City & Country: The devil is in the details

The National Economic Policy (NEP) was implemented in 1971. The intentions were honourable and in time, the NEP has proved to be a nurturing ground for increased bumiputera equity in all areas of society and resulted in Malaysia’s majority community realising its future and pride. But over time, and with the advent of globalisation, the NEP has fallen within the purview of the politically well connected and, some would say, lost sight of its original objectives.

The policy was long overdue for a revamp and more and more of the national majority did not see the NEP as being relevant to their lives.

Prime Minister Datuk Seri Najib Razak understood the need to bring foreign direct investment (FDI) into Malaysia and took note of research done by various agencies on public sentiment.

The Foreign Investment Committee (FIC) was set up to protect bumiputera interests and contained basic guidelines that covered equity investment by foreigners and Malaysian companies that were more than 50% owned by foreigners and non-bumiputeras.

Initially, all properties acquired in Malaysia were subject to not only federal FIC but also state FIC restrictions. After 35 years, in December 2006, foreigners were allowed to buy residential properties priced above RM250,000 each without seeking FIC approval. The limit on the number of properties they could buy was also removed while permanent residents could acquire residential properties priced above RM100,000 each.

Where commercial properties were concerned, foreigners could buy them without incorporating a local company provided the value did not exceed RM10 million. However, if the property cost more than RM10 million, the foreigner had to incorporate a local company with 30% bumiputera equity.

Now, foreigners can buy industrial property incorporated under a local company without any price limit or FIC approval, provided it is for their own use. Leasing a property to a foreigner for more than 10 years, however, requires FIC approval.

The decision to drop the 30% bumiputera equity requirement for foreign ownership of property removes a major impediment to FDI. In effect, property transactions between foreigners and non-bumiputeras are not subject to FIC regulations. However, the ownership transfer of bumiputera property or government assets valued at more than RM20 million requires approval.

In cutting the Gordian knot, Najib, like Alexander the Great, has removed the FIC as an anachronism from another age.

Over the last few years, companies have found other ways to get around the bumiputera equity issue. From my own experience, I know that asset-backed securities were used by an Abu Dhabi fund to acquire the Kenanga International Building in 2006 for its private equity fund to circumvent the bumiputera issue — a debt instrument does not require bumiputera equity.

Upon retiring the FIC, Najib set up a separate unit to monitor property transactions involving the dilution of bumiputera equity. But the devil is in the details. Land is a state matter and state governments have final say in implementing the directive from the federal government unless the latter requires the states to retire their FICs.

Recent examples are a cause for concern. Under the federal FIC, there are no restrictions on foreign ownership of residential properties worth more than RM250,000 but state governments have implemented their own rules.  Selangor, for example, has increased the limit on foreign acquisition of properties priced from RM250,000 to RM500,000 while in Johor, foreigners buying property have to pay the state a levy of RM11,000. This is confusing investors and making the job of investment advisers very difficult. 

Now that the FIC has removed the restrictions on commercial ownership, are the states going to implement their own guidelines to circumvent the federal government’s efforts to make Malaysian properties more appealing to investors? The answer, perhaps, lies in the fact that foreigners are concentrating on the Federal Territory, where federal rules apply automatically.

Kumar Tharmalingam is chairman of Hall Chadwick Asia, a property advisory company that provides corporations with solutions on branding

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 762, July 6-12, 2009