10 SB11 Construction&RealEstate

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Construction & Real EstateAgriculture, tourism and logistics projects under way Incentives for greener construction practices Retail activity gets a boost from consumer spending Increases in property values across all segments Many competitive advantages for foreign property buyers

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CONSTRUCTION OVERVIEW

The SDC has attracted over $1.3bn in investment in the past two years

Picking up speedAn array of projects will keep builders busy for years to comeActivity is heating up in Sabahs construction industry, which is widely viewed as a bellwether for the overall economy. Tourism growth is stimulating demand for hotels and luxury resorts, while the boom in palm oil has boosted income levels across all consumer segments, encouraging property and retail development. Meanwhile, the Sabah Development Corridor (SDC) is attracting increased investment in areas ranging from urban beautification projects to biomass facilities. BUSINESS OPPORTUNITIES: This is an exciting time for the sector, but there are also constraints that raise the cost of doing business. Due to poor transport logistics and high shipping taxes linked to the cabotage policy, buildings materials in Sabah cost some 25% more than in Peninsular Malaysia. Contractors also cite high utility connection fees and insufficient human resources as challenges facing the sector. There is a shortage of skilled local labour in Sabah, which forces companies to conduct extensive on-thejob training, Choon Seng Wong, CEO of SabaConcrete, a producer of ready-mixed concrete, told OBG. There is also high turnover, with qualified employees leaving the state for better-paying jobs in other territories. Nevertheless, investment opportunities are substantial, as reflected in the wide range of building projects in the pipeline for the next five years. One reason for the upswing in activity is the business-friendly approach taken by the state government. Continued growth in construction and property development, along with good market returns, is down to the political stability that Sabah offers, David Wan Young Yin, general manager (East Malaysia) of Hap Seng Properties Development, told OBG. This gives investors peace of mind. DEVELOPMENT PLANS: The authorities have issued a number of development plans that have expanded opportunities for companies in the sector, including the SDC, a socioeconomic blueprint to be implemented over three phases. Whereas phases one (2008-10) and two (2010-15) focus on sustaining growth through human capital and infrastructure development, phasewww.oxfordbusinessgroup.com/country/Sabah

Tourism, logistics and agriculture have been highlighted as three main growth areas under the Sabah Development Corridor, a three-phase blueprint that will be implemented through 2025.

three (2015-25) envisions Sabah increasing its GDP to RM63bn ($19.7bn), up four-fold from RM16bn ($5bn) in 2008. If realised, this is expected to make Sabah one of the leading economic entities in South-east Asia and a highly attractive destination for foreign investment. There are three key growth areas identified by the SDC that have significant implications for the construction industry: tourism, logistics and agriculture. Major development projects have been initiated, with many contracts going to private companies. In the past two years alone, SDC initiatives have attracted more than RM4bn ($1.3bn) in investor capital. TOURISM PROJECTS: To enhance the tourist experience, the SDC has emphasised urban beautification, particularly in Kota Kinabalu, which is the main entry point for visitors. This is reflected in the Kota Kinabalu Harbour Front development, a joint venture led by Sunsea Development, a subsidiary of the Waterfront Urban Development Group, and DBKK Holdings. The continued growth of the tourism industry in Sabah will have a marked impact on the property development industry as more and more projects come on-line to serve this market, from hotels to the beautification of Kota Kinabalus waterfront area, Johnson Koh Yong Siang, director of Waterfront Urban Development, told OBG. With an estimated completion date of early 2013, the RM500m ($156.7m) harbour project will see the construction of a 2-km boardwalk, a convention centre, a performing arts hall and several high-end hotels on a 1.24-ha strip of waterfront. These amenities are expected to attract high-end, high-yield visitors, helping Sabah to increase average tourist spending to a target of RM5364 ($1681) by 2025, up from RM2517 ($789) in 2006. According to Selvarajah Nagalingam, president of BlueScope Lysaght (Sabah), a maker of rollformed steel building and industrial products, this upmarket trend may in turn increase demand for highquality construction materials. The local market in building materials is very price-sensitive; however, given that Sabahs tourism industry has begun catering


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to high-end travellers, we can expect demand for quality materials to rise, Naglingam said. Given estimates from the SDC blueprint that Sabah needs an additional 4000 five-star hotel rooms to meet demand, opportunities for resort developers are also likely to increase. Our thriving tourism industry has created an urgent need for more high-class hotels, Mohd Rahimin Mustafa, managing director of BorneoSys, told OBG. Moreover, now that Kota Kinabalu International Airport has been named the eastern hub for Malaysia Airlines, we can expect even more tourists from regional destinations. In 2010 the tourism development firm Karambunai Corp made news when Chief Minister Musa Aman announced that the company would build an RM6.5bn ($2bn) nature resort in Sabah by 2020, just the sort of upscale accommodation the sector needs to draw in high-end, high-yield visitors. The five-star complex will offer nature lodges, duty-free shopping, a mangrove education centre, a water theme park and rainforest safaris. Officials estimated that the 150-ha resort will create a total of around 15,000 jobs. INVESTMENT IN LOGISTICS: To enhance transport logistics, the SDC has initiated projects to extend Sabahs road network by about 10% from 2005 to 2010, with the length of paved roads increasing by 20%. Although most road projects have been undertaken by the government, there are also opportunities for the private sector. In 2007, Global Upline finished upgrading work, worth RM144m ($45.1m), on the Putatan-Kepayan highway in Kota Kinabalu, and in 2011 the firm completed the citys RM120m ($37.6m) Tanjung Aru flyover. Road work has also boosted profits for cement suppliers, especially state-owned Cement Industries Sabah (CIS), which holds a dominant position in the local market. Of the 2540 km of roads scheduled for construction in Sabah during the 10th Malaysia Plan (2011-15), 5% will use polymer modified asphalt concrete, a costeffective material known for its durability. The use of concrete in road construction under the 10th MP offers opportunities to the cement industry to develop and expand its production, Haji Hashim Paijan, permanent secretary to the Ministry of Industrial Development, told reporters in December 2010. CIS is now undertaking a cement silo project which will increase storage capacity to 15,000 tonnes. Costing RM36.2m ($11.3m), the silo is expected to be ready by the end of May 2011. In partnership with the private sector, the authorities have launched many other ventures to enhance inland connectivity. To rejuvenate Sabahs old railway line, which was built in 1896 by the British North Borneo Company, the government has hired Suria Capital Holdings and Hikmat Asia to revamp 130 km of track stretching from Tanjung Aru to Tenom at a cost of some RM300m ($94m). The largest concession for rail system development has gone to SP Setia, a leading Malaysian property developer. In 2008, the firm began work on the vast RM600m ($188m) Aeropod Project, which will turn the Tanjung Aru Railway Station into an integrated transportation centre equipped with apartments, office towers, a mall and a luxury hotel.

