Malaysia and Singapore can return to the pre-Asia financial crisis growth level as both countries strengthen their economic relationship.
This is especially so after the recent release of the Tanjong Pagar railway station land to Singapore.
Malaysia has agreed to swap the railway land, which it owned in exchange for six parcels of land with a permitted gross floor area of up to 501,020 square metres.
HwangDBS Vickers Research, in its research note today, said the breakthrough agreement was reached as there is a need to improve co-operation on national security and growth sustainability as both are faced with increased competition and threats from terrorism.
"We believe the warming of ties between both countries can bring a change in the business environment," it added.
The research house said Singapore could leverage on Malaysia's growth potential. Malaysia in turn, can tap into Singapore's track record on execution.
"We believe that by improving ties, Malaysia and Singapore will maintain growth sustainability over the next five years. There are many areas of cooperation such as banking, manufacturing, logistics and environmental, which were left behind after the Asian financial crisis," said the research house.
As for the agreement, sectors that would benefit include property, construction, transport as well as hospitality.
Johor, particularly, could be the biggest beneficiary, as investments into the state can fit Singapore's goal of boosting domestic demand.
The research house said Johor has potential to be a special economic zone for Singapore due to its proximity and where land resources can be tapped.
Singapore was a big investor in Johor in the early 1990s before the bilateral relationship turned sour, after the Asian financial crisis.
Apart from that, the combined market capitalisation of companies listed in the Singapore and Malaysia stock exchanges is close to US$1 trillion.
Combined, it has the potential to be the fourth largest market after Hong Kong, India and South Korea.
Currently, the Malaysian market offers high growth prospects but valuations in terms of price-to-earnings ratio (P/E) and dividend yield are dearer than in Singapore.