Malaysia offers tax breaks to revive Forest City amid stalled Chinese project

Malaysia is doubling down on reviving Johor state’s Forest City, an area that is host to a troubled Chinese housing megaproject, by offering a slew of incentives it hopes will attract foreign investment to the region and foster its development.

Real estate analysts and developers, though, have mixed feelings about how successful these incentives will prove in growing the region’s economy and enabling a turnaround of the fortunes of the housing project.

The debt-laden Chinese developer Country Garden’s U.S. $100 billion project, once pitched as a luxury residential enclave for mainland investors has now been dubbed a “ghost town.”

At the Friday launch of the previously announced Special Financial Zone for Forest City, the Malaysian government said that starting in the first quarter of 2025 it would offer tax breaks ranging from no taxes for some kinds of companies setting up there, to much-reduced personal income taxes for some individuals who move there.

Forest City “will be the first location in Malaysia to offer a zero percent tax rate for family offices,” said Malaysia’s Second Finance Minister Amir Hamzah Azizan during the launch that was attended by the Johor Regent Tunku Ismail Sultan Ibrahim and the state Chief Minister Onn Hafiz Ghazi.

Family offices are private concerns that manage the wealth of high net worth individuals or families.

“Supported by good infrastructure, a competitive talent pool, robust common law practices and effective governance, opportunities abound for family offices,” the minister said.

Additionally, he announced that some corporations will pay no taxes for a certain period, while some may pay between 0% and 5%. 

Skilled workers who move to Forest City will be taxed at a special rate of 15%, which is lower than personal income tax rates. The individual income tax rate for residents earning 50,000 ringgit (U.S. $11,893) and more ranged from 11% to 30% in 2023, according to the HSBC banking group’s website.

In 2023, Malaysian Prime Minister Anwar Ibrahim announced that the government would designate the Forest City area as a special financial zone and hinted at some of the incentives that would be offered.

The tax breaks announced Friday would make the Forest City area “a magnet for international capital,” Finance Minister Amir Hamzah said.

‘Save what can be saved’

According to Carmelo Ferlito, chief executive at business consulting firm Center for Market Education, the Special Financial Zone (SFZ) and incentives are the Malaysian government’s attempt to salvage state efforts to enable the Chinese real estate project. 

“The failed experiment is the main reason for setting up the SFZ there, precisely to try to save what can be saved and to give a different life to the city’s development,” Ferlito told BenarNews.

Country Garden initially conceived the luxury housing complex as one aimed at wealthy Chinese buyers.

Its plan was to accommodate 700,000 residents in waterfront apartment towers on four man-made islands spanning 30 sq km (11.6 square miles) between Malaysia and Singapore.

The company, China’s largest real-estate developer, said Forest City would have parks, shopping malls and hotels, create 220,000 jobs and contribute an estimated 200 billion ringgit ($47.6 billion) to the nation’s GDP by 2035.

Launched in 2013, Forest City was the Guangdong, China-based developer’s largest overseas project. 

Country Garden wanted to capitalize on China’s then-booming property market to offer Forest City as an investment opportunity for Chinese buyers.

Samuel Tan, chief executive of Olive Tree Property Consultants, noted that the appeal to Chinese buyers made sense at the time. “They were attractive to the Chinese buyers because they were familiar with [the developer],” he told BenarNews.

“And China was experiencing an upsurge in wealth creation and property prices were spiking. Malaysia was a preferred investment destination as our property prices were relatively low.”

But as of August 2023, the venture was only 15% developed, Khalil Adis, founder of Singapore-based Khalil Adis Consultancy, had told BenarNews. 

A Bloomberg News report that same month said that according to Country Garden, 9,000 people lived in Forest City.

Local and regional news reports referred to the development as a “ghost town,” because even with just 15% of it completed, few residences were occupied and the deserted streets and empty malls made it look like a post-apocalyptic township.

The project’s fortunes had taken a downturn because of, among other reasons, the global economic slowdown caused by the COVID-19 pandemic. The financial troubles of Country Garden also weighed heavily on the project. 

The company’s woes came to a head in the middle of 2023, when it failed to pay tens of millions of dollars in interest due on debt securities. 

Soon, the former powerhouse in China’s real estate market announced it would undergo offshore debt restructuring after defaulting on $11 billion in offshore bonds, several media  reported.

But the Malaysian government sees the incentives and the special financial zone as a way to grow the economy in southern Johor, hoping the companies that potentially set up there can use the civic infrastructure built by the state government for Country Garden’s housing project.

However, Ferlito, of the consulting firm Center for Market Education, doesn’t believe Forest City can morph into an industrial area.
“Forest City was built with a different purpose in mind and therefore, while I think that the SFZ is a good project … it is important that it evolves into something different. A financial hub is something very different from a residential hub,” he said.

“While the SFZ is a good idea, I doubt it can fully heal the previous scars.”

Still, Ferlito said that Forest City’s proximity to Singapore, a key financial center, could play to its advantage in this new phase. 

Johor, where Forest City is located, historically has had close economic ties with Singapore. Many Johor residents work in Singapore, commuting daily across the border. 

The special financial zone is intended to build on these links by making it easier for skilled workers based in Singapore to live and work in Johor, Anwar said last year when announcing the initiative.

‘Generally hopeful’

That’s what makes Lee Ting Han, a Johor state government investment official, optimistic.

“Forest City has its advantages as it was designed as a duty-free island since its early phase, with infrastructure ready to support such an initiative,” Lee, chairman of the Johor government’s investment, trade, consumer affairs and human resources committee, told BenarNews. 

Additionally, he noted that the start of these incentives coincide with broader efforts to boost economic cooperation between Malaysia and Singapore. 

The two countries are expected to formalize a new Johor-Singapore Special Economic Zone (JS-SEZ) during their annual leaders’ retreat later this year to strengthen economic links between Johor and Singapore.

“People in Johor are generally hopeful,” said Tan, the property consultant.

Besides, Malaysia’s current King Sultan Ibrahim Iskandar is also Johor’s sultan, and according to an analyst James Chin, the Forest City housing project “is linked with the Johor sultan.” 

Ibrahim is on a four-day state visit to China, where he has met with President Xi Jinping.

Chin, the analyst at the University of Tasmania,  said the Malaysian king’s  influence could extend beyond just Forest City. 

The analyst was referring to Ibrahim having expressed support to revive the long-stalled high-speed rail project between Kuala Lumpur and Singapore, which could benefit Johor’s economy. 

The project would naturally also boost the Forest City region’s fortunes.

“Now [the Malaysian king] is in China, representing the country, of course they’ll talk about infrastructure projects,” Chin told BenarNews.

“I’m sure he wants to push for the HSR project as well because it will benefit Johor the most.”