How a revamped railway could boost house prices in Malaysia

This week’s article comes from Malaysia. I’ve travelled down here from Singapore. If you hadn’t realised that was possible, you’re not alone. Even some Singaporeans and Malaysians have no idea there’s a rail link between their capitals.

There’s a good reason for that. The journey takes seven hours, in carriages that were once quite luxurious but are now shabby. And dining options are limited.

Sure, it’s not as bad as third class in India. You’re not squashed in among the chickens. But you may find yourself sharing a seat with a freeloading cockroach.

However, on the plus side, you get to see something of Malaysia outside the cities. And it also tells you a great deal about relations between Malaysia and Singapore.

Britain’s parting gift – a traditional railway farce

The railway was built when what are now Malaysia and Singapore were British colonies. After independence in 1963, the two were briefly part of the same federation before parting ways in 1965. However, the railway station and track within Singapore remained Malaysian property. This was held by Malayan Railways (KTMB) on a 999-year lease.

Unsurprisingly, this has caused problems. Space in Singapore is at a premium. So the Singaporean government wanted to develop the prime land occupied by the railway. But agreeing a deal proved difficult. And so the railway has become a popular way for the two sides to needle each other.

For example, Singapore’s extensive metro system doesn’t include a stop near the station. The closest bus stand is directly across from the terminus. But you have to cross a busy carriageway to get to it – and there’s no pedestrian crossing.

Kuala Lumpur’s options for retaliation are more limited. But for many years a provocative ‘Welcome to Malaysia’ sign hung above the door.

The high point of the farce came in 1990. A deal was struck to move the station and redevelop the land jointly. Singapore built a new station and immigration checkpoint at the top of the island. Then Malaysia decided to delay its relocation. But Singapore went ahead anyway in 1998.

So today, you pass through Malaysian immigration before you actually board the train. Then you ride a bit further down the line and get off to pass through the checkpoint out of Singapore. It’s the only place in the world I know of where you supposedly enter one country before leaving another.

Pulling together at last

But if you want to take this unique trip, you’d better do it soon. Earlier this year, the two countries finally agreed a deal to relocate the station from July 2011.

This is good news for more than just railway passengers. It should mark the start of much greater cooperation between Malaysia and Singapore. And that should benefit both countries.

Singapore is wealthy. Land is scarce and wages are getting too high to do much manufacturing work. Malaysia is a middle-income economy that still needs more manufacturing jobs, especially in areas such as Johor Bahru, which borders Singapore.

So it would make sense to relocate factories from Singapore into Malaysia’s Iskandar Development Region, just across the straits. This should be good for everyone involved, similar to Hong Kong firms’ moves into China’s Guangdong province in the 1980s and 1990s.

It’s not just manufacturing. Malaysia also wants to increase skilled service developments in the area, such as healthcare, attracting investment and clients from Singapore. These can benefit from Malaysia’s lower labour costs while allowing workers to move into high-value sectors. This is crucial to keep ahead of competition from countries such as China which have hurt lower-end employment.

The possibilities don’t end there. For example, Singapore is one of the world’s leading financial centres, while Malaysia – where Islam is the main religion – hopes to make Kuala Lumpur the global hub for Islamic finance: the two could clearly be complementary.

More broadly, Southeast Asian countries will need to work together in the years to come to deal with the rise of China and India. The Association of Southeast Asian Nations (ASEAN), long derided as a talking shop, finally seems to be evolving into something more. It has the potential to become a major free trade and investment area. As the two most advanced economies in the region, Malaysia and Singapore will obviously be key players in such a trend.

Malaysia is investing in the future again

A trip down the railway also shows you how things are changing in peninsular Malaysia. The network itself is being upgraded. And you also trundle past new roads, residential buildings and other construction projects.

This is encouraging. Malaysia desperately needs investment – in infrastructure and elsewhere – to stay ahead of regional rivals and make the leap to developed status in a decade or two.

The country suffered several years of drift under its previous prime minister, Abdullah Badawi. He was well-meaning and relatively honest by the standards of Malaysian politics, but showed little determination.

But his former deputy Najib Razak, who succeeded him in April 2009, shows more promise. He seems to have a clear idea of what Malaysia needs, plus the determination to push it through.

For example, the latest budget included a RM40bn (£8.2bn) plan to expand Kuala Lumpur’s woeful metro transport system to cover the whole city, along with other infrastructure and skills spending. And moves have been made to attract more foreign companies, especially in areas such as financial services.


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Meanwhile, some of the bumiputra rules that discriminate in favour of ethnic Malays and against other races are being relaxed a little. These affirmative action policies were intended to lift the standard of living for poorer Malay groups and had an important purpose at first.

But they also made much of the country feel like second-class citizens, discouraged investment and exacerbated racial divisions. So for the last year or so, Malaysians have been bombarded with the “1Malaysia” campaign, which attempts to smooth over these differences and persuade everyone to work together.

Of course, this is extremely cynical. The same politicians who are now promoting this campaign were happy to pander to racial divisions when that suited the agenda better. The metro is plastered in pro-equality quotes from Abdul Razak, Najib’s father, who as prime minister in the 1970s was responsible for introducing the bumiputra policies in the first place.

But it reflects the new reality. As China and India become more important, Malaysia’s ethnic Chinese and Indian populations and their connections could be very handy – but only if they don’t feel rejected by their country. So it’s encouraging to see that top politicians are pragmatic enough to recognise this and change track.

