Mar. 22, 2017
As Malaysia gears up for its self-imposed 2020 target to become a high-income, developed nation, it is pulling out all the stops to transform itself, allotting large portions of its budget in a bid to develop and upgrade its infrastructure across the country. The Eleventh Malaysia Plan announced in 2015 similarly highlights the importance of infrastructure development in ensuring Malaysia reaches its 2020 targets. The plan emphasizes infrastructure as being not only crucial for economic growth, but also necessary for the social wellbeing and advancement of its citizens. The construction sector in particular will continue to play a pivotal role in Malaysia's ambitious growth plans, and the country's ever-growing demand for a modern and efficient infrastructure ensures the sector will continue to grow in contrast to the weakened performance of other sectors in Malaysia and globally. The construction sector was highlighted as one of the few sectors in Malaysia with a positive growth outlook moving forward, in large part because of the continued roll-out of large infrastructure projects. One of the fastest-growing sectors since 2011, the construction industry clocked growth of 8.9% and investments of MYR29.7 billion in infrastructure projects in 1H2016, a figure that exceeded the 2015 total. Civil engineering, in particular, was a major driver of growth in the construction sector, expanding 20% YoY and surpassing that of residential and non-residential properties, and with almost MYR30 billion of projects expected to be rolled out in the coming months, the sector's prospects in the country remain the brightest.
According to the Department of Statistics, Malaysia (DOSM), the value of completed construction projects in 3Q2016 grew by 10.7% annually to reach MYR31.9 billion, with the biggest growth seen in the civil engineering (19.3%), residential (16.4%), and special trade activities (4.2%) sub-sectors. Activities in the civil engineering sector, similarly, comprised 34.9% of all completed construction work, followed by non-residential buildings (30.7%), residential buildings (30%), and special trade activities (4.4%). The bulk of construction work continues to be driven by the private sector, recording MYR19.6 billion in construction projects across the country in 3Q2016 compared to the MYR12.3 billion initiated by the public sector.
There are numerous public transportation, rail, road, skyscrapers, and mixed development projects in the pipeline, including groundbreaking projects such as a high-speed rail to Singapore, the pan-Borneo highway in Sarawak, a mass rapid transit project in Kuala Lumpur, a Refinery and Petrochemical Integrated Development (Rapid) project site in Pengerang, and Merdeka PNB118 tower, set to be the tallest building in Malaysia and among the world's tallest when completed. The Construction Industry Development Board (CIDB) in its Construction Industry Review and Prospect 2015/2016 also highlighted key infrastructure projects identified in the Eleventh Malaysia Plan, such as the construction of new water plants and the upgrading of existing water treatment plants to increase supply reserves in excess of 10% at all plants, the construction of centralized and regional sewerage treatment plants, and the construction of 3,000km of surfaced rural roads and four new highways. And though the private sector continues to finance the bulk of construction work in the country, the sector in fact stands to gain the most according to the 2017 federal budget, with a record high of MYR49.5 billion of construction projects awarded in the first nine months of 2016. Approximately MYR260 billion was set aside for development expenditure under the Eleventh Malaysia Plan, a 16% increase from the previous plan. Part of the government's plans include a 600km East Coast Rail Line network that is expected to cost an estimated MYR55 billion. Stretching over 620km, the rail line was identified as a high-impact project and work is expected to begin as early as 2017. The line will connect, among others, Port Klang, Kuantan, Kuala Terengganu, and Kota Bharu. Also on the books is the upgrading up to 616km of roads and bridges across the country, estimated to cost MYR1.2 billion, and plans for a MYR9billion LRT 3 project in Kuala Lumpur.
The Pan-Borneo Highway project, expected be completed by 2022, is set to be a key game changer in East Malaysia. Connecting the states of Sabah and Sarawak and their neighbor Brunei, the 2,000km long highway will considerably improve connectivity, expand the road network in both Malaysian states, and accelerate economic growth. A total of 11 contracts amounting to MYR16.49 billion were awarded for construction of the project in Sarawak, while three packages for the Sabah portion of the project was awarded for MYR12.8 billion. The 11th Malaysia Plan had outlined the importance of key investments in infrastructure in Sabah with the aim of spurring development and improving the state's interconnectivity. Other crucial projects in the state include upgrading Kota Kinabalu Port at an estimated cost of MYR5 billion, including plans for a possible international cruise terminal to better capitalize on tourism. Also in the works are the Kota Kinabalu Bus Rapid Transit project worth MYR311 million, a new airport, and railway line connecting the coasts of Sabah.
