Why you shouldn’t invest in Malaysian real estate in 2023

Why you shouldn’t invest in Malaysian real estate in 2023 – that will be the topic of today’s article.

Many expats come to South East Asia, including Malaysia, and a percentage become interested in the local property market.

Whilst there are always positives and negatives associated with every investment, this article will explain some of the reasons why you shouldn’t invest in the market.

If you are looking to invest in more productive assets, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

Introduction

Malaysia is located on the busiest sea route in the world – the Strait of Malacca. This allowed its economy to work well, simply based on where it is located on the map. 

Combine this with capital outflows from the Middle East, sizable oil reserves, business-friendly policies, and the strongest Islamic banking industry in the world. Seems like Malaysia is without doubt one of the best investment destinations in Asia, BUT there are some points that will tell you the opposite side of investments in Malaysia.

But first let us tell you a little about Malaysia, real estate features, investments, restrictions, advantages and disadvantages.

Investors should know that Malaysia is virtually the only country in the region to allow foreign investors to own land, but it comes with many restrictions. We’ll look at some of the restrictions later, but the laws are much simpler than most other countries.

Therefore, Malaysia has more opportunities than most other Asian property markets. The ability to own land opens up not only several very different classes of investments (houses, the ability to develop, and so on). But also different cities and towns.

For example, foreign buyers can only own condominium units in Thailand. This leaves them essentially blocked from small towns. This is because very few condominiums exist in places like Khon Kaen and Nakorn Ratchasima.

Property buyers in Malaysia have more cities to choose from. You can own a typical Kuala Lumpur apartment or townhouse depending on your needs. Things are not entirely cloudless for the Malaysian real estate market.

Meanwhile, employment rates are low throughout Malaysia. Some large cities are considered overdeveloped even by the locals. Another thing that Malaysia has is population growth.

The country’s population will grow from 30 million currently to over 40 million by 2050. This will help absorb the supply in the long run. The rising middle class will also help. Malaysia plans to become a developed country by 2030.

Can foreigners invest in real estate in Malaysia?

You can not only own a typical condominium also houses, townhouses and land. However, not all so simple. There are a few restrictions and quirks, and land falls into several different categories.

For starters, there is a minimum purchase requirement for foreign buyers. The goal is to enable foreign buyers in the mid to high end segment without allowing them to increase the value of homes in the price range of the average Malaysians.

In Malaysia, the minimum purchase volume is RMB 1 million (about US $ 225,000 at the beginning of the year). But in the state of Selangor it’s RM2 Million and foreigners can only purchase land in gated communities. This price has been raised several times prior to the last update.

In addition, foreign buyers cannot own land designated as “Bumiputra only” – which means “ethnic Muslim Malays”. They also cannot own most of the agricultural land or properties identified by the government as low or medium value housing.

Foreigners buying property in Malaysia are subject to a minimum purchase price that varies depending on the condition, location and type of property.

Each state has different minimum requirements, while in some states the price rises depending on whether you are buying an apartment or a land property.

How much are property taxes in Malaysia?

High taxes are a weak point for real estate investment in Malaysia. The rental income tax here is a flat rate of 20% for residents. And taxes are 25% if you are not a resident of the country.

The real estate gains tax (RPGT) payable on any gains made on the sale of real estate is also very high if you have owned the property for less than half a century.

Capital gains tax in Malaysia is 20% if the sale of property is carried out for less than 5 years. But this is only 5%.

Preventing speculation among short-term buyers is the stated goal of the RPGT in Malaysia. Most countries in the region estimate similar taxes, with the exception of Cambodia.

There is also an annual property tax, but it is not very high. Expect payments only between 1 Sen (about $ 0.002) and 2 Sen (about $ 0.004) per square foot.

In addition, you must pay an annual rental cancellation tax, which is usually less than Ringgit 100 (US $ 25).

If you buy an apartment in a condominium or belong to a land community, they will likely have an annual maintenance fee as well. They vary greatly by location, equipment, density, and standards, but usually hover around RM4 ($ 1) per square foot.

Is it safe to buy property in Malaysia?

Malaysia has one of the most well-documented and safest title systems in Asia. This applies to both land plots and condominiums, so you are unlikely to have any problems from the government.

So any problems or things to look out for – as is the case in almost every real estate market in the world – will be those that come from a development company or builder.

If you buy from any reputable company, you will be fine. New houses and apartments always come with a guarantee. The developer is obliged to comply with warranties and build the project in accordance with the specifications in the purchase agreement.

There are about twelve publicly registered developers. A Malaysian exchange listed on an exchange country is usually a good sign that a firm has a good track record.

