by Ryan Ong
One of our favourite complaints is that the G won’t trust us with our money. But while the “nanny state” mentality chafes, it’s hard to argue that a lot of Singaporeans really are bad with their money.
Iskandar is a prime example. This is so spectacular an example of herd mentality, it should be studied by veterinarians, not property analysts. In 2013, Iskandar property agents could have demanded buyers wear cowbells in the showroom and the only response would have been “moo”.
These days, Iskandar fever has cooled a bit, but there are still Singaporeans pouring money into it – and many prior investors can’t bring themselves to cut their losses and leave. Why? Because too many of us still follow the way of the cow, and it ends in a slaughterhouse.
For the initiated, in other words, those who aren’t part of the herd, Iskandar Malaysia was established in November 2006. This an area about 2,200 sq km, covering Johor Bahru, Pontian, Senai, Pasir Gudang, and Nusajaya (which is the intended administrative capital of the region).
The Iskandar boom started around 2012 to 2013, with Australian billionaire Lang Walker investing S$1.59 billion in the region’s land development. Mr Robert Kuok, Malaysia’s richest man, soon followed suit.
Iskandar’s attraction is its close proximity to Singapore – it should, in theory, be popular among Malaysians who work in Singapore, and Singaporeans who live in Malaysia. Likewise, Singaporeans often shop in Malaysia (and vice versa), so easier access will only speed up economic development in the region.
Major industry players long ago expressed interest in Iskandar, like Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional, builder CapitaLand, and investors such as billionaire Peter Lim. Singapore Business Review reported in March 2013 that more than 3,500 Singapore businesses, mainly SMEs, have set up shop in Iskandar, pumping in more than RM5 billion. That was two years ago.
Investments grew significantly after Feb 19 2015, when the Prime Minister Lee Hsien Loong and his Malaysian counterpart, Mr Najib Razak, agreed on the construction of the High Speed Rail (HSR). This rail line will connect Jurong East to Kuala Lumpur in a 90-minute trip, supposedly by the year 2020.
The HSR is relevant to Iskandar investors because it’s imperative to the region’s growth. DTZ Malaysia Consultancy & Research Head Brian Koh said: “The HSR will have a significant impact on population growth in Iskandar”.
Another unnamed property analyst told The Malaysia Reserve: “It could be said the success of Iskandar does hinge on the rail project.”
Unfortunately most of this exists in the imagination. And with each passing month, cracks in the Iskandar dream become more obvious.
Red Flags Everywhere
Without going into details (a simple Google search will highlight a multitude of issues), here are the warning signs:
- There are around 336,000 private residences still about to be built in Iskandar. This number exceeds the number of private residences in Singapore, and does not yet include 1,400 hectares that will be space for even more residences after 2020.
On top of that, Iskandar is projected to have a population of about one-fifth of Singapore (around 1.3 million) in 2025. Landlords had better be ready to price war each other to death.
- Malaysia’s Budget 2014 set a “magic number”: RM $1 million. This is the minimum amount a property must cost before a foreigner can buy it.
So a Singaporean investor who bought a property valued at, say, RM $700,000 before the budget announcement now cannot sell it to another foreigner. Not unless the property value goes up to RM$1 million.
But can local buyers (people living in the Iskandar region) afford properties in the RM $700,000 – RM $900,000 range? We don’t know. If it turns out they can’t, and foreigners also can’t buy it, the property just becomes a liquidity problem.
In addition to this, Malaysia imposed a 2 per cent property levy, and increased sales tax.
The late Minister Mentor already warned us about this : “This is an economic field of co-operation in which, you must remember, we are putting investments on Malaysian soil, and at the stroke of a pen they can take it over.”
The Budget 2014 announcement already gave us a taste of that. But still, Singaporeans investors kept buying.
The recent HSR confusion about where the rail should end, in Johor or Jurong East, should be an awakening. While the Malaysian authority was just misquoted, it raises a key issue: the HSR doesn’t exist yet. And should Malaysian or Singaporean authorities change their minds, the HSR project can be drastically altered or abandoned. That could send Iskandar property values plummeting in short order.
But in spite of all the warnings, some Singaporeans continue to pour money into Iskandar.
The Key Lessons on Herd Investing
There are three main takeaways from the Iskandar situation:
- The bigger the herd, the more likely you are to stay in it
Most of us don’t like admitting we’ve made a mistake. So when property investors are told that they’ve sunk money into a disaster, their first recourse is almost always to band together.
They’ll raise their concerns to their property agent (who will of course try to dismiss them) and side with others who have made the same investment. It’s psychological strength in numbers.
When the herd is especially large, we can get confirmation from even more people. And we rationalise that “this many people can’t be wrong”. Case in point, discussions like this one, which don’t address the over-supply issue and seems to explain things with “even the Chinese are in on it”.
It’s a defensive argument you’re sure to hear if you talk to many Iskandar investors.
- Within the herd, warning signs are often inverted
See Point 1 for an example of this. The massive influx of Chinese developers should be taken as a threat, as it means potential oversupply. But the herd mentality inverts this warning sign: instead, it’s taken as evidence that Iskandar must be a good investment because of all the attention it’s getting.
When reminded that Iskandar is a very large area with a very small population, a common retort from investors (probably learned from property agents in Iskandar) is that it just means you get more space for your buck.
That’s actually only great for owner occupiers who are living there, not for people making an investment – you want land scarcity to drive up property prices. But again, it’s a negative that becomes perceived as a positive, just because a lot of people have said it often enough.
- By the time you hear a property is hot, it is probably not
Iskandar had to be a centre of investment and high speculative values in order to make it into the news. So the media hype doesn’t predict the value of an asset (this works the same way with stocks, bonds, etc.), it only tells you the value has risen after the fact.
By the time everyone is talking about something and buying into it, the herd is already formed and stampeding. It’s almost always too late to get into the same deal without becoming one of the cattle.
- Joining the herd can mean being stuck with it
You know what large herds attract? Whips and lassos. The more rampant and noisy people get over something, the more likely it is to attract government attention. Like Bitcoin (banned in China), property (attracts new taxes and loan restrictions), etc.
More seasoned investors have a radar, and often know how to quit when they’re ahead. They sell at the peak of the hype and have usually moved on before the slew of regulations kick in.
Amateur investors don’t – they stay with the herd too long and get caught. Case in point: Malaysia’s Budget 2014 announcements. As mentioned above, people who bought property to the tune of RM $700,000 – RM$900,000 may now be stuck. They may not be able to sell and run even if they want to.
Singaporeans have a long way to go in terms of becoming savvy investors. The bulk of us still know little beyond our flat and CPF, and the main way investments are sold are still by word of mouth: we buy what relatives and friends recommend. We’re still more willing to trust personal relations – as inexpert as they may be – over qualified financial experts.
Financial advisers and other Singaporean wealth managers will understand what I’m getting at, and they’ll be happy to give you an earful if you ask them.
Perhaps a part of this propensity is, ironically, due to a certain trait in our national character to play as a team and pull in the same direction. Unfortunately, there are some issues that a one-directional stampede will not overcome.
Featured photo by Shawn Danker.
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