Infrastructure development is vital to boosting GDP growth

LAND FOCUS: Agriculture is a fundamental pillar of Sabahs economy, accounting for about 30% of GDP, 33% of employment and 35% of export revenue. Under the SDC, which puts palm oil production and downstream processing at the centre of its agenda, sector construction has been concentrated at the states palm oil industrial clusters (POIC). Established in 2005, the 2023-ha POIC at Lahad Datu has attracted some RM2bn ($626.8m) in investment from 30 companies representing a wide range of industries. In late 2010, BriSteel Properties purchased 7 ha of land from the Lahad Datu POIC to build a business complex for small and medium-sized enterprises. Referred to as PortCity@POIC, the complex will feature 17 light industrial warehouses, 35 detached homes, and 196 shop and office units. According to BriSteel officials, an option has also been signed to buy 12 additional hectares at Lahad Datu for further development. Also in 2010, the Singaporean agribusiness Mewah Group purchased 8 ha of land at the POIC for the construction of an RM150m ($47m) refinery. Expected to create some 200 jobs, the site will open in 2012 with

Transport logistics improvements include work to extend and modernise the road network and rejuvenate the old railway line.

Construction workforce, 2005-09 ('000)108 106 104 102 100 98 96 94 92 2005 2006 2007 2008 SOURCE: Sabah Department of StatisticsTHE REPORT Sabah 2011

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The retail construction surge seen in the past decade has been boosted by population expansion, increasing income levels and a growing number of tourists arrivals.

a capacity of 500,000 metric tonnes, making it Sabahs largest palm oil facility. To cultivate renewable sources, which account for about 3% of Sabahs electricity, the POIC also signed an agreement in 2010 with a South Korean consortium for the construction of an RM280m ($87.8m) biomass plant running on palm oil waste. RETAIL DEMAND: Over the past decade Sabahs retail construction sector has seen a major hike in activity. Growth has been driven by three trends that are stimulating consumer spending: population growth, increasing income levels across all social classes and an upsurge in tourism. These trends show no sign of abating, especially tourist arrivals, which are projected to increase from 2.5m in 2010 to 4.5m in 2020. Much of the activity in the retail segment has been centred in Kota Kinabalu, where a clutch of modern shopping malls have opened. One of the citys newest entrants is Suria Sabah, an RM330m ($103.4m) complex completed in 2009 by the private developer Makamewah. This followed the arrival of the 1Borneo Hypermall in 2008 and the KK Plaza Mall in 2001, prompting some concerns that the citys retail sector might be nearing saturation. Nevertheless, according to the 2010 Kota Kinabalu Property Market Report issued by CH Williams Talhar & Wong, mall values in the capital have remained stable, with speciality stores posting strong visitor numbers. Other Kota Kinabalu shopping malls are in the planning stages. One upcoming project is the second phase of KK Times Square, which will see the creation of an

RM1.4bn ($438.8m) mall featuring retail outlets and serviced apartments on an area of 344,000 sq metres. According to the developer Syarikat Kapasi, a subsidiary of Asian Pac Holdings, once the nine-storey complex is completed in 2013, the facilitys lettable area of 62,000 sq metres will generate an annual rental income of RM40m ($12.5m). This will diversify Asian Pacs portfolio and inaugurate a new company strategy focused on Sabahs capital. With climbing palm oil prices, the SDC programme and increasing tourist arrivals, we see good potential for Kota Kinabalus property market, Mustapha Buang, the managing director of Asian Pac Holdings, told reporters in June 2010. Other major cities in the state are also welcoming new shopping centres. In Tawau, the RM172.5m ($54.1m) Eastern Plaza-Promenade Hotel complex was established by the Sabah Urban Development Corporation (SUDC) in 2009. SUDC is also responsible for the construction of the Darvel Bay Plaza shopping centre in Lahad Datu, which is expected to open in September 2011. In Sandakan, ICSD Ventures, a subsidiary of Aseana Properties, has begun construction of the Harbour Square Mall, which will feature an entertainment and wellness centre. The Harbour Square Mall is predicted to generate increasing returns once the RM2bn ($626.8m) Sandakan Education Hub comes on-line in 2015-16. A 1200-acre site designed to accommodate dozens of colleges in one concentrated area, the Education Hub is a priority project under the SDC.


