- 7 months ago
Malaysia’s construction sector is booming, driven by private investments and the rising demand for data centres. However, the recent expansion of the Sales and Service Tax (SST) to 6% on construction work services introduces new challenges for developers, contractors, and buyers. In this exclusive interview, Leo Leow, Country Director of Turner & Townsend Malaysia, shares insights on how the industry is adapting to cost shifts, procurement strategies, and evolving buyer preferences amid this changing tax landscape.
Category
🗞
NewsTranscript
00:00Thank you for tuning in to Niagawani.
00:10Right now we want to explore on the evolving Malaysia's landscape of construction in Malaysia
00:17that's right now very dynamic, where construction growth among private sector investors in Malaysia
00:23is gaining momentum, largely driven by the surging demand for data centres.
00:28And this trend reflects a border shift in infrastructure priorities as digital transformation accelerates across industries.
00:35And according to Turner & Townsend's Global Construction Market Intelligence GCMI 2025 report,
00:41construction costs in Kuala Lumpur remain relatively low compared to regional peers.
00:47And however, the recent expansion of the Sales and Service Tax, SST, to 6% for all construction work services,
00:54particularly for infrastructure, commercial and industrial projects exceeding RM1.5 million annually
01:01adds a new layer of complexity to cost management.
01:05So this policy shift raises concerns about potential cash flow constraints and this disrupts contract as well.
01:13And when it comes to project delays, it involves that as well, which could ultimately slow down the market momentum.
01:19So to unpack these challenges and also explore the road ahead, I'm joined by Liu,
01:26Liu, the Country Director of Turner & Townsend Malaysia.
01:29Good morning, Liu.
01:30Good morning. Thanks for having me.
01:31Thank you for joining me in the studio this morning.
01:33Perhaps we could start before we expand further on this issue.
01:37How do you foresee the expanded SST is actually influencing both the broader Malaysian real estate
01:42and also the construction market in Malaysia and what are the immediate and also long-term impacts
01:48when it comes to cost shift for both developers, contractors and also buyers?
01:53Yes, right.
01:53So it is clear that the expanded SST is adding a new layer of cost and also the complexity
01:58to both the construction and the real estate markets.
02:02Immediately, it increases the cost of development, especially for industrial, commercial
02:06and also the mixed-use development.
02:09While the residential projects are exempted, however, this tax is still applied to residential
02:14building within the mixed-use development.
02:17So for immediate impact, we are seeing a cost-pass-through effect where the contractors now are reflecting
02:24their pricing to include the 6% SST.
02:28And naturally, we are expecting the developers to pass on the cost to the buyers.
02:33As a result, the price could be higher and this is directly impacting the affordability.
02:40We are also seeing a cash flow pressure on developers.
02:46The higher upfront payment is actually putting more pressures on the project financial.
02:50And on top of this, there are a wave of contract renegociations.
02:55For ongoing projects, many of them require variation to the original contract sum, especially
03:02if the original agreement is without a clear tech clauses that define how the change in
03:09XST is being treated.
03:11So this adds to the complexity and potentially delay the project timeline.
03:15So in the long run, we expect to see a reduced margin, especially in price-sensitive markets or segments,
03:22where both the developers and the contractors may have to absorb part of the cost to stay competitive.
03:30Otherwise, not alternatively, otherwise, this could lead to a shift in the buyer behavior,
03:35as the higher cost could defer or even deter the purchasers.
03:42Also, we anticipate a change in behavior in how the contractor is approaching the tendering.
03:48Many of them are likely to price it more conservatively or adding a contingency sum to cater the uncertainties related to XST.
03:57And in terms of planning, we may see developers becoming more selective in terms of the land banking
04:04and also the product strategy.
04:06In particular, mixed-use development might be phased or even designed differently to mitigate the tax impact.
04:12So overall, the expanded XST is now reshaping how the project is being priced,
04:19how the project is being financed, and also how the projects are delivered across the industry.
04:24All right, so the price height after the XST expansion to 6% is very worrying,
04:29not to just consumers or buyers, but it's to developers and contractors as well.
04:35So for ongoing construction projects, how are developers and also contractors actually
04:40adjust their financial planning and also procurement strategies to account for the expanded XST?
04:47Yes, indeed, ongoing projects are in a very challenging situation now.
04:50Most of the projects, if not all, were planned and budgeted before the XST expansion.
04:57And this additional cost has actually forced the project team to rethink their whole strategy.
05:03Now we are seeing developers and contractors reassessing the procurement model.