Being on the list means that the company meets certain financial standards, capitalization requirements and is accountable to its shareholders. They are not going to just run out of money in the middle of a project.

The real risk for investing in Malaysian property (and not only)

Investing in Malaysia, whether it be stocks or real estate, at first glance seems to an ordinary average investor to be a rather risky business. In most cases, the reality is that risk is simply what investors perceive, not what actually happens in the market. 

The bottom line is that foreign investments are no different from domestic ones, but each jurisdiction has its own certain rules and nuances, knowing about which you can hedge yourself. 

Of course, investing in overseas property is perhaps one of the most popular and reliable forms of investment. But for today, few people have doubts about the investment attractiveness of the Asian real estate market. 

It’s true, investors are not always able to make an analysis and take into account all possible risks from future transactions. When buying real estate abroad, your main source of information will be a real estate agent and there is no guarantee that such a specialist will have a special certificate or license for this type of activity. 

Therefore, it is important to prepare in advance and protect yourself as much as possible before heading to your new home. After analyzing the real estate market abroad, we prepared a guide and introduced the most common mistakes that every second buyer makes, so be careful, below shown tips will be 100% helpful for you.

Early purchase planning

Lack of a pre-planned investment plan is one of the biggest mistakes you make when buying a home abroad. Finding a home after forming the right investment strategy is the right way to go. 

Many investors make the mistake of buying a house solely because they consider it a successful deal in advance, but later, when the euphoria passes, they begin to think about how the new purchase can fit into their life from a financial point of view. 

Make up the maximum number of requests for a future purchase, this will allow you to purchase the ideal option from an investment and financial point of view.

Quick profit expectations

Making quick profits is a misconception among investors. Getting rich quick on real estate is just a myth, it is important to understand that real estate investing is a long-term project.

Dumping prices

A common practice is to dump the cost per object by different agents. On average, in 3-4 different agencies, the cost of a house can differ by 10-30 thousand. 

Another feature that affects the price can be the fact that in many markets local agents do not set a price for the object at all, preferring to first assess the client and his solvency. 

In such a situation, the right decision would be to analyze the cost per square meter in advance, this will give a clear understanding of where the real price is, and where is just a twisted stuffing.

Currency risk

Given the currency risk, it is important to understand how volatile the currency of a given country is (in this case of Malaysia), where is the purchase planned and why? 

Commodity-based countries have strong currencies if the price of their commodities is high in the world. 

The lack of a hard currency causes volatility in more dramatic cycles. The main aspect of international investment is diversification, including currency diversification. 

During the Asian financial crisis, the Malaysian ringgit fell 41.3 percent and the Thai baht fell 76.4 percent against the Singapore dollar in just seven months from June 1997 to January 1998. If you were to buy Malaysian or Thai property, you would have lost an enormous amount of foreign exchange, in addition to the falling prices of your foreign property.

Political, economic and legal risk

The choice of jurisdiction for investment is one of the important points when planning a future purchase. 

It is important at the initial stage to understand whether the country has a strong leadership with a stable government or there are problems with corruption and bureaucracy. 

Perhaps the country is periodically plagued by political unrest or a coup d’état, if something like this happens, what will you do with your real estate? From an economic point of view, it is also important to understand how stable the economy and financial situation in the country is. 

Legal systems vary from country to country. Foreign buyers can face a difficult legal battle or any kind of legal dispute such as complaints against developers, disputes with real estate agents or contractors, missing rent, or evacuating tenants.

Market risk

The issue of market risk is that when choosing a property abroad, it is important to understand how the real estate market works in a given country. In simple words, you have decided to buy property in Malaysia, it is important to analyze the buyers and landlords of the Malaysian property market. 

What is it for? If you decide to sell your home, it will be easier for you to understand who is the target audience for your property. 

Another important point is monitoring the market with high shares of leveraged funds, if economic problems arise, you will immediately see that sellers are quickly dumping real estate and withdrawing their money, thus creating an excess supply of real estate abroad.

Project risk

When buying real estate abroad, it is important to find out at what stage of construction the project is, how many square meters have already been sold and its geographic location. 

It is also important to understand from what source the construction project is financed – own funds, a bank loan or funds received from the sale of ready-made objects. 

At any time, such financing may stop, for example, the bank decides to refuse for some reason to allocate funds and the developer will be left with an unfinished project. It is strongly recommended to consider all of these risks before buying and then compare them with your tolerance levels and overall investment goals.

Risk of expropriation

There are two types of expropriation – indirect and direct. A government that enters and seizes every private property under the flag of “incomprehensible reform” is very close to the outright expropriation you can get. 