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BUILDING MATERIALS: One of the sectors main challenges is the comparatively high cost of building materials. According to surveys conducted by the Sabah Housing and Real Estate Developers Association, as of early 2010 a 50-kg bag of cement in Peninsular Malaysia and Sarawak cost some RM12.25 ($3.80) and RM13.25 ($4.15), respectively. Cement in Sabah, however, was about 20% higher, at RM15.25 ($4.80) per bag. Also, steel prices in Peninsular Malaysia were about RM2000 ($627) per tonne in early 2010, while in Sabah they hovered around RM2500 ($784). Prices for construction materials in Sabah have also risen in absolute terms, partly due to changes in government policy. For many years cement and steel tariffs across Malaysia remained stable due to a ceiling price mechanism implemented by the government. After repeated calls from major manufacturers to remove the ceiling, a market-oriented automatic pricing mechanism was implemented in 2008 to achieve greater allocative efficiency. However, this led to upward price fluctuations, with cement and steel tariffs in Sabah rising after the new policy by some 25%. Most analysts predict that building materials will become even more expensive in Sabah, as demand increases in Malaysia, China and the Middle East. This is expected to increase the price of industrial and commercial properties in Kota Kinabalu by an estimated 5% in 2011. Nevertheless, given that property demand in the city mainly comes from local palm oil planters who are enjoying record profits most realtors do not anticipate a decline in sales or development. INFRASTRUCTURE CHALLENGES: Sabahs underdeveloped infrastructure poses another challenge for contractors. According to some estimates, whereas 90% of roads in mainland Malaysia are paved, in Sabah this figure is only 40%. Furthermore, many of the states existing roads are narrow and ageing, having been designed and built back in the 1970s and 1980s when the state had a much lower volume of motor vehicle traffic. Weak infrastructure also hinders the provision of basic utilities, further deterring investment in construction. Sabahs electricity grid is less reliable than systems in other parts of Malaysia. According to figures from Sabah Electricity, in 2005 the system average interruption duration index (SAIDI) for the state was 2540 minutes, whereas mainland Malaysia registered a SAIDI of 101.6. Electricity connection fees are also quite expensive. As far as property developers are concerned, utility connection fees are a serious issue, Susan Wong, president of the Sabah Housing and Real Estate Developers Association (SHAREDA), told OBG. Electricity connection charges are around RM450 ($141) per unit in Western Malaysia, but in Sabah they are RM5000 ($1567) per unit. Some argue that our low population density drives costs, but the more likely source is limited infrastructure capacity, she added. HUMAN RESOURCES: One common complaint from those involved in the construction sector is the limited supply of human capital. Local workers lack sufficient skills and training, especially for positions at the

top of the employment scale. Others say that Sabah does not have enough workers interested in manual labour. Despite having the highest unemployment rate in Malaysia, the state only filled 22% of overall job vacancies in 2009, largely because most openings were for unskilled and unwanted occupations. Yet foreign recruitment is an imperfect solution. In recent years the levy per international hire has hovered between RM1000 ($313) and RM1400 ($439), an exorbitant sum for small companies, and a risk for all employers because there are no guarantees that workers will stay on the job. This encourages illegal hiring. Human resources has become a serious issue in Sabah, Tan Tiang Lai, group executive director of Sagajuta, a local property development firm, told OBG. On the one hand, the government has imposed restrictions and duties on the importation of foreign labourers to quell controversy over illegal immigration. On the other hand, we now have a serious shortage of workers in industries such as renovation and construction, fields that generate little interest from locals. To address this shortage, in January 2011 the state government relaxed laws restricting the number of countries from which companies could obtain workers. Whereas in the past international hiring was limited to the Philippines and Indonesia, under the new regulation firms involved in construction, agriculture, and forestry can now recruit employees from Bangladesh, Nepal, Myanmar and Vietnam as well. OUTLOOK: The sector is likely to see increased activity so long as growth continues in tourism and palm oil Sabahs two major industries. Contractors will also find plentiful opportunities in the implementation of the SDC blueprint over the next 15 years, as public officials advance plans for infrastructure development that require private capital and expertise. Although high building costs narrow profit margins, the authorities have taken concrete steps to address the sectors human resource shortages through new reforms of the labour market. Coupled with economic growth, the governments proactive approach to the business community has created an attractive environment for construction investment in a wide range of industries.

The comparatively high cost of construction materials in the state is one of main challenges facing the sector, along with underdeveloped infrastructure.

Employment by sector, 2009

Agriculture Construction Manufacturing Hotels & restaurants Fishing Other community, social & personal act. Other

28% 9.3% 7.6% 6.1% 3.2% 2.9% 27.1% SOURCE: Sabah Department of StatisticsTHE REPORT Sabah 2011

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CONSTRUCTION ANALYSIS

A financing scheme is in place for firms that use green technology

Going greenEncouraging more environmentally friendly construction methodsTo achieve sustainable growth Sabah must balance development with ecological conservation, a difficult task considering the wide range of construction projects planned or under way across the state. According to environmentalists and policymakers, green building can help the sector overcome this challenge. As economic activity expands under the Sabah Development Corridor, green building methods can ensure minimal habitat loss, pollution and resource consumption, William Baya, deputy permanent secretary of the Sabah Ministry of Tourism, Culture and Environment, told OBG. Green building practices in Malaysia were formalised into a set of guidelines in 2009, when the Malaysian Architects Association and the Association of Consulting Engineers came up with the Green Building Index (GBI), a rating system based on six criteria: energy efficiency, indoor environmental quality, sustainable site planning and management, materials and resources, water efficiency and innovation. Under the GBI, a residential or commercial property is assigned an overall score that corresponds to one of four grades: certified, silver, gold or platinum. Until 2014, developers that receive GBI certification are eligible for tax exemptions such as accelerated tax depreciation and investment allowances for energy capital expenditure. In November 2010, Masidi Manjun, Sabahs tourism, culture and environment minister, called upon architects and engineers to help the state play a leading role in green building, and indicated that local GBI projects would receive strong backing from the government. We are looking at all possible avenues to encourage the development of green and sustainable buildings, and to retrofit existing buildings into green buildings, he told reporters. This followed Prime Minister Najib Abdul Razaks 2010 federal budget address, which introduced measures to promote eco-friendly construction, and an RM1.5bn ($470.1m) financing scheme for firms that use or supply green technology. ART GALLERY: In February 2011 Masidi announced that the Sabah Art Gallery and Conservation Centre in Kotawww.oxfordbusinessgroup.com/country/Sabah

Developers with a Green Building Index certification receive tax exemptions such as accelerated tax depreciation and investment allowances for capital expenditure on energy until 2014.

