The Star reported Urban Wellbeing, Housing and Local Government Minister Datuk Abdul Rahman Dahlan as saying the residents would be relocated.
"The demolition of Kampung Simunul and relocation of the residents is to ensure terrorists and criminal elements don't use their homes for illicit activities," he said.
Kampung Simunul, which is within sight of Semporna town, is estimated to have 1,500 houses.
The residents are expected to be moved to a housing project in Semporna, where 800 houses are under construction and expected to be completed by next year.
Abdul Rahman said the government would build more houses to meet the relocation needs and also assist the villagers, most of whom were fishermen.
The government is also assessing other floating water villages along Sabah's coastline to ascertain its security risk.
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