05:08In many cases, they're splitting the work packages in a more strategic way
05:12to maximize the B2B exemption. And this helps to avoid double taxation and contain the rising costs.
05:20At the same time, they're revising the financial model or financial planning to incorporate the
05:25additional costs for SST because this is no longer something that can be treated as an incidental cost,
05:32but it has to be built into the core financial model of the project.
05:35And also, there is a much stronger focus or emphasis on value engineering.
05:41So the teams now are going back to the drawing board, trying to optimize the design and specifications.
05:47This is often a more design, I mean simplifications, substitutions,
05:52and even rethink the whole construction method.
05:56And finally, we are also seeing a growing reliance on the quantity surveyors
06:00and also the commercial advices. Their roles are becoming even more critical now to help the team
06:05to understand what is the tax implication and work with the team to find ways to mitigate the financial impact.
06:13So indeed, a holistic approach needs to be done as well to actually mitigate all these challenges,
06:19and also when it comes to the financial planning as a whole.
06:23But one of the strategies to actually mitigate the cascading tax effects is businesses now explore
06:30B2B exemptions. This is to actually provide construction work to actually mitigate these challenges.
06:38So what challenges do you foresee in implementing this, managing these exemptions across multiple tiers
06:44of subcontractors as a whole?
06:46Yes, well, there's no doubt that the B2B exemption is a very good mechanism.
06:51It is designed to avoid double taxation, but however, to put this in practice is actually quite tricky,
06:57especially for construction sector where we often have a long and complex chain of subcontracting.
07:03One of the biggest hurdles is actually to maintaining a consistent and clear documentation.
07:09For larger projects, there are multiple layers of subcontracting.
07:13So to maintain a clear documentation trail is challenging.
07:18Everyone needs to be aligned, which is quite difficult.
07:22Another issue is awareness and inconsistent understandings.
07:27Smaller subcontractors in particular, they might not be familiar with how the B2B exemption works,
07:32for example, or they might be slow to comply with the documentation required.
07:37And this could lead to a gap in the compliance, which is leading to another concern, the audit risk.
07:44Without a clear documentation trail, businesses could face issues during the tax audits,
07:50which is leading to a penalty.
07:53And above all this, here comes the administrative burden.
07:57Managing all these documentations and verification process takes a lot of time and effort.
08:02So basically, it could delay the whole procurement and adding more pressures to the already typed timeline.
08:10So in short, B2B exemption helps, but it requires a strong coordination.
08:16It requires clear communication and it definitely requires a strong documentation practice to make it work smoothly.
08:24But given this new tax landscape complexities, what are the actually practical strategies
08:31can contractors and also developers employ to effectively navigate this new expanded SSD
08:37for both ongoing and also the future projects?
08:41Yeah, that's a really important question.
08:42So we are definitely in a very complex environment now.
08:47But there are few practical steps that could help, in my opinion.
08:51First, by setting up an SST task force or internal tax team,
08:56or engaging an external tech advisor, especially for larger projects.
09:05Either way, having a dedicated support for the tax matters can actually help the team to make sure that
09:11the tax planning is integrated from day one, but not an afterthought.
09:16Also, having this dedicated support or tax team,
09:19is actually helps to monitor the tax compliance, it helps to coordinate the SSD documentation,
09:26and it also helps to stay ahead of any changes.
09:31Second, to incorporate clear clauses about the SSD as to how the tax is treated,
09:38who is responsible, and also how the indemnity are handled.
09:42This avoids confusion and disputes later on.
09:46Also, the communication and training are key.
09:50The project team, especially the procurement team and the finance team, need to be up-skilled.
09:55They need to understand how the SSD works.
09:58The subcontractors need to understand how the B2B exemption works.
10:02So everyone in the supply chain needs to be aligned.
10:06And last but not the least, tax planning.
10:09Contractors and developers, they can look into the supply chain more strategically,
10:15sourcing from the SSD exam, the suppliers, or restructure the procurement model to legally
10:22minimise the tax exposure.
10:24So overall, it's all about being proactive.
10:27That means upfront planning, tightening up the processes,
10:32improve communication, and equally important, make sure that the right expertise is in place.
10:36But are there any further support or perhaps clarification that would be beneficial for the industry to ensure a smooth transition towards this expanded SSD when it comes to the implementation?
10:48Yes, I mean, certainly there are a few steps that I think will be helpful for the industry to navigate this more smoothly.
10:59First, we need a clear and timely guidance.
11:03At this point of time, at this moment, there's still a lot of uncertainties and misunderstanding about the SSD,
11:11such as how the SSD apply.