Kinabalu would become the states first GBI-certified building. According to project officials, once completed in late 2011, the RM16m ($5m) gallery and conservation centre will feature a library, exhibition halls and storage rooms across 3060 sq metres of space. The facility will be energy efficient, powering air conditioning through two forms of solar technology, and meet criteria for water usage by harvesting rainfall. GREEN DEBATES: In order to attract more GBI projects, however, the authorities may need to provide extra incentives for going green, particularly in Sabah where costs for construction materials and utility connection fees are quite high. According to those involved in the industry, GBI certification in the state can increase building costs anywhere from 5% to 15%. Further, the complex application process can take months with registration fees ranging from RM5000 ($1567) to RM45,000 ($14,103). According to a primer on green building issued in May 2010 by PricewaterhouseCoopers, to make sustainable building more attractive, the authorities should provide tax deductions for green items within a structure, such as ecofriendly partition walls, and allow double deductions on costs incurred during the GBI certificate renewal process, which occurs every three years. Proponents of the GBI system, however, point out that initial expenses will be covered by long-run savings rooted in more efficient energy usage. Supporters have also highlighted a number of international studies demonstrating that green buildings are likely to yield larger returns for investors. According to ongoing research conducted by the CoStar Group, CB Richard Ellis and McGraw Hill Construction, compared to a conventional structure, a sustainable property is likely to see a 4% higher return on investment, a 5% higher occupancy rate and a 5% higher growth in value. Moreover, other studies have indicated that the fastest growing market for green building is Asia, where the percentage of firms utilising the technology is projected to increase from 36% in 2011 to 73% in 2013.

REAL ESTATE INTERVIEW

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Saifuddin Tahir, Managing Director, Sabah Urban Development Corporation

Hot on the marketOBG talks to Saifuddin Tahir, Managing Director, Sabah Urban Development CorporationWhich segments of the real estate market show the most potential for growth in the coming years?TAHIR: Generally speaking the property market is buoyant and has been expanding for a number of years now with steady and stable growth rates. Interestingly we are seeing successful developments across the entire state, not just around the capital. Most developments are selling well with strong local demand as well as increasing demand from West Malaysian consumers and progressively more foreigners who are also entering the market. Foreign investors are typically from other countries in South-east Asia, such as South Korea, Japan and China. However, Sabahs status as an attractive winter destination, coupled with the Malaysia My Second Home (MM2H) programme, which allows foreigners to gain long-term residency status here, will likely lead to more Europeans, Australians and investors from the Middle East buying property here. Both the residential and commercial sectors of the property market are growing well throughout the State. The commercial sector is increasingly interesting to investors, but any new shopping centre will need a major anchor tenant to be a success over the long term. These anchor tenants, such as large supermarket chains, not only ensure high customer numbers, but attract more stores into the shopping centre. high end of the residential sector. Foreign experts and workers will likely be hired help develop the industry, this will mean that they will have to take up residence here. With their wages, they will expect to purchase excellent properties. Some might require custom designs, but this could be a major opportunity and a potentially ideal situation for developers. The tourism industry is also proving to be very lucrative for the property and construction industries in Sabah. Currently it is estimated that another 1000 beds are required to meet the demands of the growing tourism sector in the short term. This leaves plenty of opportunities, especially in the lower ends of the hotel market. Many developers are already entering the market, including the Sabah Economic Development Corporation (SEDCO) and the Sabah Urban Development Corporation (SUDC).

What long-term trends are you expecting to see in the residential development market in Sabah?TAHIR: Land is going to become an increasingly more important issue as Sabah develops. It is becoming difficult to find new land to buy in prime locations, so any company that does not already have a good land bank throughout the state will struggle to enter the market. Prime locations, especially those in Kota Kinabalu, are now almost impossible to find. Property developers are challenged not only to offer the right concept for the market, but also to anticipate which areas have the greatest potential to become hotspots. Looking at the economy and at the growing oil and gas industry here in Sabah, it would appear that Kudat and Kimanis, as well as the areas around the Sabah Oil and Gas Terminal, will become popular in the future. Sandakan also displays potential as it develops. Greater infrastructure development, coupled with a growing population, will lead to expansion in the property development market there. The land strategy of property developers in Sabah and their ability to anticipate the next popular locations will determine their success.THE REPORT Sabah 2011

What are the key drivers of growth in the property development market in Sabah?TAHIR: There are a lot of smallholders involved in the palm oil industry and other commodities markets in Sabah who have become very wealthy over the past few years. These people have invested in the tangible property market instead of leaving their money in a bank, where it will lose value due to low interest rates, or investing it in the stock market. This has generated local demand and invigorated the property market. Looking forward, other sectors of the economy are likely to have an equally large impact on the market. The oil and gas industry has the potential to affect the

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Raymond Chan, Managing Director & Executive Chairman, Sagajuta

Expansion across the boardOBG talks to Raymond Chan, Managing Director & Executive Chairman, SagajutaWhich segments of the commercial property development sector are likely to drive growth in the market over the next five years?CHAN: The type of project that is going to drive growth into the future is the shopping complex. I do not think that office complexes will be an important segment yet as there simply is not local demand for them. Over the longer term with strong economic growth and the encouragement of new private sector investment, it is possible that the office segment will eventually pick up pace, but for now there is not much movement. Office towers will not work in Sabah unless the developer has an anchor tenant. Otherwise is very difficult to generate the interest to produce a successful project. There is much more demand from investors in officeshopping complex combinations and dedicated shopping complexes. Demand is so high that the prices of these properties have surprisingly increased to the point where they are actually comparable to other major urban centres in Malaysia, such as Penang and, to an extent, Kuala Lumpur. The other vibrant segment is and will continue to be composed of projects related to the tourism industry, which has seen sustained healthy growth for many years now. Most of the top-end hotels are already running close to capacity and with the completion of the extension of the Kota Kinabalu International Airport (KKIA) runway, we can expect the number of tourists to increase still further. Even at present KKIA is the second-busiest airport in Malaysia. Sabah welcomes visitors from all over the region, including such points of origin as Hong Kong, Osaka, Taiwan and Korea. These tourists come to Sabah for short trips and give a boost to the retail sector while they are here. cial property instead of residential property, which is limited because the supply has been affected by delays in approvals for these projects by the authorities. There are many schemes on the commercial side that have less stringent regulatory frameworks, making it possible to enter into the commercial side of the property development market in Sabah much faster, which of course helps it to be much more attractive to investors whose confidence is greatly influenced by such factors. Of course, we currently have money circulating from the commodities market, principally the palm oil industry, which has been enjoying record high prices for a sustained period and looks set to be that way for some time to come. This has served as a boost to many local investors, who prefer to invest in something tangible rather than in the equity markets. They have been drawn to the property market, specifically to the commercial property development segment. Within this segment the main areas of interest in Sabah are the capital, Kota Kinabalu, Sandakan and Tawau, which are all strong on the commercial development side.

