In between the gleaming high-rises and manicured lawns of Iskandar, a vast new city taking shape on peninsular Malaysia’s southern shore, lie swathes of still untamed scrubland and dusty construction sites. But when it is completed, by a projected date of 2025, the special economic zone dubbed ‘Malaysia’s Shenzhen’ will be three times the size of adjacent Singapore. The zone has been touted as a means of bolstering the fortunes of both countries — giving the city-state the hinterland it lacks, and allowing Malaysia to leverage its neighbour’s financial expertise. Iskandar is part of a growing nexus of economic ties between the two countries, whose relations were frayed — but not quite severed — by Singapore’s ejection from the Malaysian federation in 1965.

Najib Razak, Malaysia’s prime minister, has said his country could be New Jersey to Singapore’s Manhattan, while Singapore’s central bank chief has floated the idea of a single economic zone covering Iskandar and the neighbouring city-state which would provide investors with an “integrated production and services base” in Southeast Asia. “Policymakers see the possibility of businesses being co-located in Iskandar and Singapore,” said Eugene Tan, associate professor at Singapore Management University. “We just don’t have the land here and Iskandar is close enough for companies to have manufacturing there but the finance and R&D in Singapore.”

A number of Singapore businesses have seized the opportunity already. Angela Pang, manager of a Singapore machine tools reconditioning business, which recently shifted its workshop to a hangar in Iskandar, said: “Our sales office is 30 minutes from here, in Singapore. “There’s a lot of walk-in customers and we can bring them here to test the machines.

“Our rental in Singapore was going to expire and this is cheaper,” Ms Pang added, saying the cost of commercial spaces was about a third of Singapore prices. But the Iskandar project — launched by the Malaysian government in 2006 — is challenged by a glut of property development in southern Malaysia, and a shift away from labour-intensive manufacturing that has squeezed domestic investment. While foreign manufacturing investment rose last year, investment in Iskandar by domestic manufacturers dropped by 41 per cent in 2016, compared with the previous year, according to government data. Analysts say an increase in the minimum wage in Malaysia last year is likely to chill investment further.

Veena Loh, a research director at the real estate services group JLL, said: “As the [Malaysian] government tries to move the country towards higher value-added manufacturing industries with incentives — as well as with penalties like the implementation of higher minimum wage cost — the local domestic industry is likely to be impacted these few years.”

The weakening of investment calls into question whether there will be enough jobs to provide for a population expected to grow from 1.2m to 3m people in the next seven years Meanwhile, property developers have been increasingly cautious about investing in Malaysia, fearing an oversupply of property at a time when a vast Chinese-backed development is also taking shape off the southern coast. Total real estate investment in Iskandar fell from $1.4bn in the 12 months to the end of March 2013 to $86m in the 12 months to the end of March this year.

“The drop in volumes between now and 2013 is highly noticeable,” said Petra Blazkova, Asia-Pacific director at Real Capital Analytics. “Our view is that it stemmed from an imbalance between the supply of land or property and demand from real estate investors.” There is a gap between developers’ expectations and what prospective buyers are willing to pay, Ms Blazkova said, and property investors are also shunning risk and opting for more mature destinations.

Forest City, a $100bn Chinese-backed township being constructed on reclaimed land, adds to the challenges for Iskandar because of its vast scale — it will house an estimated 700,000 people when it is completed in two decades’ time. China’s crackdown on capital flight has forced Country Garden, the Forest City developer, to turn elsewhere in search of prospective buyers, adding to the potential lag in filling the region’s housing, analysts say.

Ismail Ibrahim, chief executive of the regional development authority, admitted last month there is a “temporary” glut of housing in the region in a briefing reported by local media. But Mr Ismail said he expected economic growth in the region would mean demand will eventually catch up with supply.

UEM Sunrise, the master developer of a 24,000-acre stretch of the economic zone, dismissed concerns about Chinese developers overwhelming the residential market. Anwar Syahrin Abdul Ajib, chief executive of UEM Sunrise, said that mainland Chinese groups were attracting additional potential investors. “They bring in people from that side of the world … and those guys, we are able to tap on them,” he said.