Dateline: Kuala Lumpur, Malaysia It’s no secret that I’m a fan of Kuala Lumpur, Malaysia. In fact, I like it so much that I dubbed it the third most livable city in booming Southeast Asia — and the most livable city when you exclude the highly pricey Hong Kong and Singapore. While many think the “Nomad” in Nomad Capitalist means non-stop perpetual travel, I’m really a fan of the “home bases” method, wherein one maintains one or two main residences (such as a main base coupled with a summer base) and travels as they wish from those bases. It’s a lot easier and less stressful than non-stop travel. For me, Kuala Lumpur ticks many of the boxes as a great potential home base in Asia. But what about buying real estate in Malaysia? Is it worth it? Or should you just live in Malaysia and rent?
Malaysian real estate: Prices and process
Malaysian real estate prices were on the rise for some time. As with many other places in Asia, people here say things such as “Why would you rent? Real estate prices always go up.” Gee, where have I heard that before? (Cue some mortgage guy who bought infomercial time from me in 2006 saying “real estate prices here in San Diego always go up!”) However, the Malaysian government is taking a variety of measures to cool the property market and foreign investment. I’m no fan of government intervention into the market — whether it’s into Malaysian real estate or anything else. But perhaps the cooling measures have worked because, as of 2014, Malaysian real estate prices have slowed to break even growth. I suspect that prices in Kuala Lumpur could dip as much as 10%, even though prices aren’t too far off from their levels after the late 1990s Asian financial crisis. What are the local real estate cooling measures? To start, the Malaysian government rolled out its second increase in what is essentially a foreign ownership restriction on Malaysian property. Starting in 2014, foreigners are required to buy property valued at 1 million Malaysian ringgit or more (roughly US$317,000). That means no cheap real estate purchases if you want to live in Kuala Lumpur or anywhere else in Malaysia. That limit applies to each property you buy. In the same way you can’t use your one-liter customs allowance to bring twenty 50mL bottles of alcohol into The Land of the Free (at least not without paying tribute), you won’t be able to purchase multiple Malaysian properties adding up to exceed the 1 million ringgit minimum. That will make real estate investing in Malaysia a bit trickier, especially considering that property prices here (while having undergone some large gains) are still somewhat quasi-reasonable. Note that I said “somewhat”. While the spacious expat-friendly apartment I rent as a home base might have sold at a pre-construction price of one million ringgit, the wealthy Malaysian-Chinese landlord wants twice that now, in line with prices in the prestigious KLCC area. Yet, I can rent the place for less than $2,000 a month. A mediocre yield for her, and a terrible yield now. You could easily hit the 1 million ringgit mark by buying in the more tony locations. The suburbs, for example, feature many “landed” houses with yards — a feature somewhat unique to Malaysia’s close-in suburbs — that aren’t nearly that expensive. All of the wealthy Malaysians live in places like Petaling Jaya where things aren’t quite so pricey. Personally, I don’t want to be in the luxury rental market. Meanwhile, larger units in similar parts of town would likely decrease yield in the case of rentals and tie up more capital in the case of a flip. That means my ability to own rental property in Malaysia is effectively knocked out… at least in Kuala Lumpur. If you did decide to fix and flip a large unit, or even to have a short hold time on a rental property, you’d be subject to a new capital gains tax on foreigners. Rates for the first five years are 30%, whereas rates thereafter will be 5%. Malaysian corporations will be taxed at the same rates. Deductions will be allowed, including agency fees, renovations, and stamp duties. But only Malaysian citizens will get lower rates. That means having a Malaysian spouse or business partner will come in handy if you want access to cheaper properties you want to sell in a short period of time. These changes come as the government tries to respond to lower and lower-middle-class Malaysians who are complaining that housing prices are getting out of control. Sharp rises in Malaysian property prices have caused Malaysians to strike back politically. And, after their first tight election in ages earlier this year, the ruling political party can’t afford to let those people down. As Singapore imposes measures to cool its own maddening property bubble, part of the bubble is beginning to spill over into Malaysia. However, I believe more of that is occurring in Johor Bahru — the ever-increasingly New Jersey to Singapore’s New York — than further north. Meanwhile, the region of Penang is floating the idea of a three percent tax on the sales price of any property to foreigners. Officials there are wanting to curb speculation from foreign investors, but experts claim that it’s essentially just a stamp tax, and that such a low number will have no such effect. Remember when the United States had a luxury tax on cars over $36,000 or $40,000? Did it really stop anyone from buying a BMW? That logic makes sense when you consider Singapore has imposed a whopping 15% stamp tax on foreign property investments. As much as I love Singapore for their economic freedom, they’ve gone crazy with the cooling measures. All of this said, buying real estate in Malaysia is still pretty affordable — especially for Asia. Round-trip transaction costs can be as low as 3.5%, and up to 7%, excluding taxes.
Foreign ownership restrictions on Malaysian real estate
Malaysia also imposes fewer foreign ownership restrictions than many other countries such as the Philippines, Vietnam, and Cambodia. The types of property that foreigners can buy, including landed property, are relatively broad. Another important consideration when buying Malaysian real estate is the type of title you will receive. Many westerners are used to owning property in perpetuity, but as with other parts of Asia, that may not be possible in a few parts of Malaysia. You should always make sure the property you are buying is “freehold” property, rather than leasehold property, for which you are simply buying a long-term lease. The good news about real estate in Malaysia is that there are few other restrictions on property ownership. Foreigners can own multiple properties without limits, other than the entry-level restrictions. Direct foreign ownership is allowed and financing is relatively straightforward and cheap for the region. Loans are available starting in the mid-5% range, and foreigners can usually qualify for a loan with a multinational bank with as little as 10-15% down on 15-35 year terms. If you’re looking for a second residence in Malaysia, the Malaysia My Second Home Program (MM2H) offers a way to become a resident by showing offshore deposits and guaranteed monthly income. Residency comes with easier terms for purchasers of valuable property. If you’re looking for investment, I still believe real estate in the Philippines is a better overall value proposition, although it does come with foreign ownership restrictions, such as only being allowed to purchase a condominium.
A final recommendation
While I do think Malaysian real estate has risen too quickly for my tastes, there are some real fundamentals backing it up. There is still decent growth potential in Kuala Lumpur, and I think other, more resort-like areas will see interest from groups like the Russians, which could drive growth there as well. Condos right next to the luxury shopping areas are going for insane prices in Kuala Lumpur, but walk just a few minutes away and you can find some great buys. In my opinion, it would be better to live there yourself. Kuala Lumpur is different from other places in Southeast Asia in that condos aren’t the size of a shoebox. For less than $200,000, you could buy an entry-level-sized two-bedroom, 800-900 square foot condo in a relatively new building right in the middle of Raja Chulan, near a monorail stop. Of course, there are a number of units in that building for rent from $800 to $1,200 a month, so it may make sense to dip your toe in first before you buy (as I’d always recommend). My verdict: with a large population of real estate loving investors, including a large Chinese population, real estate in Malaysia isn’t a horrible investment. But it’s not great for yield, and appreciation potential is a bit tepid. Malaysia is a great place to live when you take into consideration that it is rather developed and roomier than other Asian cities like Bangkok. Plus, if you are willing to bite the bullet and own your home here, then the fundamentals are less important for you.