What are the main factors that have contributed to the healthy state of the sector in Sabah?CHAN: The sector has been booming only over the past five years. Before that for over a decade the market was fairly stagnant. Therefore the sector has been playing catch-up, which has enabled it to really grow at a rapid pace. Additionally, the economy in Sabah has been growing at a quick rate over this same period, which inevitably has had an impact on the property sector. The extremely high price of commodities on the global markets is also having a direct effect on the economy and the property market. The oil and gas industry is also expanding rapidly in Sabah, which brings a lot of investment from the major players, and the tourism industry is doing very well. There is expansion across the board, with many different sectors contributing to the growth and development of the state and the economy. This is being reflected in the property market.

How much of a driving force is the commercial property development sector in Sabah?CHAN: I think that the market in Sabah is going to be extremely vibrant over the next two years. This is mostly because investors in Sabah prefer to buy commerwww.oxfordbusinessgroup.com/country/Sabah

REAL ESTATE OVERVIEW

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Price increases are expected in all segments of the market in 2011

Prime landRising demand leads to a hike in property valuesBuoyed by soaring palm oil revenues, Sabahs real estate sector is seeing record highs in demand and activity. Property values are appreciating in all segments, with prices for residential, commercial and industrial units projected to increase by 5-10% over the next year. Despite rapid expansion, the market is stable due to strong local purchasing power and new laws dissuading speculation. Meanwhile, the authorities remain committed to equitable growth and have partnered with the private sector to build thousands of affordable housing units worth RM2bn ($626.8m). To realise its potential, however, Sabahs real estate market will have to provide more high-end properties to foreign buyers in conjunction with the incentives offered through the Malaysia My Second Home (MM2H) programme. FACTS & FIGURES: According to figures from the Valuation and Property Services Department of the Ministry of Finance, 4948 real estate transactions took place in Sabah in the first half (H1) of 2010. This reflected a 3.3% increase from 4791 transactions in H1 2009. During this period, the total value of real estate transactions rose from RM1.2bn ($376.1m) to RM1.98bn ($620.5m), a jump of 63%. Overall, in H1 2010 the agricultural segment of the real estate sector represented 33.6% of market share, with the residential, commercial and industrial segments accounting for 30.7%, 17.3% and 12.2%, respectively. Residential property prices rose in many areas from H1 2009 to H1 2010. In Kota Kinabalu, prices for double-storey terraced houses in Kingfisher Park, Seri Millennium and Taman Indah Permai rose 8.9-18%, and condominium units at One Borneo Tower A increased 7%, selling between RM250,000 ($78,350) and RM280,000 ($87,752). In Sandakan, single-storey terraced houses in Taman Fajar appreciated by 5%, and apartments at Utama Court and Sentosa Apartment by 24.3% and 28.6%, respectively. On the whole, the percentage of residential transactions above RM500,000 ($156,700) rose from to 3.3% in H1 2009 to 6.3% in H1 2010, reflecting increased purchasing power in the market. Sabahs commercial segment also registered increases from H1 2009 to H1 2010. According to the Valuation and Property Services Department of the Ministry of Finance the total value of commercial transactions grew from RM196m ($61.4m) to RM342m ($107.2m), and the percentage of sales above RM1m ($313,400) rose from 2.4% to 4.5%. In terms of activity, sales of commercial properties increased 13% from 621 to 707, helping to reduce overhang in the shop sub-sector, where the number of unsold units fell 26.4% from 329 to 242. Not all indicators during this period were positive, however. In the industrial segment, the number of unsold properties jumped from 41 to 130. In the retail sub-sector average occupancy rates declined from 86.7% to 81.8%. Nevertheless, average occupancy rates for offices remained steady, at 88%, and in the leisure sub-sector occupancy rates at three to five-star hotels increased significantly, from 45.4% to 60.4%. RESIDENTIAL MARKET: Residential property values in Sabah have steadily increased over the past five years. This trend has been most pronounced in Kota Kinabalu, where the cost of a two-storey terraced house in a middle-class neighbourhood has risen from about RM170,000 ($53,278) in 2006 to RM350,000 ($109,690) in 2010 a compound annual growth rate of 15.5%, according to local newspapers reports. In upscale locations, such as the northern suburb of Luyang, terraced houses have reached RM765,000 ($239,751), with semi-detached units now running as high as RM1.3m ($407,420). Although some analysts contend that rising prices in the capital are driven by land shortages, others argue that land supply is sufficient, except in areas with good public services. Property has become expensive because land cost is high, James Lo, director of Henry Butcher Malaysia (Sabah), told local press in early 2010. And there is a short supply of land in close proximity to public amenities, good schools and medical facilities. Prime land shortages in the state capital have inhibited home construction, with developers favouringTHE REPORT Sabah 2011

The total value of real estate transactions increased 63% between the first six months of 2009 and the same period in 2010. The commercial segment also recorded positive growth.

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Rising property values have been influenced by increasing prices for the states main export, palm oil, and the fact that local buyers have become wealthier.

