Monday, December 31, 2012

Iskandar: Boon or bane for Singapore real estate?


Today
04:45 AM Dec 28, 2012

Iskandar Malaysia was launched in November 2006 with the aim of developing the southern Johor region into a strong and sustainable metropolis of international standing.

With a total area of 2,217 sq km, the region will have five flagship zones including the Johor Baru City Centre, Nusajaya and Senai-Skudai, and will incorporate work, live and play elements. A number of key projects have been planned to attract investments into Iskandar, and some have been successfully completed, such as the Johor Premium Outlet and LegoLand.

According to recent reports, as of last September, Iskandar had recorded nearly RM100 billion (S$40 billion) in investments, about 40 per cent of which came from foreign sources.

A number of Singaporean companies such as Ascendas and Raffles Education, and even Singaporean billionaire Peter Lim, have invested in Iskandar-related projects -proof that it is gaining momentum and critical mass.

Given Iskandar's rising prominence and proximity to Singapore, one cannot help but wonder what impact it may have on the property market here.

Industrial real estate to get hit

In my view, the impact will be felt most keenly in the industrial property sector.

Due to the recent shift in government policy, Singapore's immigration and foreign worker rules have been tightened, resulting in rising wage costs, especially for labour-intensive industries such as manufacturing and construction.

In addition, industrial property prices have hit a new record high, driven by low interest rates and buoyant investment demand.

And while industrial property rentals have not risen as much as sale prices, the almost 40 per cent increase in rentals since the third quarter of 2009 has significantly increased tenants' cost base.

With the higher labour and occupancy costs here, industrial firms in Singapore may increasingly find Iskandar to be a good relocation destination.

While this may be a good option for tenants, it could be negative for industrial property demand and prices.

Besides industrial property, Iskandar could also have an impact on Singapore's housing sector.

Current record-high home prices, coupled with the Government's cooling measures and the risk of further curbs if prices continue to rise, could sap potential investment demand for residential property.

Instead, such demand may be diverted towards Iskandar, given the increasing buzz there and the fact that Iskandar's home prices are currently only a fraction of Singapore's.

And if Iskandar's transportation network and security situation are further enhanced, it could add to the attractiveness of residential properties in the region.

Currently, engineering studies are being conducted on the proposed MRT link from Woodlands to Johor Baru that would significantly enhance the convenience of commuting between Iskandar and Singapore.
Indeed, we have recently seen evidence of more Singaporeans investing in residential properties in Iskandar, either for rental income or as a second home.

Long-term gain, short-term pain

Thus, Iskandar Malaysia may be a boon for industrial property tenants and residential real estate investors in Singapore looking for lower-cost alternatives.

It may also be a boon to the Singapore Government's cooling efforts by helping divert investment demand away from the red-hot residential market.

In the long term, with the recent improvement in bilateral relations between Singapore and Malaysia, Iskandar could become a natural hinterland for Singapore, helping the Republic overcome its land constraints.

In the near term, however, Iskandar could be a bane for Singapore industrial property landlords and residential property developers, as it could divert demand away from these two market segments.

Tan Chin Keong is an analyst at UBS CIO Wealth Management Research.


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