The slew of infrastructure spending is aimed not only at spurring growth in the short and medium term, but also providing economic opportunities to locals, improving their standards of living, and boosting the construction industry as a whole.
Malaysia's strategic position within the New Silk Road under the One Belt, One Road initiative could also lead to increasing investments into the infrastructure sector, injecting further optimism into the sector. Maybank IB Research noted in a report that growing interest from China in key infrastructural and property projects in Malaysia as a result of the nation's strategic position could see a large number of Chinese investors and contractors getting involved in projects such as the KL-Singapore High-Speed Rail and the East Coast Rail Line. China Railway Group (CREC) has already invested MYR8.4 billion, a 60% stake, in Bandar Malaysia, the Malaysian terminus of the High-Speed Rail, and plans to build an integrated office complex at Bandar Malaysia that will house its regional headquarters. Similarly, Chinese state-owned enterprise Greenland Group in November announced it had signed an MoU to participate in a highway construction program in Malaysia, the first time the top Chinese developer will be involved in an overseas construction project.
Despite the overall rosy outlook for the construction sector, certain real estate segments are not expected to perform as successfully. An oversupply of high-rise residential units in the last several years has led to a steady decline in prices and demand, with Bloomberg reporting that the value of residential sales in Malaysia fell by 11% in 2015. Forecasts for property construction activities have not been rosy in light of falling demand, rising household debt, and oversupply. Construction of residential properties grew by 11% in 2015, down from 22% in 2014 while construction work advanced marginally lower at 11% YoY in 1Q2016.
Residential property transactions in 2015 made up 65.2% of all transactions, though this only amounted to 49% of all property market transactions in terms of value. This corresponded to a fall of 4.6% and 10.4%, respectively, compared to 2014. The greatest demand in the real estate market in 2015 was for residential properties priced at MYR300,000 and below (64.4%), luxury homes (19.2%), residential properties costing between MYR500,000 and MYR1 million (10.7%), and those between MYR400,000 and MYR500,000 (5.7%). However, the residential property market is expected to experience positive spillover effects from targeted projects under the Eleventh Malaysia Plan, such as affordable housing projects and a first-time buyers scheme that includes incentives such as full stamp duty exemption and subsidized housing. Plans are underway to construct 606,000 housing units for low and medium-income households, with 47,000 units also planned to be built or repaired for the underprivileged, the Construction Industry Development Board (CIDB) reported. In addition, private developers have also slowed the pace of construction in a bid to allow the market to absorb unsold properties.
Demand for commercial properties, meanwhile, is expected to be bullish given positive tourism figures and the further development of townships and activities along various transport routes upon the completion of important public transportation projects. In addition, given the government's many initiatives to boost tourism and attract 36 million tourists and MYR168 billion by 2020, developers are optimistically planning to offer more retail spaces to fulfill Malaysia's goal of becoming the regional shopping hub. There are reports that Iskandar Malaysia in the South Johor Economic Region, for example, will have as many as 10 new shopping malls in the next five years, reflecting the bullish expectations of the area. Iskandar Malaysia is expected to have a population of 3 million and a workforce of 1.6 million by 2025. Sunway Bhd, meanwhile, has plans to invest up to MYR5 billion in developing properties in Penang, including a 500,000sqft expansion of a mall and building new hotels, hospitals, and colleges. The group also has ambitious plans to double its portfolio of retail space across the country from 4.5 million sqft across five malls to 10 million sqft over 10 malls in total by 2020.
Iskandar Malaysia is also the site of other impressive real estate projects, such as Forest City, a USD100 billion-project set to be constructed on four man-made islands in the Straits of Johor totaling 1,386ha. The brainchild of Chinese property developer Country Garden Holdings, the development is expected to house 700,000 people and include office towers, parks, hotels, shopping malls, and an international school. There are estimates that there are as many as 60 ongoing development projects in Iskandar Malaysia alone and that the area has attracted as much as MYR202 billion in investments.
With many infrastructure projects in the process of being developed and many more in the pipeline across various sectors and around the country, all signs point to a promising year and a full order book for construction in Malaysia in the coming years.