On 19 April 2012, Chief Minister Lim Guan Eng of Penang, Malaysia, announced a change in policy concerning foreign ownership of landed property in the State. The proposal will lift the minimum level of investment in property by foreigners from RM500,000 to RM1 million, with a new minimum investment of RM2 million for landed property on Penang Island.
The Chief Minister explained the rationale behind the move in a speech at a private screening of the documentary Habitat which was followed by an expert discussion panel:
As a first step to protect the interests of local Malaysians, the state government is proposing to increase the minimum limit for foreign purchases of all properties from the existing level of RM 500,000 to RM1 million with a higher limit of RM 2 million for landed properties only in Penang island and retaining the present RM 500,000 limit for Permanent Residents.
In 2010 and 2011 there were 774 and 890 property transactions involving foreigners. These transactions constitute only 2.98% and 2.26% respectively of the total number of transactions in Penang. However to protect the interests of locals to ensure that they enjoy priority for less expensive properties, this restriction will help to provide a level playing field since foreigners have the advantage of a higher currency.
The Penang state government stresses that we welcome foreign participation in our economy including our property market. The state government feels that foreign participation can be profitable to both Penangites and foreigners in the higher end market where they can add value by helping Penang to transform itself into an international and intelligent city.
We don’t know the full details of the proposal and have no access to the discussion that followed the Chief Minister’s speech. Nor are we aware whether this proposal will also apply to investment in property development, commercial property or property obtained within the MM2H scheme.
The proposal itself is interesting when faced with another comment during the Chief Minister’s speech:
Many of the urban challenges we face can only be resolved by changing the way we plan, build and manage our cities and urban areas.
The Traditional Approach
The solution the Chief Minister is proposing is an example of how we can get trapped in our thinking. Cities all over the world have been faced with issues of rising housing prices and many have reacted in the same way – protect the interests of the locals by putting barriers in the way of outsiders. Our thinking is limited by the focus on money, value and financial gain because we are attuned to thinking about the “property market” rather than property as part of our lives and central to the values of our community.
There is another common element among those cities where property protection has been implemented in this way – the moves have generally failed. The limits the Chief Minister is suggesting will have an impact on some investors, but not on institutional and professional investors – those investors whose primary concern is financial reward and who are only looking for good investments. They have little or no concern for property use or government policy, they can invest for long enough to wait for changes of governments and they do what has to be done to make money. Through their ownership of property they are also able to assert enormous influence to gain economic advantage, often to the detriment of urban planning.
For these investors, it is very strongly to their advantage to ensure property prices continually rise to the detriment of the local community. If they have to invest larger sums under the new rules, they will also want greater returns. Rising property prices and the search for greater investment returns are two major barriers to affordable housing. These investors often avoid foreign ownership rules by establishing corporate entities allowing even greater investment at the expense of local ownership.
Defining the Values
The approach the Chief Minister is suggesting is highly unlikely to lead to the results he is trying to achieve because the solutions are not driven by the values behind the goals. In this case, the Chief Minister would like more Malaysians to be able to buy into the local property market, particularly those at the lower end of the economic scale. Greater local property ownership will help to ensure a sustainable cultural foundation for Penang, create long-term improvements in the prosperity of individuals and families, and provide greater opportunities for economic development driven by Malaysians.
Penang has become attractive to foreign investors for many reasons, not the least of which is the state of the current property market and forecasts about the future. So the question being faced by the Chief Minister is how to attract the type of investors who share the values and goals of the State (and probably Federal) government.
A New Approach
The Chief Minister and advisers should think about leveraging foreign investment to achieve their local ownership aims. There are significant market instabilities around the world at the moment making investment uncertain. There is also an ageing population globally, and many of these people are looking at small, safe, diversified investments with stable returns. Smaller investors tend to invest in places and things that they know – it is likely that if the government was to look for small investors, many of them would have been to and know Penang and would be prepared to invest based on their experiences, not just as a financial investment.
Instead of encouraging big money investors, create a framework around foreign investment for local ownership. Encourage small investors who are not looking for huge returns. Allow them to buy individual properties, up to a maximum of approx RM500,000, on condition that they enter into an agreement with a qualified local family or individual to lease the property to them for 3 or 5 years. The rental is set at a return rate below normal residential rental rates, allowing the renting family to save money on rental. So in an area where rental rate of return is currently 7%, set the rental at 4% return.
At the end of the lease period, the renter would have the right to purchase the property. They have had the opportunity to save money for deposits during the rental period as a result of the reduced rent. If the renter doesn’t want to purchase the property, the owner must sell the property in the open market.
To add to the possibilities, because of the long-term nature of such a scheme the government could build a fund which would allow the renter to purchase at the original purchase price paid by the foreign investor, with a guaranteed return provided to the investor through the fund (perhaps excluded from capital gains tax to save additional money) to make up for the difference between the original purchase price and the current market value. This fund could also be used to provide return on capital improvements, encouraging maintenance and renovation of the property which would put the renters in an even more advantageous position when they are able to purchase the property. No payments would be needed from this fund until the first leases end and the amounts required over the years would be both predictable and controllable.
This scheme might produce lower returns for foreign investors, but they will be safe returns, highly appealing to those nearing retirement age. This is an ideal type of foreign investor for Penang and an ideal type of foreign property investment for Penangites. The original investment could potentially be an alternative or combined addition to the current bank deposit required by the MM2H scheme.
A scheme like this would take the current interest in foreign investment in Penang and leverage it into creating the future that the Chief Minister seemed to be aiming for in his speech, creating opportunities for local ownership. We know it is short on detail and there are undoubtedly practical problems with the solution, such as limiting the number of these types of purchases a single foreign investor could make.
There may well be other and better ways of improving the prospects of local land ownership in Penang using a values-based approach. We’d love to hear them and hope the Penang state government can develop great proposals.