Visitors look at a scale model of Chinese developer Country Garden's Forest City, a US$100 billion metropolis project in Malaysia's southern state of Johor. Built on four artificial islands, with a construction plan of 20 years, the project will house around 700,000 people once completed. (AFP)

Chinese developers, including big State-owned enterprises (SOEs), still view the Malaysian real estate market as a promising destination, despite a tightening of controls on outbound investment.

Some projects have already seen sales fall below expectations, but analysts believe the market will remain attractive to Chinese investors.

A source at a large SOE told China Daily Asia Weekly that the company is looking into developing several plots of land in the Malaysian capital Kuala Lumpur, with decisions to be taken before the end of this year. The company has invested heavily in infrastructure overseas.

The source indicated that the supervision of outbound investment is directed more at private companies. SOEs can still expand development overseas by following proper procedure.

China’s real estate investment in foreign countries fell 82.1 percent year-on-year in the first half of 2017, according to the Ministry of Commerce. This is seen as one of the results of tightened measures since the end of last year in response to what the ministry called “irrational overseas investment”.

Nevertheless, Chinese private developers remain active in Malaysia, even though they may find it difficult to send money abroad to buy land for development, said Sarkunan Subramaniam, managing director of Knight Frank Malaysia.

According to Knight Frank, an independent global property consultancy, Malaysia was the third favorite destination for Chinese developers from 2012 to 2016. About 35 percent of the country’s residential land transactions were carried out by foreign buyers in the last five years, of whom the majority were from the Chinese mainland.

“The size (of investment from Chinese developers) will reduce, but it will still be large,” said Sarkunan, pointing out that China will remain a major player in Malaysia’s property market.

But he believes China’s recent move regulating outbound investment has added a dampener to the market and will prove challenging for the company.

According to a statement from the State Council, China’s cabinet, Chinese investors will be required to get regulatory approval from the government for outbound investment in sectors such as real estate under tough new restrictions released in August.

Sarkunan believes that China’s monitoring of capital outflows has thrown “cold water” on some projects. But he sees it as “a bit of a hiccup”, not a permanent dampener, as the favorable foreign residency plan, cultural similarities, and strong China-Malaysia ties under China’s Belt and Road Initiative will continue to attract Chinese investors in the long term.

The Belt and Road Initiative is a strategy to revive the ancient Silk Road routes with a trade and infrastructure grid that boosts Asia’s connectivity with Europe and Africa.

China has overtaken Singapore as the biggest investor in Malaysian real estate, with total investment exceeding US$2.1 billion between 2014 and 2016, according to the Financial Times, which cited figures from research firm Real Capital Analytics.

High-end projects

Companies including Country Garden, Greenland, R&F, Macrolink and Agile have bought land for development in Malaysia, bringing high-end property projects to Kuala Lumpur, Johor, Penang and other places.

Among them, Country Garden’s Forest City, a US$100 billion metropolis project, has drawn most attention. Built on four artificial islands, with a construction plan of 20 years, the project will house around 700,000 people once completed and is the biggest of about 60 projects in Malaysia’s Iskandar economic zone around Johor Bahru, according to Bloomberg.

In an interview with Bloomberg, Yu Runze, chief strategy officer at Country Garden Pacificview, admitted there had been a slowdown in the first half of this year, but he added that the company will not be slowing or stopping the project.

To avoid a mismatch between supply and demand, Knight Frank’s Sarkunan warned that Chinese developers need to understand the smaller nature of the Malaysia market compared to China. What in China may take five years to complete selling could take around 10 years in Malaysia because of relative population size and demand, he said.

A source with a Malaysian listed property developer agreed, saying that Country Garden lacks understanding of the market in Iskandar Malaysia in southern Johor, which now suffers from “severe oversupply”.

Prime projects developed by Chinese companies were simply not affordable for the local people, said the source, who declined to be named.

The Edge Financial Daily in mid-July reported oversupply in certain segments of Malaysia’s property sector such as high-end condominiums, “especially in Iskandar Malaysia”. The report blamed high property prices and high household debt.

Ronald Pua, vice-president of the Malaysia Real Estate Promoting Association, also feels the impact of Chinese developers. Despite the massive development of Johor Bahru, he believes it will take time for the market there to grow.

Many of the Chinese developers in Malaysia target buyers from China with their residential projects. However, things have changed since China’s stricter restriction on capital outflows has deterred many from investing in overseas properties.

In January 2017, the State Administration of Foreign Exchange reiterated that individuals should not purchase foreign currency to buy property overseas. Chinese residents’ annual purchase limit of US$50,000 remained unchanged, but the purpose of purchasing and additional information were required to be provided for government records.

Diversified clientele

Pua has noted a drop of around 20 percent in the number of Chinese buyers this year.

A buyer surnamed Liu, from East China’s Fujian province, went on a tour organized by Country Garden at the end of 2016 to visit the Forest City project. “Around 86 percent of the units were sold to Chinese,” said Liu, quoting Forest Garden’s sales manager. “Not just Chinese from China, but also Chinese from other countries, such as Singapore and Malaysia.”

Country Garden no longer organizes tours to the project for potential Chinese buyers and has ceased marketing Forest City in its sales galleries in the Chinese mainland. Instead, the company will open galleries to target customers in the Philippines, Indonesia, Vietnam, Thailand and Dubai between August and October to diversify its customer base, Bloomberg reported.

Liu said that many people he knows from a Forest City buyers chat group are worried that their investment could come to nothing, with some even considering canceling.

Shan Saeed, chief economist at real estate and investment advisory firm IQI Global, said “capital controls” happen in every economy when it is required. “We are quite buoyant about Chinese investment coming into Malaysian real estate.

“Most of the investors would like to be centered around the downtown area like KLCC (Kuala Lumpur City Centre).”

According to Shan, prices ranging from 1 million to 2.5 million ringgit (US$233,000 to US$584,000) will find favor with Chinese buyers, who are looking for high-end projects.

That high-end market will continue to be the focus of Chinese developers, with some starting to show more interest in Kuala Lumpur, said Sarkunan from Knight Frank.

But Sarkunan hopes that Chinese developers will pay more attention to the affordable housing segment where there is local demand. He reasoned that although the profits may not be as great as in the high-end market, expected profits without sales are meaningless.

According to figures from Knight Frank Malaysia, there was a year-on-year contraction of more than 20 percent in 2016 in both the volume and value of transactions of condominiums and apartments in Kuala Lumpur. Contractions of 7.95 percent in volume and 4.1 percent in the value of transactions were recorded in Johor.

“I think the trend (in the high-end market) will continue, but I hope they realize and change focus,” Sarkunan said.

Zhang Haizhou contributed to this story.