The Chinese Connection

China is the world’s second largest economy that offers tremendous potential. But what exactly attracts the Chinese to potentially invest in a country and how favourable is Sabah as an investment opportunity?

We sit down with Calvin Chung, the Strategic Partner and Advisor of Laurelcap Group. Calvin has over 20 years in real estate professional services, including 10 years in China. He is a Registered Valuer and an Estate Agent with the Board of Valuers, Appraisals & Estate Agency, Malaysia. Calvin’s assignments include emerging markets spanning Far East and South East Asia.

The importance Of The Chinese Market

It is important to tap into the massive Chinese market with their significant outflow of outbound real estate investment outside of China, most prominently in the last 5 years. This trend is likely to continue as they seek to preserve and expand their wealth outside of their country.

Key underlying factors that currently continue to drive individual Chinese investors to seek alternative avenues and locations outside of China to invest their riches in more stable, attractive and established markets:

  1. Interest rates in China at a record low
  2. The country’s unpredictable stock market
  3. Tightened credit conditions from local banks
  4. Strengthening of the Yuan currency versus the Malaysian Ringgit

For many Chinese families, their regular foreign travels to overseas destinations in recent years have greatly influence their outlook and understanding on the potential to invest and preserve their wealth for their future outside of China. Back home, over-crowded cities resulting from rural to urban migration, hazardous air quality, lower education, health and city living standards compare to western countries are some of the key factors driving many of the wealthy Chinese to look abroad for better quality of life.

The primary challenge is to tap into the broader Chinese market. China is a huge country, so the onus is to broaden the market scope and boundaries, ensuring that marketed properties do reach key cities like Beijing, Shanghai, Guangzhou and Chengdu, followed by other equally important cities such as Hangzhou, Shenzhen, Chongqing and Dalian. From my understanding so far, the profile of majority Chinese buyers of Malaysian properties are primarily from the South of China. This is understandable, given the geographical proximity of Southern China provinces to Malaysia, and perhaps, ancestral affiliation to a certain degree. The other challenge is to determine whether we currently offer the competitive edge and investment quality to attract more Chinese to invest.

Chinese Investment In Malaysia Compare To Other Countries

Malaysia is already a well-known holiday destination for the Chinese. When compared to other South East Asia countries, Malaysia can be regarded as one of the top destinations for Chinese Investment in recent years given the stable political and trade relationship between the two countries, Malaysia’s geographical proximity to mainland China, its climate and the presence of a Chinese speaking community in the country. The Chinese do tend to naturally gravitate where there is an established Chinese population.

However, the Chinese still do prefer to invest in developed nations such as the U.K., the U.S. and Australia before considering Malaysia. With all their acquired riches in the last decade, the wealthy Chinese have inevitably adopted a greater understanding and taste for quality. Overseas education for their children, immigration opportunities and quality of life are the three main reasons for their investment decisions. Well established cities like New York, L.A., Sydney, Melbourne, and London offer the type of quality living, status, social and economic vibrancy that meet most Chinese investors’ primary objectives.

Sabah’s Potential As A Property Investment Destination

Sabah certainly has attractive investment potential because of its natural environment and climate. The blueprint to develop a success story is always there.

However, the current reality is Sabah’s potential as a property investment destination is primarily tourism related. Meaning most Chinese investors would view Sabah as merely an investment destination simply for retirement and modest wealth preservation, but not necessarily significant capital gains on their investment that they would expect in other developed cities abroad.

Most of the wealthy Chinese accumulated their riches during China’s Real Estate boom and the stock market bull-run in the last 10-15 years. Therefore, they have also become market savvy investors, continuously seeking potentially high growth yields or returns from their investment in prominent overseas locations where they can boast their accumulated investments with a sense of pride. At the same time, they are also looking to the future, offering their children a solid foundation for quality overseas education whilst seeking potential immigration status and favorable pension schemes in return for their investments. Established western countries have certainly provided these for the Chinese where they can also attain a sense of pride and status which Sabah is not able to provide such dynamics yet.

Ultimately, Sabah needs to improve the fundamental market dynamics and standard of infrastructure compared to other competitive and established overseas investment locations.

For a start, it lacks a sizeable population catchment and levels of income sufficient to drive a bustling economy that can promote sustainable demand growth and a certain vibrancy to attract a lot more Chinese to invest.

