying that there is room for improvement in the release mechanism. If developers get to sell more properties and earn more profits, we pay more taxes to the government. So, everyone is happy,” he said at the press conference.

Rehda Johor has also asked for the price threshold of RM1 million for foreign buyers to be reduced to rejuvenate foreign buyers’ interest in the state’s property market. The association also said banks should be more “open-minded” when it comes to financing property purchases in Johor.

Asked whether the Johor property market, with its large overhang, has passed the point of no return, Chong said there was still demand for properties in the state, but the state government needs to do something soon.