high-density apartment buildings to conserve space and keep prices low for middle-class consumers. According to figures from CH Williams Talhar & Wong, 5474 apartments and 1529 condominium units were launched in the city in 2009, but only 51 detached houses, 206 semi-detached houses and 234 terraced or town houses. The number of homes being constructed in the city and throughout Sabah is actually decreasing, Ben Kong Chung Vui, CEO of property developer Wah Mie Group, said. It is likely that the lack of prime land and the rising cost of building materials will continue to drive home prices upward by 5% per year. From 2008 to 2010, condominium values in the city jumped 60%, with average prices per square metre increasing from about RM2691 ($843) to RM4306 ($1350). According to local reports, condos at the highend Signal Hill Residence and the Peak Vista II now sell for as much as RM6082 ($1906) and RM9343 ($2928) per sq metre, respectively. Here, too, high prices are sustained by insufficient supply, especially for properties targeting foreign buyers. There is a lack of high-quality condos on the market across Sabah that match the demands of the expatriate community, Mike Steel, managing director of MJS Services, told OBG. The private sector is expected to address this lack of supply in the near future, however. Given the steady increase in tourism arrivals and the rise in foreign professionals living and working in the state as employees for oil and gas firms in particular, demand for high-margin upscale accommodation is likely to grow. In a sign that major players are beginning to heed market trends, in 2010 May Sing Group, one of the largest housing developers in Malaysia, announced that it was looking to purchase a significant amount of land in Sabahs beachfront areas. In a statement to the press, May Sing Groups managing director, Tan Sri Leong Hoy Kum, said that any investment would specifically target clients for the MM2H initiative in Sabah (see analysis), a homeownership scheme targeting foreigners. GATED COMMUNITIES: Gated and guarded residential properties are also likely to become more desirable. When the Ganang Villa gated townhouse complex opened in Kota Kinabalu in 2007, for instance, units were reportedly valued between RM200,000 ($62,680) and RM210,000 ($65,814). As of late 2010, however, these units were priced at about RM300,000 ($94,020). People want better quality living conditions and better security for their families. Therefore the gated community living concept will keep expanding, Chong Choon Kim, managing director for CH Williams Talhar and Wonsaid, told local press in late 2010. As long as these units are well managed, their value will appreciate much higher than traditional public housing estates. RISING FORTUNES: Both residential and commercial property values in Sabah have increased in part because local buyers have become wealthier and thus capable of large purchases. According to official figures, from 2004 to 2008, household poverty in Sabah fell from 24.2% to 16.4%, and mean monthly gross income increased from RM2593 ($813) to RM3102 ($972). During this same period, the percentage of real estatewww.oxfordbusinessgroup.com/country/Sabah

transactions above RM500,000 ($156,700) rose from 6.3% to 11%. Things are heating up in Sabah because the population is growing and people are becoming more wealthy, Stephen Wong, principal Sabah chairman of the Malaysian Institute of Estate Agents, told OBG. This trend is likely to continue over the next five years, especially with our palm oil, rubber and cocoa export values reaching all-time highs. Growth in Sabahs real estate market has been influenced by the rising price of palm oil, Sabahs chief export. From 2002 to 2010, palm oil production in the state remained steady, but due to rising global demand, average prices per tonne surged over 300% from RM893 ($280) to RM3776 ($1183). In the past, palm oil planters used their earnings to buy more plantations, but given the scarcity of suitable land in Sabah for major industrial development, they are now investing in residential and commercial units. In addition, property has become more appealing to palm oil players due to the unappealing interest rates offered by local banks. However, these same low interest rates have enabled more people to get on the property ladder. Anthony Sia, CEO of Borneo Housing Mortgage Finance, told OBG, Despite property prices continuing to move on an upward trajectory across Sabah, more Sabahans are now able to enter the property market than ever before. This is being aided by very low interest rates and excellent finance packages. With palm oil playing such a crucial role in sector activity, however, some analysts are concerned that the market has become too dependent on the commodity, the value of which is subject to external trends in China and the Middle East, among other places. Indeed, figures show that palm oil accounts for about 40% of Sabahs GDP and nearly 60% of revenue through windfall taxation. The world demand for palm oil will strongly influence the outlook of our real estate sector, Kong told OBG. Although market research indicates that demand for palm materials will remain high, our economic history shows that there are no guarantees. STABILITY: When it comes to the outlook for Sabahs real estate sector, pessimists are in the minority. Along with strong palm oil futures, the state can point to a growing population and a beautiful natural environment that is gradually beginning to attract more foreign buyers through the MM2H programme. Moreover, Sabah has a history of market stability, with property values in the residential and commercial segments remaining relatively steady through the Asian financial crisis of 1997-98 and the recent global economic downturn. This history is often cited by industry insiders in reference to talk of the local market overheating. Even though the palm oil effect has generated a property surge, the market does not appear to be in a bubble, said David Wan Young Yin, general manager (East Malaysia) of Hap Seng Properties Development. Historically, Sabah has avoided the peaks and troughs we have seen in other countries due to the steady supply of locals, who make up the vast majority of buyers. With 90% of market demand coming from locals, the sector has maintained stability by avoiding specula-


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tion from foreign investors. Furthermore, some argue local buyers are often too cautious to make speculative bets. Speculative practices have also been dissuaded by new federal regulations. To promote stability and protect genuine buyers during the current nationwide boom, in November 2010 Bank Negara Malaysia, the countrys central bank, maintained 90% financing options on first and second homes, but enacted a maximum loan-to-value ratio of 70% on third homes. Also in 2010, a new federal regulation enacted by the Foreign Investment Committee (FIC) took effect, raising the minimum price threshold for home purchases by foreign buyers from RM250,000 ($78,350) to RM500,000 ($156,700). Although critics have argued that the new law will discourage foreign investment, supporters have pointed out that foreigners typically purchase properties well above the specified limit. Moreover, by making FIC approval no longer necessary for purchases above the RM500,000 ($156,700) threshold, the rule change expedites the approval process. In 2010 Sabah Chief Minister Musa Aman said that he intends to push forward with further sector deregulation, announcing plans to expedite the development approval process, which is widely regarded as long and complex. The Ministry of Local Government and Housing has begun preparing a streamlined standard process for building projects that will be issued to the state cabinet for implementation. The new guidelines, which are expected to cut approval times from nearly two years at present to as little as three months, have been welcomed as a major breakthrough by many, including representatives from the Sabah Housing and Real Estate Developers Association (SHAREDA), which has participated on many state government committees and helped to shape government policies for the sector. SHAREDA president Susan Wong told local press, Long approval processes make projects more expensive for developers, who pass on costs to house-buyers. This problem is especially felt by families in lowerincome groups, whose chance of finding an affordable house in the right location is getting more remote. AFFORDABLE HOUSING: As residential prices in Sabah rise, the authorities are taking steps to safeguard homeownership for lower-income groups. In 2011, the Sabah Housing and Town Development Authority (SHTDA) and Malaysias Probil Sonati Development finalised plans to build 20,000 units of affordable housing across Sabah over the next five years. The RM2bn ($626.8m) venture has received financial backing from major lenders such as Bank Rakyat, Maybank, EON Bank and Etiqa Insurance, and will follow three development phases. Overall, the housing units will be priced between RM85,000 ($26,639) and RM2m ($626,800). Targeted financing schemes have promoted affordability. In 2011, the My First House Programme was initiated in Sabah to provide tax exemptions and full loans to first-time buyers earning less than RM3000 ($940) per month. In late 2010 premiums for extending residential land leases were also reduced by 80% (and for commercial properties by 45%). This was designed to ensure that Sabahans can remain in their homes.

