Iskandar Malaysia: on the edge of glory or a billion-dollar failure?

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January 20, 2017 by iskandarinsider

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The Iskandar Malaysia development project was supposed to create an economic powerhouse that bridged the gap between Malaysia and Singapore. Ten years later, businesses have made it their new home but it is leaving investors disappointed.

By Victoria Wah

Iskandar Malaysia was once called, “one of the most ambitious development projects in the world.” Begun in 2006 it aimed to turn South Johor into a flourishing economic zone with three million people, 1.46 million jobs, and a gross domestic product of US$93.3 billion by 2025.

International investors initially received it well, with many Singaporeans coming on board and putting RM 9.2 billion (US$2 billion) into Iskandar over the first seven years. This is more than twice the amount invested by other national partners.

Initially, these Singaporeans had high hopes that their investments would produce fruitful returns. However, a decade later the prospects of realising South Johor as the next Shenzhen economic powerhouse of Southeast Asia has significantly dampened.

Iskandar’s uncertain future

On the surface, the project is well on track. An Iskandar Regional Development Authority (IRDA) spokesman says the area’s population has increased by 39%, from 1,297,000 in 2008 to 1,805,000 in 2013, and is well on its way to hitting the three million target by 2025.

Furthermore, the project has achieved around half of its goal of attracting RM383 billion (S$128 billion) of investments, driven by the manufacturing sector which accounts for about RM52.10 billion of committed investments to date. This translates into steady demand for industrial space.

However, the data released by the IRDA is limited. It only focuses on financial investments, not job creation, and this makes it difficult for investors to predict the long-term returns to be made from this project. Furthermore, the information at hand does not factor in potential issues that could wipe the contribution of these foreign investors clean.

For example, political manoeuvres to limit the sale of land to the Chinese, and sudden withdrawals from big projects have shaken investors’ confidence. This has created a tense atmosphere as investors continue to cautiously trudge forward, uncertain about the future.

Too much property, not enough people

One of the issues at hand are reports that property oversupply in Iskandar Malaysia is, likely to get worse before it gets better. In fact, property transactions in the area have precariously dipped by one-third, making the city the worst performing in Malaysia.

This drastic decline in residential and commercial values is attributed to unchecked property growth. Local developers say they face stiff competition from big Chinese groups that seek to monopolise Iskandar’s economic zone with their massive glut of housing projects. Ms Wong, a Maybank analyst, explained, “the Iskandar property market could be hit by too much supply of high-rise mixed development projects if there is still no coordinated planning and control – this will induce price volatility.”

Meanwhile, the value of industrial property has mostly remained intact thanks to its much lower cost. This potential saving alone has attracted many small and medium enterprises (SMEs) in Singapore to set up their manufacturing subsidiaries in Malaysia.

However, even this has its downsides – there are problems with retaining manpower. Mr Wee, president of the Association of Small and Medium Enterprises, highlights that, “There is not yet a large enough domestic population in and around the (Iskandar) region to help alleviate the labour shortage.”

Generally skilled workers rank Singapore as a more attractive place to work because of the benefits brought about by the smaller country’s modernised economy. This, coupled with the recent decrease in industrial land prices in the city-state, makes its industrial property market much more sought after than Iskandar.

There are some interim measures companies can use to tackle this, such as sending Singaporean workers to Johor and paying workers based in Malaysia in Singapore dollars. However, Mr Chan, president of the Association of Small and Medium Enterprises (ASME), stresses that these are not sustainable solutions, as these would only increase labour bills and undermine the cost advantage Iskandar offers.

Mr Mustapa, the Malaysian International Trade and Industry Minister, has tried to assure foreign investors that the Malaysian government is currently working to address the low manpower supply. It remains to be seen how that will be done.

It is also interesting to note that despite the lower corresponding value of the ringgit, and enticing apartment costs, fundamental logistic problems are still deterring foreigners from buying apartments. In particular, a lack of connectivity still hinders the flow of goods and people between both countries.

Mr Sivadas, executive director of PA Property Consultants, stresses that, “until the Causeway and Second Link congestions are solved, this region will be held back. It will not be able to fully realise the potential of being complementary to Singapore”.

All hope is not lost

But despite the litany of problems, investors must not lose hope. While Singapore is the top foreign investor, the majority of the investment is still being driven by the domestic market. The IRDA reports that 62% of the total cumulative investments were from Malaysia, while foreign cash made up the rest.

Furthermore, the residential property sector formed only 40% of the total cumulative investments. These encouraging statistics reignite hope for foreign investors that Iskandar can realise its potential if it can deal with its connectivity and manpower issues. At least one of those seems in hand; the completion of the cross-border rail link between Singapore’s MRT and Johor Bahru’s RTS system in 2019 will make a huge difference.

As the Sultan of Johor explains, “Once the links are in place, it will become the norm for Singaporeans to live in Johor and work in Singapore. That is the future.” This will result in more investments in Iskandar Malaysia and the potential realisation of it being the next Shenzhen of Southeast Asia.

It remains to be seen how Iskandar will benefit investors in the long run, and whether plans to encourage Singaporeans to stay and work there can ease the barriers to its success. Yet at the same time, Singapore’s own strong security and economic scene make it unlikely these issues will go away. Regardless, strong domestic investments mean progress on the project will continue; the question is just how well those investments will perform.

Source: Asean Today

Iskandar Malaysia: on the edge of glory or a billion-dollar failure?


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