Published March 23, 2007

M'sia scraps property gains tax; stocks soar

It also removes bumiputera equity rule for six sectors in Johor's development region


MALAYSIA has rolled out the red carpet to local and foreign investors by proposing to scrap the bumiputera equity requirement in six sectors in Johor's new development region and removing the country's 35-year-old property gains tax.

Analysts are excited by the slew of measures announced yesterday by Prime Minister Abdullah Ahmad Badawi at the Invest Malaysia Forum in the Malaysian capital.

The removal of the property gains tax from April 1 went down best - stocks of land-owning companies immediately jumped 8-15 per cent.

'We believe these moves will lead to a very strong re-rating of the entire property sector, spilling over to the stock market,' said Lim Beng Leong, a director of UOBKayHian in KL. 'We expect land prices to surge 50-300 per cent within 2-3 years.'

The property tax was meant to discourage speculation, starting at 30 per cent of profit from a sale after the first year of ownership and sliding to zero after five years for locals.

Foreigners were hit harder, with a flat 30 per cent tax until the fifth year of ownership after which it became 5 per cent. Singaporeans are among the top three foreign buyers of Malaysian properties.

Carmen Chua, who is developing high-end condominiums opposite Kuala Lumpur City Centre, reckons the tax is the main reason Malaysia's real estate prices lag their regional peers.

'It's a disincentive to foreign investment,' she told BT. 'That's why condominium prices, for example, never took off. We are still about 50 per cent below our peak in 1997.'

Apart from the nationwide property fillip, Mr Abdullah gave the southern state bordering Singapore a major boost.

Top of the agenda is the plan to give long tax holidays and waive bumiputera equity conditions in six service clusters in Johor's Iskandar Development Region (IDR) - an area three times the size of Singapore.

The clusters are creative industries, educational services, financial advisory and consulting, health care, logistics and tourism-related services.

Qualified companies in these areas will be able to source capital globally and employ foreign employees freely.

More importantly, foreign investors can have full ownership and need not comply with Foreign Investment Committee rules. This is an effective suspension of the bumiputera policy, which generally sets aside 30 per cent equity for Malay and indigenous partners.

Johor Chief Minister Ghani Othman does not think this will be an issue for the Malays, who have enjoyed affirmative action under the bumiputera policy since the 1970s.

'We agree with it,' he said. 'It is for defined activities in a very defined area.'

Earlier, former deputy prime minister Musa Hitam said the affirmative action policy should not apply to Johor because it put foreign investors off the IDR.

Mr Musa - part of a five-man IDR advisory panel that also includes 'Sugar King' Robert Kuok - suggested the award of contracts 'on merit'.

To further attract foreign investors, Malaysia has thrown in 10-year exemptions from corporate tax and withholding tax on royalty and technical fee payments to non-residents.

But qualifying companies must start operations before 2015. Foreign knowledge workers in the IDR will also be allowed to import or buy a duty free car for personal use.

Malaysia provided similar incentives when it launched its Multimedia Super Corridor in Selangor in the late 1990s.

Yesterday's initial package of incentives is expected to have a much bigger impact because it covers more sectors and a much bigger area of 2,217 sq km. Land in the IDR is also cheaper than in neighbouring Singapore.

To offset the waiver of FIC rules, qualified firms must contribute to a social development fund managed by the new Iskandar Regional Development Authority for social welfare development within the zone, including projects for the Malay community. Details are being finalised.

The Johor masterplan is being promoted as a regional metropolis-in-the-making - a Shenzhen of sorts to Singapore.

Over the next 20 years, it hopes to attract some US$105 billion of investments. The federal government and related agencies have agreed to commit an initial RM10 billion (S$4.4 billion).

All the measures announced yesterday should benefit developers like UEM World, which has been developing the Nusajaya township near the Second Link bridge connecting Singapore.

'All these are very good and encouraging incentives,' chief executive Ahmad Pardas Senin told Reuters. 'That should spur a lot of interest in both the property development industry as well as from end-buyers.'