New guidelines for building projects will cut approval times and streamline standard processes

Not all affordable housing regulations have proved popular. Under current low-cost housing (LCH) requirements, developers working on projects above 4.05 ha must sell about 30% of units at controlled prices ranging from RM40,000 ($12,536) to RM51,000 ($15,983). Given that construction costs for basic housing units often reach RM120,000 ($37,608), builders argue that this law severely narrows industry profit margins already reduced by high prices in Sabah for utility connections and construction materials. The law has been blamed for creating cross-subsidies wherein costs are passed on to standard buyers, thereby diminishing overall affordability. In a March 2010 communiqu to the federal government, SHAREDA and the Malaysian Developers Council called for a repeal of the law. BUYER PROTECTION: The authorities have taken additional steps to protect consumer rights. In February 2011, the Kota Kinabalu High Court issued a landmark ruling ordering a property developer to pay 46 homebuyers in Sabah more than RM4.5m ($1.4m) in compensation for negligence and breach of contract. The plaintiffs, who sought damages under Clause 18 of the Sale and Purchase Agreement, claimed that their homes were delivered late and in defective condition, and the developer refused to make suitable repairs. They also sought damages for distress and inconvenience, and for the loss of value that each home incurred. OUTLOOK: Price increases are expected across all segments of the real estate market in 2011, with property values in and around Kota Kinabalu projected to rise considerably as premium land becomes scarcer. Building materials are likely to become more expensive, which may compel developers to hike prices further. As Sabahs palm oil, petroleum and tourism industries grow, so too will opportunities for housing developers capable of providing upscale units catering to foreign and increasingly wealthy domestic buyers. If, as planned, the authorities are able to expedite the cumbersome approval process for property development, the investment environment will become even more hospitable.THE REPORT Sabah 2011

With property prices increasing, the authorities are taking steps to ensure access for lower-income groups. Affordable units will be built over the next five years, while a housing programme offers tax exemptions and loans to first-time buyers.

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Ben Kong Chung Vui, Executive Director, Wah Mie Group

The bigger pictureOBG talks to Ben Kong Chung Vui, Executive Director, Wah Mie GroupHow would you describe the development of Sabahs property sector over the last few years, and how do you see it developing in the future?KONG: Most of Sabahs development and growth has come about in the last five years. It has happened at an unprecedented pace, with Sabah suddenly bursting through after years in the political wilderness. Sabah was left behind, and had a stagnant growth rate for 10-15 years. Now, however, the state government has an excellent relationship with the federal government, which has made this rapid growth and development all the more possible. During the last five years a huge amount of catching up was needed, which is exactly what Sabah has done. The next five years, however, are likely to see a doubling in the pace of development from even the speed of the past half decade. This is due to economic factors rather than political ones. In terms of the economy, infrastructure and development, Sabah can be compared to where Singapore was 20 years ago. Sabah will no doubt follow the same development path as Singapore, but the speed of development in the modern world is much faster than even a decade ago, so the time it will take to catch up will be substantially less than 20 years. tunity to arrange more point-to-point flights to a large number of attractive urban centres and destinations in the region. This will cause a surge in tourism as getting here becomes easier. Tourism is the best way to give the economy an immediate boost and has the potential to be the leading sector, but it also allows other areas of the economy to be showcased. Many potential investors first arrive in Sabah as tourists but quickly identify the potential here. This includes the many people who subsequently buy property. Tourist figures are currently around 2m per annum, but we can expect this to rise to around 4m over the next five years. The more tourists that arrive, the more will come back here to buy property, given the prices and the potential return on investment, all of which are on top of the obvious natural beauty and charm of Sabah and its people. Economic growth here will also bring to Sabah an increasing number of multinational companies looking to relocate their offices, and they normally require an expatriate management team and highly skilled labour, neither of which is readily available here. This is something that we are especially going to witness in the oil and gas industry. This sector is being developed via Sabah Oil and Gas Terminal, which will create a regional hydrocarbons hub in Sabah. It is likely that these expatriates will want to buy condos. At present there are only around 2500 condos of a high standard in KK, which will not be sufficient. Therefore we can expect a rise in new builds of high-end condos in the future to cater for this market. Even those renting will create a surge in demand. Currently 70% of condos are purchased for the buyers habitation rather than for renting. Along with wanting high-end condos to live in, these senior expatriates will require facilities and services in other sectors such as health care and education that match international standards. So all these additional sectors can expect an upturn, as

Which segments do you think will offer the best returns for investors in the future and how can these areas be further developed?KONG: Sabah has two great blessings. The first is its beneficial location in the leading region in the world for economic growth. Within five hours flight there are 80 major cities and areas that could provide an excellent source of affluent tourists and a consumer market, not to mention potential investors for everything from new business interests to property. At present, Kota Kinabalu (KK) International Airport only serves 40 destinations point-to-point, but with runway improvements being completed this will increase. The upgrades will give Sabah the opporwww.oxfordbusinessgroup.com/country/Sabah


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well as that which will be felt in the construction and property development sectors. Because the economy is likely to grow at a good rate in many different sectors, the property development industry is going to have balanced growth across the board over the next five years, from residential and commercial developments to those in the tourism industry, such as hotels and resorts. This will make the sector stronger, as it will not be reliant on one single driver but several. As a result, even in the worst-case scenario, for instance if commodity prices fall dramatically, there will still be other areas in demand for property development that will maintain growth. The state also has an amazing opportunity to create the biggest ecocity in the region. This would help put Sabah on the map and would give it an identity wholly of its own that is not dependent on Malaysia or Borneo. This concept would fit in extremely well with the bigger picture of development in Sabah. In the tourism industry, it would help to make Sabah an internationally marketable brand and would strengthen the states image of natural beauty and conservation. Building the brand and awareness of Sabah internationally would have a knock-on effect on all the other areas of the economy.

