Malaysia's Island City In Trouble As New PM Targets China-Linked Projects

An ambitious $100 billion island city being built off Malaysia has found itself in troubled waters as the new government takes aim at the development, the latest in a series of China-linked megaprojects started under the scandal-plagued ex-premier to come under attack.

Forest City's futuristic high-rises and waterfront villas are under construction on four man-made islands in southern Malaysia, just an hour from the affluent city-state of Singapore.

The project, which is meant to house up to 700,000 people once finished in 2035, is being developed by Hong Kong-listed real estate giant Country Garden and a firm partly owned by a powerful Malaysian sultan.

It has been aimed at mainland Chinese investors as an alternative to pricier property in Singapore, with reports saying Chinese buyers have snapped up about two-thirds of units already sold before construction is finished.

But the development, which boasts international schools, shopping malls, hotels and even an immigration centre, was troubled from the start.

A clampdown on capital outflows from China hit demand, while it became a lightning rod for public anger at growing Chinese influence in Malaysia under the government of Najib Razak.

Environmentalists have also warned that dumping sand to reclaim land for the city could destroy marine life.

Now Prime Minister Mahathir Mohamad has hit out at foreigners buying apartments at the vast development, which is threatening to add to a glut of new residential property in southern Malaysia.

Malaysians are unlikely to buy or stay there due to high prices and its relatively remote location, while foreigners do not automatically get long-stay visas by buying a property.

- 'Built for foreigners' -

With the shock defeat of Najib's government in May and the election of Mahathir, who has long railed against the explosion of Chinese investment in Malaysia, speculation has intensified that Forest City could become a white elephant.

Mahathir, 93, has already shelved $22 billion of Chinese-financed projects struck under the former government during a visit last month to Beijing following criticism the deals were unfavourable to Malaysia, and now he has trained his sights on Forest City.

Last week, he made some of his strongest comments yet on the development, saying he objected to the project because it was "built for foreigners, not built for Malaysians. Most Malaysians are unable to buy those flats."

He added that Forest City "cannot be sold to foreigners... We are not going to give visas for people to come and live here."

His nationalist rhetoric was not in line with Malaysia's laws -- it is legal for foreigners to buy houses and apartments in Malaysia -- and his office later clarified that he only meant purchasing property does not automatically guarantee residency for a foreigner.

But observers said Mahathir was intending to undermine a project he has long detested. A subsequent announcement that the government was establishing a committee to review the terms agreed on to set up the development and foreign ownership there only added to the sense authorities may be trying to put a halt to it.

It is not yet clear what the committee might recommend. Analysts said the worst case scenario in the short term could be the state government in Johor, where the project is based, raising the minimum price for foreigners buying property or increasing levies.

Yeah Kim Leng, a professor of economics at Malaysia's Sunway University Business School, said investors would be deterred and predicted the developer might have to delay or scale back the project.

"Perhaps they will put it on hold, or aim for something smaller," he told AFP.

Malaysian property consultant Samuel Tan Wee Cheng meanwhile warned against turning "the project into a white elephant", the Star newspaper reported.

Only a fraction of work has been completed on the development and only a small number of people, mainly staff, are living there, according to reports.

- Chinese jitters -

During Najib's nine-year rule, Chinese investment into Malaysia surged but hastily struck deals fuelled suspicion that the leader was seeking help to pay off debts from a massive financial scandal.

While Forest City is a private project, it was perceived by many in Malaysia as another example of unwelcome mainland Chinese influence and there were fears it could become an enclave for wealthy Chinese.

In reality, however, analysts say it is unclear who will inhabit the development, particularly as foreigners must apply for long-stay visas through a separate programme.

With one-bedroom apartments being offered for about $170,000, the prices are out of reach for most Malaysians.

Despite its troubles, Forest City has remained upbeat. A spokesman pointed out that of 20,000 properties launched by the end of last year, 18,000 have been sold, and stressed the development has brought investment and jobs to Malaysia.