In September Malaysia’s government unveiled its 2013 budget, a key policy document that sets out a range of major initiatives aimed at boosting the economy and buoying support for the prime minister, Najib Razak, and his governing National Front alliance ahead of elections next year. There were few surprises in the MYR252 bn (USD81 bn) budget, but the construction sector stands out as one of the winners, with the government setting out plans to continue its spending on major infrastructure projects and to invest heavily in a programme to build thousands of new affordable houses.
The construction sector is currently in a rapid growth phase, having expanded by nearly 19% on an annual basis in the first half of 2012. According to the government’s figures, the sector will manage growth of 15.5% in 2012 as a whole, up from 4.6% in 2011. In 2013 it is forecast to grow by a further 11.2%, a projection that is in line with Timetric’s forecasts.
Much of this growth is being driven by public and private investment in a number of large projects under the Economic Transformation Programme (ETP), a programme aimed at transforming Malaysia into a high-income nation by 2020. These projects include new roads, railways, airports, industry and commercial zones, and power stations. Government spending on the transport infrastructure is budgeted at MYR9.4 bn (USD3 bn), down slightly from MYR10.1 bn in 2012 (Chart 1). This will continue to finance a number of projects, such as the construction of the East Coast Highway Phase II, which runs from Jabor to Kuala Terengganu, the upgrading and expansion of the Sibu airport, and the first phase of the Mass Rapid Transit project running between Sungai Buloh and Semantan. In total, the transport development budget accounts for around 20% of the total development budget for 2013.
The construction sector will also benefit directly from spending in other areas of the development budget. For example, the public utilities budget (MYR6.4 bn) includes provisions for the building of new water treatment plants and improved urban drainage, as well as a host of projects related to the improvement of basic infrastructure in rural areas of Sabah and Sarawak. Part of the trade and industry development budget (MYR5.5 bn) will also be allocated to finance the upgrade of infrastructure facilities in major industrial areas in an effort to attract new investors.
The 2013 budget also outlines major plans for residential construction, with the government making affordable housing a “continuous priority”, allocating MYR1.9 bn to build 123,000 new affordable housing units. Under the 1Malaysia People’s Housing (PR1MA) programme, some MYR500 m (around USD160 m) will be spent to build 80,000 housing units nationwide, with a sale price of between MYR100,000 and MYR400,000, and MR500 m will be allocated to the Housing Facilitation Fund to engage with private housing developers to build new housing that can be sold 20% below market prices.
The remaining funds will be controlled by the national housing agency, Syarikat Perumahan Nasional Berhad (SPNB), and Jabatan Perumahan Negara, the former building nearly 23,000 residential units (21,000 of which will be built in 2013), and the latter implementing a total of 24 projects with around 20,000 units.
The government has also unveiled a plan to revive 30 abandoned housing projects nationwide, allocating MYR100 m to the Ministry of Housing and also providing a range of tax incentives, such as giving the rescuing developer double deductions on interest paid and other costs incurred in obtaining loans, as well as a range of stamp duty exemptions to developers and purchasers.
While providing a further boost to the construction sector and supporting overall economic growth momentum in the coming few years, the affordable housing projects are likely to prove popular with voters. This is a key issue for the government ahead of the forthcoming elections in 2013, not least because of voter concerns over the recent sharp rise in property prices. Although the increase in property prices slowed in the second quarter of 2012, to 7.9% on an annual basis, prices have been on a tear in the past few years, with the nationwide average now around 30% higher than in early 2009 (Chart 2). This has been driven partly by speculative behaviour, with investors capitalising on the fact that there has been insufficient supply of housing, particularly in urban areas, in recent years. It is still debatable whether Malaysia is in the early stage of a property market bubble, particularly when comparing the recent increases in prices with trends in other markets in Asia, particularly Singapore and Hone Kong.
As well as boosting the supply of new property, the government has taken other direct steps to try to curtail speculative behaviour. In the 2013 budget, the government has revised its real property gain tax (RPGT), a tax that is imposed on the gains from property sales or the disposal of shares in a real estate company. Effective January 2013, the RPGT will be raised from 10% to 15% in the case of properties being sold within two years of purchase, and from 5% to 10% for properties sold between three and five years after purchase. The rate drops to 0% for sales made after six years of the purchase.
Although the increase in the RPGT could potentially curb demand for new properties, developers appear relieved that the change was not more severe. Representatives from the Real Estate and Housing Developers’ Association in Malaysia have stated that further increases in the RPGT would not have been justified in any case, claiming that much of the recent increase in property prices has been driven by higher costs for materials and labour and not speculation. Conversely, the Housing Buyers’ Association has expressed its disappointment that the RPGT hike was not steeper, and has called for an increase in the tax to 30% for properties sold within two years of purchase.
On the whole, the Malaysian government’s budget plans for 2013 will ensure that the current growth momentum of growth in construction activity will be sustained. The large investment in infrastructure projects under the ETP is not born of a desire to boost economic activity in the short term, but to bolster the strength of the economy over the longer term, addressing infrastructure deficiencies that risk pulling Malaysia into the middle-income trap. We also believe the government has struck the right balance between allowing the property market to continue to thrive while taking steps to rein in excessive speculation as well as to ramp up supply of affordable units.