This S$143b Chinese-made city in Johor 'scares the hell out of everybody'

JOHOR BARU — The landscaped lawns and flowering shrubs of Country Garden Holdings’ huge property showroom in southern Malaysia end abruptly at a small wire fence. Beyond, a desert of dirt stretches into the distance, filled with cranes and piling towers that the Chinese developer is using to build a US$100 billion (S$143 billion) city in the sea.

While Chinese home buyers have sent prices soaring from Vancouver to Sydney, in this corner of South-east Asia it is China’s developers that are swamping the market, pushing prices lower with a glut of hundreds of thousands of new homes. They are betting that the city of Johor Baru, bordering Singapore, will eventually become the next Shenzhen.

“These Chinese players build by the thousands at one go, and they scare the hell out of everybody,” said Mr Siva Shanker, head of investments at Axis-REIT Managers Bhd and a former president of the Malaysian Institute of Estate Agents. “God only knows who is going to buy all these units, and when it’s completed, the bigger question is, who is going to stay in them?”

The Chinese companies have come to Malaysia as growth in many of their home cities is slowing, forcing some of the world’s biggest builders to look abroad to keep erecting the giant residential complexes that sprouted across China during the boom years. They found a prime spot in this special economic zone, three times the size of Singapore, on the southern tip of the Asian mainland.

The scale of the projects is dizzying. Country Garden’s Forest City, on four artificial islands, will house 700,000 people on an area four times the size of New York’s Central Park. It will have office towers, parks, hotels, shopping malls and an international school, all draped with greenery. Construction began in February and about 8,000 apartments have been sold, the company said.

It is the biggest of about 60 projects in the Iskandar Malaysia zone around Johor Baru, known as JB, that could add more than half-a-million homes. The influx has contributed to a drop of almost one-third in the value of residential sales in the state last year, with some developers offering discounts of 20 per cent or more. Average resale prices per square foot for high-rise flats in JB fell 10 per cent last year, according to property consultant CH Williams Talhar & Wong.

Country Garden, which has partnered with the investment arm of Johor state, launched another waterfront project down the coast in 2013 called Danga Bay, where it has sold all 9,539 apartments. China state-owned Greenland Group is building office towers, apartments and shops on 52ha in Tebrau, about 20 minutes from the city centre. Guangzhou R&F Properties has begun construction on the first phase of Princess Cove, with about 3,000 homes.

Country Garden said in an email it was “optimistic on the outlook of Forest City” because of the region’s growing economy and location next to Singapore. R&F did not respond to questions about the effects of so many new units and Greenland declined to comment.

SINGAPORE DRAW

“The Chinese are attracted by lower prices and the proximity to Singapore,” said Ms Alice Tan, Singapore-based head of consultancy and research at real-estate brokers Knight Frank. “It remains to be seen if the upcoming supply of homes can be absorbed in the next five years.”

The influx of Chinese competition has affected local developers like UEM Sunrise, Sunway and SP Setia, who have been building projects around JB for years as part of a government plan to promote the area. First-half profit slumped 58 per cent at UEM, the largest landowner in JB.

A decade ago, Malaysia decided to leverage Singapore’s success by building the Iskandar zone across the causeway that connects the two countries. It was modelled on Shenzhen, the neighbour of Hong Kong that grew from a fishing village to a city of 10 million people in three decades.

“The Chinese developers see this as an opportunity. A lot of them say Iskandar is just like Shenzhen was 10 years ago,” said Mr Jonathan Lo, manager of valuations at C H Williams Talhar & Wong, a property broker based in Johor Baru. “Overseas investors coming to Malaysia is a new phenomenon so it’s hard to predict.”

Construction soon outpaced demand. To sell the hundreds of new units being built every month, some companies took to flying in planeloads of potential buyers from China, prompting low-cost carrier AirAsia to start direct flights in May connecting JB with the southern Chinese city of Guangzhou.

On the first such flight, 150 of the 180 seats were taken by a subsidised tour group organised by Country Garden. Almost half of them ended up buying a residence, the developer said in an email.

Buses disgorging Chinese tourists at Forest City this month were met by dozens of sales agents, with the women dressed in traditional sarong kebaya outfits similar to those worn by Singapore Airlines stewardesses.

The visitors filed into a vast sales gallery where agents explained the enormity of the project using a replica of the finished town, with model buildings as tall as people.

They viewed show flats with marble floors and gold-trimmed furniture, dined on a buffet spread and were encouraged to sign on the spot. A two-bedroom apartment cost as little as 1.25 million yuan (S$258,631), about one-fifth of the price of a similar-sized private apartment in central Singapore.

But JB is not Shenzhen. The billions poured into the economic zone in southern Guangdong in the 1980s and 1990s by Hong Kong and Taiwanese firms was soon dwarfed by Chinese investment as factories sprang up all along China’s coast.

In Malaysia, investment growth is slowing, slipping to 2 per cent year on year in the third quarter, from more than 6 per cent in the previous quarter. The value of residential sales in Malaysia fell almost 11 per cent last year, while in Johor the drop was 
32 per cent, according to government data.

“I am very concerned because the market is joined at the hip; if Johor goes down, the rest of Malaysia would follow,” said Mr Shanker, at Axis-REIT Managers, who estimates that about half the units in Iskandar may remain empty. “If the developers stop building today, I think it would take 10 years for the condos to fill up the current supply. But they won’t stop.”

PROPERTY PIPELINE

Developers have a pipeline of more than 350,000 private homes planned or under construction in Johor state, according to data from Malaysia’s National Property Information Centre. That’s more than all the privately built homes in Singapore. Forest City could add another 160,000 over its 30-year construction period, according to Bloomberg estimates, based on the projected population.

The developers have not been helped by government measures designed to prevent overseas investors pushing up prices. In 2014, Malaysia doubled the minimum price of homes that foreigners can buy to RM1 million (S$322,740) and raised capital gains tax to as much as 30 per cent for most properties resold by foreigners within five years.

The stream of new developments has scared away some investors, pushing developers to concentrate more on finding families who will live in the apartments, said Mr Lo. Profit margins have fallen to around 20 per cent, from 30 per cent when land was cheap a few years ago, according to his firm.

UEM Group, the biggest landowner in Iskandar, is selling plots to manufacturers to boost economic activity in the area. “Industries are the queen bee,” creating jobs and wealth for local residents, said chief executive officer Izzaddin Idris. “That will bring a demand for the houses we are building.”

United States-based chocolate maker Hershey is among those building a plant in Iskandar, joining tenants such as amusement park Legoland Malaysia and Pinewood Iskandar Malaysia Studios—a franchise of the United Kingdom-based movie studio.

Meanwhile, sales reps sell a Utopian dream — a city of the future with smart, leafy buildings and offices full of happy, rich residents.

“It will take a while for all the parts to fall into place: Infrastructure, manufacturing, education, healthcare and growth in population,” said Mr Ho Kiam Kheong, managing director of real estate at Rowsley which will no longer build homes in Iskandar and will instead turn its Vantage Bay site into a healthcare and wellness centre. “But I have no doubt it will happen eventually,” Mr Ho added. BLOOMBERG