Are Johor Sultan’s land deals hurting Iskandar?

By Khairul Khalid

A controversial RM4.5 billion land deal by the Johor Sultan and other mega property developments linked to him caused ripples in Iskandar this year, prompting analysts to warn of their potentially dire effects on the project’s long-term growth.

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This year the Johor Sultan flexed his financial muscles and announced several massive deals that heralded his emergence as a major corporate player.

Ironically, one of his biggest deals could backfire on the long-term prospects of Iskandar, the southern economic zone that was launched in 2006 and named after his late father.

In late December last year, the Johor Sultan stunned the nation with a RM4.5 billion land sale in Iskandar to Chinese developers Guangzhou R&F.

Deep unease over land sale

The selling of prime freehold land to foreigners by royalty was unheard of previously and this deal caused deep unease among locals and industry players, although there was no immediate public opposition to the deal due to the sensitivity of the subject matter.

Nevertheless, that deal’s serious ramifications on the Iskandar project is starting to be felt and many industry players have criticised it for exacerbating an already slumping property market.

Simply put, local developers and investors are unhappy with the invasion of the Chinese developers in Iskandar and their “carpet bombing” strategy of launching units at a such a gigantic scale, leading to severe oversupply and depressing prices.

They have also complained about Chinese developers possibly getting “special treatment” in getting the necessary permits and approvals in fast-tracking their massive projects, many of which involve substantial land reclamation that requires environmental inspection and approvals. Nevertheless, none of these allegations have been been proven.

Too fast, too soon?

Are the Sultan’s multibillion ringgit land and property ventures in Iskandar dragging down the project?

The RM4.5 billion transaction for 116 acres of prime waterfront land in Iskandar gradually opened the floodgates for a torrent of criticism on the Sultan.

For starters, the Sultan’s RM4.5 billion land sale completely reversed Iskandar Investment Bhd’s (IIB) plans for a “controlled-release” strategy to limit land sale in Iskandar, announced only a few months before the Sultan’s deal with Guangzhou R&F.

According to IIB president and chief executive officer (CEO) Syed Mohamed Ibrahim then, the move was necessary because Iskandar “is still a relatively small and fragile region” and to “allow investors to make money.”

In other words, property development in Iskandar was moving too fast, too soon.

Controversial land reclamation

Land reclamation, especially those involving projects linked to the Sultan, is another touchy subject that sparked a storm of protests. The 116 acres near the Johor Bahru (JB)-Singapore Causeway that the Sultan sold to Guangzhou R&F involve a substantial amount of land reclamation.

The other project involving huge land reclamation is Forest City, a 2,000-hectare man-made island near the Second Link in JB. It is being developed by another Chinese developer Country Garden in a 66%-34% partnership with Esplanade Danga 88 Sdn Bhd, a company in which the Sultan has a controlling stake of 64%.

Even neighbouring Singapore has expressed its serious concerns to Putrajaya, about the scale of land reclamation being conducted in Johor. Many are also worried over the detrimental effects the land reclamation could have on the Tanjung Pelepas Port (PTP) owned by billionaire businessperson Syed Mokhtar Albukhary.

The tide of public opinion slowly turned against the Johor Sultan, culminating in the strong public and political opposition to Johor’s new Housing and Real Property Board Bill. The state government proposed to give the Sultan sweeping executive powers in land and property matters. The bill was subsequently shelved.

Market jitters

The Sultan’s business dealings with the top Chinese developers have clearly caused jitters in the market.

In 2013, Chinese institutional and retail investors poured US$1.9 billion (RM6 billion) into Malaysia properties, more than the US$867 million (RM2.8 billion) invested in Hong Kong and US$1.8 billion (RM5.9 billion) in Singapore, according to real estate consultancy Savills.

Although attracting foreign investments is an integral part of the Iskandar masterplan, the fear is that the Johor and Iskandar market will simply be unable to absorb the sheer volume of units that these these Chinese developers are accustomed to.

Country Garden simultaneously launched 9,000 units of its Danga Bay waterfront development in 2012, virtually unprecedented in the local market, not least in Iskandar. It is also developing the controversial Forest City project, although the total numbers for that project is yet unknown.

Guangzhou R&F is reportedly going to launch a whopping 30,000 units in the next few years. The flooding of the market in Iskandar in such a short period of time is very worrisome to property analysts.

Sales transactions of properties in Iskandar have already plummeted by an estimated 48% for the first half of this year, an alarming drop by any standards. Major local players such as Glomac, SP Setia, and UEM Sunrise are already readjusting their sales targets for Iskandar.

“The carpet building particularly in the waterfront regions in Iskandar Malaysia is worrying many in the market. It immediately creates the perception of an oversupply situation in this sector,” said V Sivadas, executive director of PA International Property Consultants in JB.

“It remains a negative perception because we are unsure yet who the end user occupiers are going to be.” The executive director feels that the spillover of this may result in a wrong perception there is an oversupply across all sectors in Iskandar.

“This may result in potential buyers and financial institutions being more cautious, thus create difficulties for other sectors,” said Sivadas.

Shock to the system

Property adviser Faizul Ridzuan is also genuinely concerned on the glut of properties in Iskandar, even if the non-local developers and projects such as Country Garden and Guangzhou R&F are excluded.

“Currently, the non-local players contribute less than 20% of the overall new supply in Johor, so the majority of the supply is still coming from the local developers. The players from China are used to launching thousands of units at one go back home but the story is a little different here. Suffice to say when thousands of units are launched within a day, it can cause a shock to the system,” said Faizul.

The property adviser also thinks that a mismatch exists in the Iskandar market, but not necessarily between supply and demand.

“The primary concern today for Johor/Iskandar will be the income versus property prices for locals. If properties are priced beyond local income, then there will genuine concerns on who will end up buying all the properties in the market,” said Faizul.

Tomorrow: Is Iskandar’s slump spooking Singaporean investors?