The bridge that kicked off a 500% property boom
Well, on 17 November, the Penang marathon took place on Penang Bridge for the last time. From now on, the annual competition will take place on the recently completed Penang Second Bridge, which, at 24km, is the longest link in Southeast Asia. The first bridge, which was state of the art not long ago, can’t handle the volume of traffic.
This weekend, over 10,000 people descended on Penang to celebrate the opening of the bridge. The people of Penang have a lot to celebrate right now.
This fishing village and the surrounding area on the island and the counterpart on the mainland, Batu Kawan, are buzzing with building cranes competing to put up office blocks, shop lots, condominiums and industrial parks. Penang is pulling up its socks and things are starting to happen.
Since the announcement of the bridge project in 2006, land prices in Batu Maung have leaped from RM50-60 per sq ft to around RM250-300 per sq ft. New apartments, which used to cost between RM250,000-300,000 each, now cost between RM700,000-800,000. And there’s a lot more to come from the infrastructure boom in this part of Asia.
This construction boom is just getting started
Last month, Ikea announced it had, together with a local partner, acquired 245 acres in Batu Kawan in mainland Penang. Starting construction in 2015, the Ikea store and the first phase of the shopping mall will take up 30 acres while another 45 acres have been set aside for the second phase.
The remainder will be used for mixed development. The new Ikea store is likely to open in 2020. Bullish tell sign. We wrote in a previous issue that opening new Ikea stores is a good indicator of cheerful markets.
Looking ahead, there are plans to build a 6.5km undersea tunnel between Penang Island and the mainland. The project, due to be completed by 2025, is said to cost RM6.5bn ($2bn) and be undertaken by China Railway Construction Corporation International (CRCC) and Beijing Urban Construction Group (BUCG). CRCC will undertake 70% of the construction work while BUCG handles the remaining 30% .
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And Penang isn’t the only example of connectivity spurring an economic boom. A visitor to Jakarta will be warned that the elevated part of the Mass Rapid Transit (MRT) system is set to kick off.
This large-scale construction will go on for the next few years and build the first MRT line which will connect Lebak Bulus and Hotel Indonesia traffic circle, with six underground stations, seven elevated stations and accommodate 173,000 passengers per day.
The project is expected to be completed in 2017 and be followed by more lines. The Japanese government through Official Development Assistance (ODA) funds the project and Japanese companies acts as the main contractors.
In Kuala Lumpur, the construction of an MRT system is in full swing and there are a number of deep pocket holes scattered around the city. The first phase of the line from Sg Buloh to Semantan is expected to be completed by end 2016/mid-2017. The additional two Klang Valley lines are expected to be completed by 2020. The combined public network of transportation is hoped to push usage from 17% to 50% by 2020.
In Ho Chi Minh City, Metro Line 1 will connect Ben Thanh Market and Suoi Tien Theme Park. Stretching a total of 17.1km with 11 stations, the line is expected to be operational in 2017. The main contractor is Sumitomo Corporation, supported by funds from ODA of Japan.
Three benefits of this connectivity boom
I see the connectivity boom leading to a leaner Southeast Asia for three reasons:
Firstly, the spending spree will trim logistics costs which act as a tax on trade. Logistics as percentage of GDP is around 5-10% in developed economies, whereas in emerging markets it is 15-20%. That gap should narrow dramatically over the next decade.
Secondly, Southeast Asia, tucked in between China and India, is pushing for better connectivity and integration under the Asean Free Trade Area (AFTA) set to be introduced by end of 2015.
This early version of EU-like free trade agreement with mostly free movements of most goods and services among the ten member countries, 600 million people with a total GDP exceeding $2trn which will allow greater efficiency in allocation of labour, land and capital.
Thirdly, Asian money (and increasingly expertise) begets Asia. Western media ignores developments lacking a Western angle. Ignore it at your peril.
I see it as a perfect example of “information inefficiency”, a fancy way of saying we can make outsized returns from the market, before the rest of the world catches up to us.