The cost of materials is also going to increase and this, again, will affect pricing. In addition, the price of land will rise as it becomes more and more difficult to find plots in prime areas. The net result of this is that the price of property is going to rise even without the predicted growth in demand and speculators buying property as awareness grows. A crucial difference between Sabah and the rest of Malaysia, however, lies in the quality of infrastructure. The infrastructure in Sabah needs to be improved and the government needs to recognise the fact that money must be spent on it. If this were to happen, it would certainly help to attract investment, which would in turn help recoup the governments initial expenditure. Without adequate infrastructure, many potential investors will turn away. The private sector must be the driving force of economic growth in Sabah, as the state government has an insufficient budget to be able to prop up the state economy, especially if it continues to grow at its current pace. Upgrading the states infrastructure is therefore key to Sabahs economic growth and future prosperity.

What do you think are the key challenges in the market for real estate development?KONG: One of the barriers to economic development and therefore growth in property development is brain drain. Too many qualified graduates are leaving Sabah to take up posts in KL and elsewhere abroad, making Sabahs economic growth unsustainable. There will be a point when the lack of skilled workers will derail the economy, especially considering the current speed of growth and the rate of loss of skilled workers. People need to be trained now to become the skilled workers of the future. This should be one of the governments top priorities. Policies must be simplified, clear and transparent, with a good delivery system to encourage investment and confidence.THE REPORT Sabah 2011

How does the real estate market in Sabah compare to the rest of Malaysia?KONG: In Kuala Lumpur (KL) the average price of condominiums is around RM8600 ($2700) per sq metre, while in KK it is only RM5400 ($1700). In KL city centre it can rise to above RM32,000 ($10,000). While KK should not be priced at the same level as the city centre, it can be compared to the suburbs and pricing is still better in KK than there, indicating that there is more room for growth in KK. The number of real estate properties that are being constructed in Sabah is actually decreasing compared to previous years, but demand stays high. This will push prices higher.

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REAL ESTATE ANALYSIS

The supply of high-end properties is limited at present

No place like second homeForeign buyers find a range of attractions in SabahThe local environment, low cost of living, appreciating home values and political stability make Sabah an ideal destination for residential property investment. It is somewhat surprising that the state has not received more attention under the Malaysia My Second Home (MM2H) programme. According to Susan Wong, president of the Sabah Housing and Real Estate Developers Association (SHAREDA), out of 1578 successful MM2H applicants across Malaysia in 2009, Sabah only registered 60 participants, for a contribution of 4%. Given Sabahs rising profile internationally, this has the potential to change. From 2005 to 2010, annual tourism arrivals rose from 1.8m to 2.5m, with development planners expecting 4.5m annual visitors by 2020. Under the Sabah Development Corridor, the authorities have begun attracting hundreds of millions of dollars in private capital, much of which has come from foreign firms. As international leisure and business travellers arrive in increasing numbers, the MM2H initiative will have more opportunities to attract customers. BASICS: MM2H was launched in 2006 by the Ministry of Tourism in order to attract greater foreign property investment. Under current rules, candidates for MM2H below the age of 50 must provide financial statements demonstrating monthly income of at least RM10,000 ($3134), along with RM500,000 ($156,700) in liquid assets. An RM300,000 ($94,020) fixed deposit is also required, 60% of which can be withdrawn in the second year as long as the money is not remitted overseas. For those above 50, the liquidity requirement is RM350,000 ($109,690) and there is an option to make a deposit of RM150,000 ($47,010) or provide evidence of a government pension of at least RM10,000 ($3134). In Peninsular Malaysia MM2H applications are processed at the federal level by the Ministry of Tourism. The programme in Sabah, however, requires a separate application that is administered by the state Immigration Department. Both territories offer many of the same investor incentives, including 10-year multiple-entry visas, tax-free allowances on pension transfers andwww.oxfordbusinessgroup.com/country/Sabah

The states attractions for foreigners purchasing property include an appreciating residential property market, low cost of living, a mostly Englishspeaking population and a beautiful natural environment.

imported goods, and the ability to bring children aged 18 and under. Two policy changes introduced in 2010, however, may serve as disincentives: the government increased the minimum price limit for home purchases by foreign buyers from RM250,000 ($78,350) to RM500,000 ($156,700) and passed a 5% real property gains tax on all properties sold within five years of purchase. The main point of contention, according to some critics, is not the laws per se, but the fact that foreign homeownership policies have changed repeatedly, creating confusion over MM2H rules. Sabah offers a wealth of attractions for prospective MM2H buyers. The states residential market is steadily appreciating, with home prices projected to increase at an annual rate of 5% over the next two years. Its natural habitat is a stunning blend of tropical rainforests, coral reefs and pristine beaches. And it is inexpensive, safe and mostly English-speaking. LIMITATIONS: Sabahs most basic constraint in the MM2H market is a limited supply of upscale properties. According to sector professionals, foreigners typically want detached homes in nice neighbourhoods or high-end condominiums equipped with sea views. Such units are scarce, however, due to prime land shortages, particularly in Kota Kinabalu. Some have also suggested that developers may be reluctant to build upscale structures as they entail higher financial risk. However, in 2010 Mah Sing Group, Malaysias fifth-largest housing developer, announced tentative plans to buy beachfront land in Sabah for the purpose of building premium residential units for MM2H customers. This made headlines in the local press, as business leaders publicly encouraged the firm to make the investment. Despite offering a variety of investment and lifestyle incentives, Sabah has enrolled only a modest number of clients in its MM2H scheme so far. This means the programme has a great deal of room for growth going forward, however. Given Sabahs competitive advantages over other second home destinations, it may only be a matter of time before the markets potential is realised.

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