On the other hand, a government that increases property taxes eightfold to the point where half the country can no longer afford to own their home is an indirect form of expropriation that happens all the time.

In general, the risks of investing abroad can be reduced to several main risks that can be easily eliminated or taken into account in your transaction, subject to timely assistance and qualified support from specialists. Keep in mind that people in the largest markets get rich enough by investing in real estate or starting a business there, and none of these risks affects most of them.

It is a bad idea to invest in real estate in Malaysia right now. Why?

At the moment we are experiencing some of the most turbulent times in history. As you probably can guess, we’re talking about the COVID-19 crisis and the Movement Control Ordinance (MCO) that followed. 

The government has taken steps since the MCO went into effect on March 18, 2020, with a number of initiatives that could be catalysts for funding. The current economic climate has likely influenced how many people in Malaysia overestimate their personal finance goals.

So if this year you were intending to accumulate several assets in Malaysia, we will help you to understand what is going on and in which destination you should move as an investor. 

In the primary sector, approved investments have all but disappeared, falling to MYR 0.3 billion ($ 73,001,580), down 91 percent year on year. This sector includes mining, plantation and commodity production, and agriculture.

Economists expect the total year of approved investments to fall to MYR 100 billion ($ 24,333,860,000) from MYR 211 billion ($ 513,444,446,000) in 2019, given the continuing uncertainty and risks associated with Covid-19 and the related Movement Control Order.

According to the Malaysian Investment Development Authority (MIDA), Malaysia’s total approved investment in manufacturing, services and the primary sector reached MYR 64.8 billion ($ 15,768,341,280) between January and June 2020, despite numerous obstacles in the global market.

Domestically, the five states, Sabah, Selangor, Penang, Kuala Lumpur, and Johor, contributed MYR 47.1 billion ($ 18,031,390,260), or 72.6%, to most of the investment received.

With some bargain hunting options emerging in Malaysia’s still weak real estate market, there has been a renewed surge of interest in Malaysian property from international real estate investors. 

The government agreed to lower criteria for high-rise buildings in urban areas for foreigners in Malaysia following the introduction of the 2020 budget. However, only the Federal Territory of Kuala Lumpur, and not the governments of other states, actually adhere to this statement.

Investing in properties located in central areas such as Selangor or KL can lead to good capital gains and good returns. This is due to Malaysia’s robust economic growth, relatively young working population and growing infrastructure connectivity in Malaysia, including high-speed rail links in the near future with Singapore.

However, when looking for property in Malaysia to buy, foreign investors planning to invest in property in Malaysia should be aware of certain restrictions and conditions that apply to them. Explore before you dig.

Overall, investors can now restructure their portfolios to handle some of the risk. In the meantime, those with leverage can take advantage of the lower (undervalued) price homes on the market. Are you able to withstand various shocks (for example, falling property prices), but are you able to hold out until prices recover? Or maybe you are someone who doesn’t want to sell in the next 3, 5 or 10 years?

If that’s all of the above, then yes, now is a great time for you to play a real estate game.

You see, nowadays developers are not only increasing the value of their unsold property to make it more attractive, asking prices are dropping, and this is helping to create the conditions for financing.

Thanks to the OPR BNM cut, interest rates will be very lenient compared to 8-9% or double-digit rates in the past.

Malaysian investors target gold

The price of gold has fluctuated from 220 to 280.0 ringgit over the past 6 months. While this was quite unpredictable, the price of gold in September 2020 is much higher than the 206 ringgit in the previous year (2019). 

Gold as a safe haven currency is considered popular in times like these. The reason is that the price of gold should rise, and sometimes even higher, in the event of a crisis. 

Many investors choose to invest in gold because in the event of any economic risk they want to minimize their exposure to losses.

For example, due to Covid-19, this year is very difficult. As such, several investors started investing in gold when the MCO opened back in March 2020. Well, this is not shocking as the economy was fragile and in decline at the time.

Here it is all the information about Malaysian property, real estate advantages and disadvantages. We tried to show you all the risks you can face while investing in Malaysia, but plus all that risks listed above do not forget about the COVID-19 virus and the affect it had on not only Malaysian but also the world economics. 

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 252.9 million answers views on Quora.com and a widely sold book on Amazon

Further Reading

In the answer below, taken from my online Quora.com answers, I spoke about the following issues and topics:

  • As a British expat in my mid 20’s what tips can you give to retire in your 40’s? 
  • Why can US expats overseas invest more (sometimes) than they can when they live in America?
  • What changes can we expect expats in the Middle East to face in the next few years or decade?
  • How can stock markets go up during a pandemic?

To read more click on the link below.

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