Some private housing projects saw pre-tax profit margins decline to around 10 to 12%, or even below 10%.
Developers’ profit margins from private residential projects in Singapore have shrunk amid rising land prices and construction costs, as well as higher commissions to property agents, reported The Business Times (BT).
In fact, some private housing projects saw pre-tax profit margins decline to around 10 to 12%, or even below 10%.
“Assuming a period of five years from the time of the land purchase to the completion and sale of the project, this works out to a meagre return on investment averaging a compounded 2% a year,” noted BT.
Property cooling measures targeted at keeping property price hikes “in line with economic fundamentals” have also limited the pricing power of developers.
And while last year’s home sales volumes were resilient despite the recession and the COVID-19 pandemic, much of the demand came from the price-sensitive market, which comprises upgraders and those looking for smaller units with affordable absolute pricing.
BT noted that land prices, which make up 70 to 75% of a project’s gross development cost, have increased partly due to competition from new players.
Lured by the property development sector’s attractive profit margins, several local construction groups, including Lian Beng Group, Chip Eng Seng and Sim Lian Group, diversified into property development two decades ago.
There were also new entrants coming from foreign construction firms, which include China Construction, MCC and Qingjian Group. These foreign developers posed particularly tough competition as they were able to aggressively bid for land since they are vertically integrated and backed by big, overseas parent companies.
Some local property groups, such as CapitaLand, Ho Bee and Keppel Land, sought better returns overseas. However, most are likely to remain rooted here.
Given the diminishing margins, investors “may be better off whittling down their portfolio exposure to property”, said BT. And many stock market investors have already done so.
The FTSE ST Real Estate Holding and Development Index (FSTREH) gained 6.9% over a five-year period – underperforming the 9.2% gain of the Straits Times Index (STI). Including dividends, the STI returned 31.8% and the FSTREH 22.7%.
BT said that there may be unintended negative consequences should the operating environment does not improve.
The market, for instance, may attract developers which do things in a quick and cheaper way or adopt a very short-term approach.
“Some observers also fear that if local companies reduce their residential development activity, foreign developers will have a bigger share but may not have the same commitment as local developers to uplift quality standards for the whole industry,” added BT.
However, any suggestions of government relief for the property sector are likely to be met with concerns given the still heated property market.
Property prices in Singapore have continued to increase this past year despite the drop in income levels for a large part of its population.
To alleviate competition, the government may ramp up its land sales programme.
There is, however, no guarantee that this would work “as seen during much of the 15-month period prior to the July 2018 cooling measures when land-starved developers were buying sites at successively higher price”, said BT.
Observers pointed to Additional Buyer’s Stamp Duty (ABSD) as one key driver of land prices.
Based on ABSD rules, developers have to complete and sell all units in a development within five years for them to qualify for upfront remission of the 25% ABSD on residential site acquisitions.
“Developers who have bought sites around the same time rush to sell their projects to meet this five-year sales deadline, and then become hungry and start bidding aggressively for land,” a seasoned developer told BT.
With this, it may be time for the government to consider slashing the ABSD on residential land acquisitions by developers.
BT acknowledge that ABSD is useful in discouraging hoarding of land.
“Without it, developers may be incentivised to slow down their launches to create scarcity and push up selling prices,” said BT.
“But perhaps the ABSD rate for developers’ residential land purchases could be cut or pro-rated in proportion to the unsold units in projects,” it added.
A more flexible system may alleviate “the current boom and bust situation in which developers race, often together, to exhaust their unsold inventory, before feeling famished and starting a fresh round of land binging”.
Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this story, email: firstname.lastname@example.org