Despite its drawbacks though, and with its potential resources, I always believe Sabah certainly has the platform to attract more investors. There has to be a fully committed, aggressive plan and action to create a catalyst and kick start a vibrant local economy and a working class migration into the state. I am certain, whatever bold plan that will be implemented in the near future will initiate the much needed competitive edge necessary to boost Sabah from being primarily a tourism destination to that of international attraction and investment value.

Perhaps a dedicated hub for specialized service, increased investment incentives and more accommodating foreign investment guidelines to foreign investors may be required to turn Sabah into a real investment destination. Currently, the size of Sabah’s market simply cannot provide that additional impetus for more Chinese investors to park their wealth here with real investment purpose and ambition.

Infrastructure the Chinese look for

We have seen in many established how prudent planning and quality infrastructure form the backbone for attractive developments. Sabah hasn’t quite reached such standards yet. Local developers have probably delivered (within their capacity) what they could, to meet the market standards and quality sufficient enough to attract overseas investors. In truth, what is evidently lacking to a certain degree is high-level infrastructure equaling international standards to create quality developments to compete with other successful cities abroad.

Despite China being regarded as developing nation, many of the smaller emerging key cities already have impressive infrastructures in place for future developments, some nearly matching those of international standards. Local governments there are highly driven and committed to provide this basic foundation to attract local, regional and international developers to invest and build quality developments. Hence, the speed and magnitude of their success have become so prominent in recent years purely from their willingness to act and deliver.

When Chinese investors visit Sabah they inevitably make comparisons firstly with their home country, and secondly, with other international or regional cities they have visited that also offer attractive property investments. Scale comparisons aside, Sabah’s infrastructures haven’t even equaled the standards the Chinese people are used to seeing back home in their country. Sabah will need to bridge this gap in order to fulfill its full potential.

Yuan Vs Ringgit

The continuing depreciation of the Malaysian Ringgit against the US Dollar favours the Chinese buyers for Malaysian properties despite the devaluation of Chinese Yuan currency. The Chinese currency continues to strengthen versus the Ringgit. Malaysian properties therefore, should be seen as cheaper and more attractive to Chinese investors.

The devaluation of the Yuan is not expected to deter or detract the Chinese investors continuing to buy overseas properties. For the Chinese, this is only a mild devaluation. It merely points to interest rates and property yields in China remaining lower for a longer period.This will have limited impact on foreign real estate acquisitions by Chinese investors and institutions, as their urge and need to build up diversified portfolios (or spreading their wealth) continues to outweigh concerns regarding currency fluctuations.

Channels Developers Should Use to Maximize Exposure To Their Market

As I mentioned earlier, we should maximize the exposure of Sabah properties by broadening the marketing scope and boundaries to Chinese visitors entering Sabah during their visit to the state. Local developers should work closely with tourism authorities, hotel and tour operators to enhance this. Local developers may also aggressively promote advertisement banners and property flyers from the point of disembarkation of visitors at KKIA airport right down to the city centre in bilingual “English/Chinese languages” specifically and deliberately to catch the attention of Chinese visitors.

Local developers should also expand their network through external marketing channels to reach mainland Chinese people. This can be through working closely with local property agents who are already actively marketing properties to the Chinese in mainland China by tapping into their growing Chinese investor database. Other equally useful channels are through local travel agents coordinating with mainland China travel agencies ad popular Chinese property agent websites promoting overseas properties.

The Impact of Chinese Presence in Sabah Within the Next 5 Years

The level of impact will hugely depend on the intensity and spread of the property as well as tourism marketing campaigns. I foresee it will continue to be modest. Nevertheless, I certainly hope that with the continued strengthening of the Yuan versus the Ringgit, more Chinese will look to Sabah as their secondary investment destination closer to China in the next 5 years, having already invested significantly in western countries in the last few years.

We must remember Sabah is still developing. The market continues to reflect this and ultimately, Sabah is first and foremost a mere tourist destination with abundant natural resources with much potential to grow- for now. There are still shortcomings- from infrastructure quality right down to the lack of supporting international standard amenities. The current lackluster economic climate also continues to undermine the situation.

The ever increasing number of Chinese tourist to Sabah definitely creates a positive outlook for potential demand in Sabah properties. However, the degree of impact and sales volume from Chinese investors depend mainly on two key factors:

  1. The economic competitiveness and attraction Sabah can offer on capital investments for the Chinese investors (in addition to being merely a tourist destination) in the next 5 to 10 years versus other similar tourist destinations in the region.
  2. The scope and intensity of the marketing by the state government, relevant authorities, developers and property agents in Sabah to the broader masses of mainland Chinese people who are looking to invest overseas.