Investments threatened by protectionism

IT may not be symptomatic to the issues surrounding trade, but when trade is hamstrung by barriers or tariffs, problems in the real sector manifest itself in different ways.

One striking example is the domestic real estate sector. It may not have direct links with tariffs but lower investments is a problem until a solution is found for the mismatch of supply and demand in the property segment.

A fall in real estate-related investments is too important to be ignored, as it will likely have an overbearing negative effect on the country’s ability to attract investments going forward.

Last year, Malaysia has seen the impact of declining investments into the real estate sector, which in turn lowered the overall investment performance.

This is amid the country’s stronger-than-expected economic growth of 5.9% and total trade results, which recorded the highest growth in 13 years at 19.4%.

Latest data from Malaysian Investment Development Authority (Mida) shows that Malaysia’s total approved investments in 2017 has fallen by 7.4% year-on-year to RM197.1bil.

According to Mida, the deterioration in investment performance is due to lower approved investments recorded in the services sector, which sees a decline of 17.2%, from RM146.2bil in 2016 to RM121.1bil in 2017.

“The decline in the services sector was affected by the real estate sub-sector which saw a 28.7% drop in value to RM45.7bil despite a 43.1% increase in the number of projects approved, reflecting a change in investment strategies towards smaller sized projects in this sub-sector,” it says.

Mida adds that the real estate sub-sector makes up the largest share of the services sector’s approved investments in 2017 by nearly 38%.

Mida is the principal investment promotion agency of Malaysia.

Economists believe that the domestic real estate sector will remain unfavourable for investments, as long as the issue of housing affordability remains unaddressed.

Speaking to StarBizWeek, AllianceDBS Research chief economist Manokaran Mottain expects real estate-related investments to continue to be on decline in 2018.

“Similar to last year, investments into the real estate sector is not anticipated to be positive in 2018, primarily attributed to the housing overhang problem in the property segment.

“We need structural reforms to address this situation, which will lead the sector to appear more attractive to both buyers and investors. We cannot afford to add more and more unaffordable houses into the property market,” he says.

In its bulletin for the fourth quarter of 2017, Bank Negara attributes the housing affordability issue to the supply-demand mismatch and slower income growth.

The central bank points out that houses in Malaysia remain seriously unaffordable by international standards in 2016, with a median multiple of five.

Under the median multiple approach, housing is deemed affordable only if median house prices are less than three times annual median household income

“The maximum affordable house price in Malaysia is estimated to be RM282,000. However, actual median house price was RM313,000, beyond the means of many households, where the median national household income is only RM5,228,” states Bank Negara.

Sunway University Business School professor of economics Yeah Kim Leng points out that both residential and commercial property development sector will likely see a slowdown moving forward.

“The domestic real estate sector will see declining investments until the Government deals with the existing oversupply condition.

“Given the current situation, the market may head towards a correction with house prices easing gradually to meet the buyers’ expectations,” says Yeah, who urges the Government to increase affordable property stock in the market.

Aside from the lower approved investments recorded last year, the country’s foreign direct investment (FDI) has also dropped significantly amid sluggish global FDI flows.

As per Mida’s figures, Malaysia’s FDI fell by 17% in 2017 to RM39.2bil. In comparison, 2016’s FDI was record high at RM47.2bil.

“According to the United Nations Conference on Trade and Development (UNCTAD), global FDI flows fell by 16% in 2017 to an estimated US$1.52 trillion. Commodity prices and global economic activities have remained subdued last year.

“However, UNCTAD expects global FDI flows to bounce back in 2018 to almost US$1.8 trillion,” the agency says.

Going forward, Mida remains cautiously optimistic on Malaysia’s overall investment performance, with the target of RM200bil approved investments in 2018 as compared to RM197.1bil last year.

In an earlier press conference, Mida chief executive officer Datuk Azman Mahmud says that domestic direct investments (DDI) are expected to once again lead investment growth in 2018, with the segment accounting for at least 60% of the total approved investments, while FDI will account for the remainder.

Despite Mida’s projection of an improved investment momentum in 2018, economists who speak to StarBizWeek remain mixed on the prospects.

An economist, who declined to be named, says that Malaysia’s approved investments may continue to slide this year, given the lingering uncertainties in the run-up to the 14th general election (GE14).

He believes that there is little room for improvement in investments, dampened further by the expected moderation in the growth of Malaysia’s gross domestic product and overall trade in 2018 due to the technical high base effect.

“Several industries in the country have been facing labour shortages while cost of doing business keeps increasing, among others. With such problems in place, it will be more difficult to attract investments both from domestic and international sources.

“Post-GE14 and moving into the second half of 2018 (2H18), effects from the politically-driven uncertainties could gradually ease. But, it remains to be seen how the improvement may help investments to bounce back to normalcy,” he says.

However, Yeah, who echoes Mida’s positive sentiment moving forward, believes that investments will pick up in 2H18 after GE14.

“Overall, for 2018, investments in Malaysia could grow by high single-digit, given the likelihood of the production for the export sector to be expanded.

“Apart from that, the mega-scale infrastructure projects such as the Mass Rapid Transit 3 and the East Coast Rail Link may provide further support.

“With the improvement in crude oil prices, Petronas will likely increase its expenditures and a more active oil and gas sector can be expected this year. This will further boost the country’s investments in 2018,” says Yeah.