Malaysia says no to foreign homeowners in Forest City project

(Adds reaction from Country Garden, analyst comment)

By Joseph Sipalan

KUALA LUMPUR, Aug 27 (Reuters) - Malaysian Prime Minister Mahathir Mohamad said on Monday he wanted to prevent foreigners from buying residential units in the $100 billion Forest City project, a setback for the Chinese developer as it tries to revive faltering demand for the site.

The project by developer Country Garden Holdings Co Ltd to build a city for 700,000 people in the state of Johor bordering Singapore has faced uncertainty since Mahathir's coalition won a shock victory at a May general election.

"One thing is certain, that city that is going to be built cannot be sold to foreigners," Mahathir told a news conference in Kuala Lumpur, the capital.

"We are not going to give visas for people to come and live here," he added. "Our objection is because it was built for foreigners, not built for Malaysians. Most Malaysians are unable to buy those flats."

Chinese buyers account for about two-thirds of the owners of Forest City units sold so far, with 20 percent from Malaysia and the rest from 22 other countries, including Indonesia, Vietnam and South Korea.

Country Garden Pacificview Sdn Bhd, a joint venture between Country Garden and the Johor state government to develop Forest City, said it has complied with all necessary regulations in developing the project.

It said Mahathir's statement "may have been taken out of context" and his comments did not correspond with the content of a meeting two weeks ago between the prime minister and Country Garden's chairman, Yeung Kwok Keung.

"During the meeting, Tun Mahathir reiterated that he welcomes foreign investment which could create employment opportunities, promote technology transfer and innovations that could benefit Malaysia's economic growth and job creation," the company said in a statement.

Shares in Hong Kong-listed Country Garden, which rose as much as 3.9 percent on Monday morning, trimmed their gains to 2.5 percent after Mahathir's comments.

Mahathir had been a staunch critic of Forest City and other infrastructure mega-projects backed by Chinese money, accusing his predecessor and former protege, Najib Razak, of selling the country to China.

Mahathir tapped into public displeasure over a perceived over-dependence on Chinese capital, saying that it was Najib's way of covering up for shortfalls caused by his administration's fiscal mismanagement and corruption, especially at scandal-tainted 1Malaysia Development Berhad (1MDB).

Malaysians living in Johor have complained of large numbers of Chinese people snapping up properties in Forest City, besides concerns of environmental damage, a glut in the property market, and the impact of land reclamation on fisheries.

Prior to the general election, Chinese demand for Forest City apartments had already slowed down over the past couple of years as Beijing moved to stem capital outflows.

Mahathir's latest comments are not expected to put a dent in Country Garden's overall financial performance, said DBS analyst Carol Wu.

"The impact won't be significant as year to date it only accounts for 0.5 percent of its sales. This could be easily made up by sales in other region," Wu said. (Reporting by Joseph Sipalan in KUALA LUMPUR and Clare Jim in HONG KONG; Editing by Clarence Fernandez and Darren Schuettler)