Good reason to be cautiously optimistic

So Malaysia is showing the signs of progress I’d hoped to see since my last visit. The country still has plenty of problems of course. High-level corruption is a major issue, although petty corruption may be improving. And some pro-bumiputra measures will undoubtedly hang around for years or decades, which will put off some foreign investors.

Education must improve. A decision to switch from teaching all students in English to teaching in Malay a few years ago is a poor one, given the importance of English in the global economy. But it’s unlikely to be reversed.

Winning more foreign direct investment will be tricky. Money coming into the region tends to flow to the hot markets of China and India, or low-cost neighbours such as Indonesia.

That’s not necessarily a vast problem for Malaysia. The country has no shortage of capital domestically. But local investors need to be persuaded to put their money to work.

Private investment has dropped from around 25% of GDP during the peak of the 1990s boom to around 10% last year. The government hopes private investors will get involved in its infrastructure projects, but it will still have to spend a fair bit of public money to get them going.

That shouldn’t be a problem for now. The government has been running sizeable deficits for many years, yet foreign investors are lining up to put their money into emerging market bonds paying decent yields. As long as the money is spent wisely, countries should take advantage of that willingness to lend. But the private sector will need to play its part if this isn’t to fizzle out.

I think the most encouraging thing is the mood in the country. In every meeting I had, the attitude was cautiously optimistic. People aren’t gung-ho, but they seemed to feel the outlook is more encouraging than it has been for a while.

Property prices are picking up strongly – perhaps too strongly

Activity in the property market certainly reflects this optimism. Condominium construction is booming. More than once, I thought I’d got lost because a new block had sprung up where I didn’t expect one.

Judging property prices in emerging markets is difficult, because of the way they respond to rising wealth. But some of my contacts who take an interest in real estate felt that Kuala Lumpur was starting to look a bit expensive.

It’s not advanced enough yet to be a bubble. But cookie-cutter condominiums are probably not the best investment. There’s a lot of supply in the wings, and in Kuala Lumpur you tend to find that last year’s hot development can rapidly fall out of favour.

However, exclusive real estate usually does very well from rising wealth. So top quality prime developers might be good long term plays. I discussed a couple of ideas while I was out there – I’ll be looking into them in more detail when I get back to the UK.

There is one development that could potentially boost Kuala Lumpur property across the city. That’s the same sluggish railway I rode in on. Plans to install a high-speed line between Singapore and Kuala Lumpur have been under discussion for over a decade. There’s no guarantee it will ever happen. But construction giant YTL is pushing the idea again in this new, pro-investment climate.

For now, high-end condos trade at around one-fifth of the cost of those in Singapore, I’m told. A high-speed line could cut the journey time down to around 90 minutes, compared with around four hours by air now. If that happened, I think we’d see heavy speculation in Kuala Lumpur property – so I’ll be keeping an eye on developments.

This article is from MoneyWeek Asia, a FREE weekly email of investment ideas and news every Monday from MoneyWeek magazine, covering the world’s fastest-developing and most exciting region. Sign up to MoneyWeek Asia here

4 Responses

  1. 26/10/2010, Robert HO wrote

    Last paragraph of this otherwise accurate and well-researched article contains a grievous error:

    “…compared with around four hours by air now” should read 45 MINUTES BY AIR NOW.

    Please correct this asap.

    Robert HO

  2. 26/10/2010, Andy N wrote

    Robert @1 – I think it might be 4 hours from central KL to downtown Singapore, comparing the same journey by rail (when stations are generally downtown). By air, you need to travel to the airport, check in, then fly – the flight is often the quickest part.

    Cris, I’m cheered by your analysis. My wife is originally from Malaysia, and we visit regularly but have been dissuaded from investing by the problems you refer to. Have spent happy times in JB and KL, and would celebrate increased investment and opportunitities in the area.

  3. 30/10/2010, Angryone wrote

    I totally agreed with Chris and Andy N comments, my wife also come from Malaysia (she is Chinese), all those years when she’s living in Malaysia she always felt like a second class citizen. From education, employment, borrow money from the bank to buying houses, because the government always gives the priority to the bumiputras, these bumiputras can easily gain a place in the university with the low mark, while those bright Chinese and Indian been pushed to study further afield.
    May be the government has tried to promote ‘1Malaysia’, but the discriminate in favour of ethnic Malays (bumiputra) still in place, the race divisions and tension still exist. Worst of all, the high level of corruption within the government department and private sector totally is a joke.
    The pro-bumiputra measures still hang around the country today; this has put off many foreign investors

  4. 01/11/2010, akng wrote

    Written by a Malay. UMNO Duplicity. In 1957, 45% of the population were Chinese, 12% of the population were Indians. In 2010, 25% of the population are Chinese, 7% of the population are Indians.
    Over 600,000 Chinese and Indian Malaysians with red IC were rejected for citizenship
    Since 1957, 2 million Chinese have emigrated,0.5 million Indians have also emigrated overseas,3 million Indonesians migrated to Malaysia to become Malaysian citizens with Bumiputra status. (Nett gain 0.5 million and an additional of manufactured 3.0 million Bumiputra )
    Non-Malays are well aware of this population tinkering – us Malays cannot say that it was UMNO we had no hand as a Malay I was then comfortable that UMNO was the dominant partner in the Barisan Nasional and Malays controlled four of the five major banks.
    Education? Between 1968 to 2000, 48 Chinese Primary Schools closed down, 144 Indian Primary Schools closed down, 2637 Malay Primary Schools were built.

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