Malaysia scraps property tax in investment drive

Malaysian Prime Minister Abdullah Ahmad Badawi delivers his keynote address during Invest Malaysia 2007 in Kuala Lumpur March 22, 2007. Malaysia will abolish capital gains tax on property next month, Abdullah said on Thursday, as part of a package to drum up foreign investments.

KUALA LUMPUR (Reuters) - Malaysia moved on Thursday to scrap capital-gains tax on property and said it would boost share trading in an effort to stimulate local and foreign investment.

The initiatives helped boost the stock market which, along with the local currency, was already riding higher on signs that the country favored a slowly appreciating ringgit.

Prime Minister Abdullah Ahmad Badawi told an annual investor conference the government would scrap the 30 percent capital gains tax on property and also announced additional tax breaks for investors in a new southern development zone.

"This is long-awaited news for developers and investors alike and I hope that it will inject more excitement and dynamism into both the property and the financial sectors," he said.

Property values in the capital, Kuala Lumpur, fetch about a third of the values in cities like Hong Kong and Singapore, but regional property fund manager Peter Churchouse said abolition of the tax was unlikely to cause much excitement among foreigners.

Foreign investors still face heavy legal restrictions on land ownership in Malaysia, said Churchouse, who manages the $110 million Lim Asia Property Fund in Hong Kong.

"At the margin it's positive, but foreigners have problems investing in Malaysia anyway," he said.

Malaysia's property index jumped 2.2 percent after the premier's statement, beating a 1.3 percent gain in the wider market and led by AMDB and Land and General.

The construction index leapt 2.6 percent, though it also received a boost from a separate announcement that the government would give investors in Malaysia's Iskandar development zone, in southern Johor state, a 10-year tax holiday.

Iskandar, about three times the size of neighboring Singapore, is the site of Malaysia's ambitions to build a new Asian boom town. It plans to harness $105 billion in mostly private funds to transform the drab area over the next 20 years.

TONIC FOR THE STOCK MARKET

Abdullah said the 10-year corporate tax holidays would apply inside the zone to healthcare, tourism, creative, financial services, logistics and education.

Investors in Iskandar would also enjoy freedom to raise capital globally and hire foreign workers, the premier said.

State investment agency Khazanah added that the corporate-tax holiday would be extended to three additional sectors but it did not name them. Islamic finance and technology would enjoy incentives specific to them, but it did not give details.

Shares in state-invested developer UEM World, which owns a huge swathe of land in Iskandar, jumped 5.5 percent. Construction unit UEM Builders climbed 7 percent.

In further measures designed to boost the share market, the prime minister said state investment agencies would sell some of their share portfolios into exchange-traded equity funds.

The move would see the creation of exchange-traded equity funds (ETFs) collectively worth up to 3.5 billion ringgit ($1.01 billion) by the end of this year, Abdullah said.

Shares in stock exchange operator Bursa Malaysia jumped 3.7 percent.

Thin liquidity is a major barrier for foreign investment in the $270 billion stock market, which is dominated by state-linked firms that rarely figure among its most-traded stocks.

The government has said it is not yet ready to sell down its holdings in these companies. But Abdullah said that when the time came, the government would do so via private placements and instruments such as convertible equity bonds to soften the blow for the market from such an overhang of selling.