By Getty Goh
These days, investing in Iskandar seems to be a very hot topic. Whenever I hold my talks or training, there will definitely be some people who will ask for my views of the location as well as whether they should buy a unit there.
In recent months, many Singaporeans are warming up to the idea of owning a unit there. Considering how expensive Singapore properties have become, some Singaporeans, as well as Singapore residents, are more open to staying in Johor where housing costs are much lower, and commuting to Singapore for work and play. However, before you jump onto the Iskandar bandwagon, you should be mindful that, despite the proximity, Johor's property market is very different from the Singapore market. Even though units there can go for as little as RM500,000 (about SGD200,000), buyers face several potential risks. So what are some of these risks?
1. Untested resale market.
Had anyone bought a unit in Iskandar back in 2009/2010, he would likely be sitting on good profits right. These days, new property launches are easily priced at 50% to 100% more.
Nonetheless, it is important for us to remember that profits are only realised when we sell the unit. As long as the unit is unsold, any increase in valuation will remain as paper profits. Although some properties in Iskandar are currently sitting on healthy paper profits, whether they can find buyers for those units remain to be seen. Even if owners are able to find a buyer from the resale market, any profits could be affected by the next factor.
2. Currency (or Exchange Rate) Risks.
For domestic Malaysian buyers, the issue of currency risk is not really a concern. In comparison, Singapore investors who wish to convert their profits from Malaysian Ringgit back to Singapore Dollar would be susceptible to fluctuations in exchange rates between the two countries. Singapore investors who own properties in Iskandar would want the Malaysian currency to strengthen (and not weaken) over time, so that profits in Singapore dollars would be more after conversion.
At present, RM1 is approximately the equivalent of SGD0.40. From Figure 1, it can be seen that the Malaysian Ringgit has been weakening against the Singapore Dollar over the last few years and the chart seems to suggest that this trend could potentially carry on. While this trend may be good for Singaporeans who are looking to buy, it works against those who are looking to sell as the value of their profits, in Singapore dollar, is gradually being eroded.
Figure 1: Exchange rate chart between Malaysian Ringgit and Singapore Dollar
Source: Yahoo Finance
3. The Iskandar real estate market is not as transparent as Singapore.
As an investor, you can find information on the Singapore real estate market quite easily online. Unfortunately, this is not the same for Iskandar and the Malaysian real estate market is not as transparent as what many Singaporean property investors are used to. Adding to the lack of transparency, there are also political risks. In the last Malaysian election in 2008, the ruling party UMNO garnered just slightly more than 50% of the popular votes and failed to win the two-thirds supermajority in the Malaysian parliament needed to pass amendments to the Malaysian Constitution. With the next Malaysian election looming, the political climate is highly uncertain. In the event that a new political party comes into power, it is possible that Malaysia's new political masters would want to review some of the standing policies as well as arrangements pertaining to the Iskandar development. Hence, such political uncertainty could pose potential risks and uncertainty to Singaporeans who have bought units there.
4. Untested rental market.
Some investors, whom I have spoken to, told me they are prepared to hold onto their Iskandar units for the long-term by renting them out. However, what some of them may not realise is that the rental market in Iskandar is currently untested and the amount of rental returns is still questionable. In addition, even if there is rental demand, it could be volatile during the initial stage. This is because many developments would be completed about the same time and that, in turn, could result in excess housing supply. With the sizable supply, tenants would be spoilt for choice and it is foreseeable that it would take a while for rental prices to eventually stabilise.
If we were to look beyond the hype of Iskandar, we can see that investing in that location is not devoid of risks.
At this juncture, I wish to emphasize that I am not saying that Iskandar is a bad investment and Singaporeans should not go in. Even I am personally exploring the possibility of investing in that location. Given the challenging property investment conditions in Singapore, it would make sense for some investors to venture across the causeway.
Ultimately, we cannot assume that the real estate market in Iskandar and Singapore behaves in the similar way. In addition, certain factors, such as political and currency risks, that we often take for granted when we buy or sell a Singapore property, actually become important considerations when it comes to buying properties across the causeway. Hence, it is important for all investors to do their research before they plunge in.
As a parting shot, let me end this article with a quote from Donald Trump, one of the richest men who made his fortune through real estate, "Every day, you'll have opportunities to take chances and to work outside your safety net. Sure, it's a lot easier to stay in your comfort zone…but sometimes you have to take risks. When the risks pay off, that's when you reap the biggest rewards." Despite the uncertainty, those who have the gumption for risks and the financial ability to hold could potentially find some gems and make money there. Only time will tell if investing in Iskandar will pay off.
Getty Goh is the director of Ascendant Assets Pte Ltd, a boutique real estate research consultancy. He has a Masters in Real Estate and a Bachelors in Building from the National University of Singapore. He conducts frequent talks on the topic of property investing. For more information, please visit www.BuyByeProperty.com.