Iskandar Development Region, Malaysia - An Intriguing Investment Opportunity

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On February 11 PBS’s Nightly Business Report ran a story that piqued my interest in a big way. The report discussed the Iskandar Development Region in Southern Mayalsia, located in the Malaysian state of Johor, situated next to Singapore and connected to Singapore by a causeway.

The power of “Malaysiapore” with its strong focus on and potential for economic growth has been widely noted. “Malaysiapore” seems to be expanding and the creation of the Iskandar Development Region (IDR) is part of the government’s larger efforts aimed at economic expansion in this Southeast Asian country. Companies investing in the Iskandar Development Region are given corporate tax exemption for 10 years. Investors are permitted to source capital globally, and permitted to employ foreign workers without restriction. The government’s policy has been to provide these incentives only for the activities that the government desires to encourage in the IDR, namely creative industries, educational services, financial advisory and consulting services, healthcare services, logistics services, and tourism related activities.

Here is a nugget from the PBS story: real estate in the Iskandar Development Region is selling for as little 1/30 of the price of the real estate on the other side of a causeway in Singapore. Forbes Magazine recently recommended taking advantage of this development by taking a “grubstake” in real estate in the Johor region, opining that it was hard to imagine that prices would not escalate.

The Indonesian Connection

Both the economy of Malaysian and that of Indonesia its neighbor grew north of 6 percent in 2007 and are expected to repeat that level of performance in 2008. The Iskandar Development Region website talks up the proximity of the IDR to Indonesia, which is describe as an important source of labor for Johor’s manufacturing and service sector, in addition to its location vis-à-vis Singapore. A quick glance at a map and the advantages of Johor’s location are immediately obvious.

Collaborating with Dubai and the Middle East

There seems to be little doubt that a major focus of the Malaysian government, as that focus has been recently articulated by Prime Minister Abdullah Badawi is cooperation with other Islamic nations with respect to economic development. Among the big investors in this region is a consortium of sovereign wealth funds and other investors from Abu Dhabi, Kuwait and Dubai. Sovereign wealth funds are the somewhat controversial funds derived from a country’s reserves, which are set aside for investment purposes that governments consider to be beneficial to the interests of the country and its citizens. One of the partners in a 4.7 billion maritime project being built in the region is Dubai World, a holding company of the government of Dubai.

But it is not just governments and private investors from the Middle East that have found the region attractive. One large investor is General Electric. GE CEO Jeffrey Immelt called the region a “substantial growth opportunity” due to the growing need for “security, water, [and] energy” in a PBS Nightly Business Report last November.

A Diverse Investment Opportunity

 

The activity in the Johor is not limited to commercial/industrial development. There is a proliferation of resort development too; the Johor region’s attractions are not limited to its proximity to Singapore or Indonesia. Add diving, surfing, golf, sandy beaches and fishing to the mix and it is easy to see why resort developers such as the prestigious Aman Resorts have announced intent to develop in the region. Anticipated growth of the region has given rise to the need a great deal of residential development as well.

A More Ferocious Asian Tiger?

This seems to me to be big story for a number of reasons. When people talk of the premier real estate locations in Asia, the two places that come to mind without much thought process are Singapore and Hong Kong. This expansion has been compared and modeled upon the dynamic Pearl River Delta (PRD) region of Guangdong province in China and its relationship with Hong Kong. The idea of the “Asian Tiger” Singapore expanding so substantially into Malaysia is potentially extremely exciting for real estate investors and can also be viewed as a venue where cooperative ventures between investors from the Islamic and non-Islamic worlds could thrive.

Considering the clear promise of the Iskandar Development Region’s location, the exuberance about the region seems somewhat muted and most of the recent reports of investment in the region do seem to involve firms from the Middle East. As the Nightly Business Report story pointed out, there is a history of less than ideal relations between Singapore and Malaysia, and the success of this region may be dependent on the enthusiasm of Singapore investors. It is dependent also on how attractive this region will become to investors worldwide, and on how well the players in this rather cosmopolitan investment setting are able to get on. For instance, some have expressed concern about the secretive nature of the Middle Eastern sovereign wealth funds which seem to be such an integral part of the development of this region.

Still, Malaysia has a strong economy and it has political leadership that is sounding the right notes and focusing on modernization and economic development. The two governments (Singapore and Malaysia) have promised cooperation. There are some potential stumbling blocks but if real estate investment really is about location above all other things, the IDR is simply too good a prospect not to merit a serious look.

Further reading:
Property investors look to Malaysian real estate as the next big one

Iskandar Development Region and real reform