11:12I've seen some visuals explaining how the SSD applies for contract sign before the expansion.
11:21Also, how the SSD applies to work before and after the SSD expansion, which is very helpful.
11:28We need more of these.
11:31Second, having a dedicated helpline or online support tools for the construction sector would be a big help.
11:40A lot of businesses, especially the small one, are still trying to figure out how it works and how to comply.
11:47So by having a central place that can offer quick answers would be a big help.
11:54Third, it would be great if the government can continue to review the grace period and to make adjustment accordingly,
12:02especially for larger and long-running projects that they started before the SSD expansion.
12:07This will allow the companies to adapt to the changes without being penalised.
12:12So that's on the perspective of developers and also contractors, all the businesses.
12:17But now let's look at the consumer or the buyer's perspective.
12:21You know, buyer preferences for housing investment has now shifted with more priority given to convenience, accessibility, safety and also affordability.
12:31So how should the Malaysian construction industry adapt to attract and also capitalise on these investments?
12:40Let's zoom out a bit to look at the broader industries.
12:43We definitely see a shift in where the investment is going.
12:47So in Malaysia, there is a growing interest in data centres, advanced manufacturing and also the logistic infrastructure.
12:55And these sectors are very much different from the traditional real estate.
12:59They demand speed, they demand scalability and they also demand strong digital integration.
13:06Another big shift is a rising focus in ESG performance.
13:10Global investors in particular are putting a lot more emphasis on sustainability, carbon footprint and also the long-term environmental impact.
13:20So it's no longer just about the cost and time.
13:24It is about the how responsibly the project is being delivered to stability.
13:31And again, for Malaysia to stay competitive, in my opinion, we need to expand the green incentive.
13:39We need to fast track the approval for strategic sector.
13:43And we also need to promote public product partnerships, especially for ESG link development.
13:49And for those developers and contractors who can better align themselves with these priorities,
13:56especially through the sustainability and the digital innovation,
14:00a much better position themselves to secure both the foreign and domestic capital.
14:07But this expanded assessing is only one of the many challenges that's going on.
14:11Right now, we have tariff deals and also we have trade wars.
14:16But despite all that, the Bursa Malaysia Construction Cost Index shows a cautiously optimistic sentiment.
14:23So what factors that contribute to this resilience?
14:26And what is your overall outlook for the construction industry in the coming years?
14:30Yes. I mean, despite all these pressures, there are several key factors of contributions,
14:38like keeping the industries optimistic but cautiously.
14:41We are seeing a strong pipeline for the public project.
14:44The major infrastructure work like the MRT3 and the Pinang MRT has actually helped to sustain the
14:51order book and maintain the activity level.
14:53So at the same time, the private investment is growing.
14:58We are seeing more development in data centers.
15:00We continue to see investments in manufacturing plants and also the logistic hub.
15:04All these projects are long-term and they bring confidence to the markets.
15:08Also, the labor market is actually recovering.
15:13The improved inflow of the labor, the foreign workers, has actually helped to stabilize the labor pool.
15:19And this is in turn reducing the cost volatility, which has been a major challenge in the past few years.
15:26Now, looking ahead, in the short term, we expect the cost pressure to continue,
15:30especially with the expanded SST.
15:33But with the right strategy in place, it is manageable, in my opinion.
15:37In the midterm, the outlook remains resilient, particularly for infrastructure, industrial and
15:44institutional works.
15:45Having said that, we are keeping a close eye on the material prices, the labor policies,
15:51and also the trend of the global interest.
15:53As all these costs and all these factors are actually affecting or influencing the cost,
15:58which we need to keep a close eye on it.
16:03Perhaps if I may add one more question.
16:06Do you have anything to say or perhaps any advice to buyers out there that have
16:14quite high interest to buy houses, perhaps, or any assets?
16:21So what can you say to them?
16:23Yeah, probably I'm not the expert here, but normally as a buyer myself,
16:27basically before I make any purchases, normally I was just not looking at the price alone.
16:33And also depending on, as a buyer, are you a speculator?
16:38Are you buying this for investment or buying this for homes, for own stay?
16:41But price is not the only parameters, right?
16:46As a buyer myself, I look at the price.
16:48I will look at the several factors at the location, accessibility.
16:53So that's who I am.
16:56Thank you so much.
16:57That was the country director of Turner & Thompson, Malaysia.
17:01That was Leo.
17:02And thank you so much for coming all the way to our studio this morning.
17:06And you can find the whole discussion on all of our social media platforms,
17:09and that includes astroawani.com.
17:11Thank you so much for watching.
Comments