Are developers really making too much?
LATELY, there have been many ongoing discussions on the topic of high property prices. It made me ponder on the various causes that might have contributed to the situation, including the question of whether developers are making too much.
As I took a sip of tea, many thoughts came to mind which I found interesting and worth sharing before we dwell further into the real factors of rising property prices.
Based on annual reports (see chart) of three major property developers in Malaysia, namely SP Setia, UEM Land Holdings and Mah Sing Group, they are generating an average of 18% profit margin from their projects, and at the same time incurring a staff cost of about 7% of their total revenue.
These companies are major developers in mass residential properties which have high sales turnover, and therefore a good reflection of the average developers’ profit margin in the residential market.
These findings may contrast with people’s perception of the profitability of the property development industry.
Though it may sound like a fantasy, assuming I could convince these three property developers to give back their entire profit to their customers, it would mean an average of 18% discount on property prices for the year in question.
This would seem like a fantastic bonanza for the buyers of the properties in question. But would a 18% discount really make these properties affordable? I would imagine that people will still find these properties expensive.
Let’s take an example of a terrace house that costs RM700,000 in Petaling Jaya. It would be priced at RM574,000 after the 18% discount.
If a home buyer is able to secure a 90% loan with a maximum repayment period of 30 years, the monthly loan instalment for RM700,000 and RM574,000 would be RM3,081 and RM2,526 respectively (based on a BLR-2.4% loan package with current BLR at 6.6% per annum).
From the above example, while the discount may seem substantial at absolute price, it is not significant in terms of monthly loan instalment for home buyers.
The debt commitment level for the latter is still considered high and out of reach for most people especially those who have just started their career.
Now, let’s take a hypothetical scenario that the property developers decide to make their staff work for free that year.
It would mean another 7% discount to customers after deducting staff cost. Even with this total discount of 25%, property prices in many areas would still be considered unaffordable to many.
Anyhow, back to reality, it is impossible for any commercial enterprise to work for free or give up its profit if it was to run a sustainable business, as well as to satisfy its shareholders’ expectations.
For the property development industry which has a product life cycle of four to six years (starting from land acquisition to handover of keys to customers), it is a challenge to further compress the profit margin after taking into account the risk and inflationary factors involved in such a long product life cycle.
Let us look at other industries as a comparison and review their profit margins.
For the banking industry, the three largest local banks that were selected are Maybank, CIMB and Public Bank. Likewise, the three major players from the mobile telecommunication services were Axiata, Maxisand Digi.
The results showed that the average profit margin for the banking industry is 35%, while the mobile telecommunication industry is enjoying an average profit margin of 26%. So, back to my question “are developers in Malaysia really making too much?”
Compared with the average profit margin of the banking and telecommunication industries, the profit margins of property development companies are significantly lower and definitely not on par in terms of the actual profit before tax figures.
Putting aside the profit margin for property development which is already relatively low compared with the other two industries, what are the other factors that are causing high property prices?
Many other underlying factors could be looked into in relation to the escalating property prices, instead of merely contemplating the issue as a market trend or as a result of developers’ profits.
The Government, property developers, home buyers, as well as NGOs (non-government organisations) will need to work together to identify the root causes of inadequate supply of affordable homes in Malaysia.
Let’s ponder this issue over the next few weeks and I welcome any suggestions and feedback to shed some light on it as I dwell further into this crucial topic in my next article.
● FIABCI Asia-Pacific chairman Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.
Source: The Star
Only 18% profit? Can you believe that?
the profit gain from land is not counted part of 18%.
LAND PROFIT IS EARNED BY LAND OWNER。。。。。
BELIEVE OR NOT， ITS UP TO INDIVIDUAL， IT WON’T AFFECT THE PROPERTY PRICES。。。。
DID YOU EVER ASKED WHY MILK POWDER PRICES KEEP INCREASING？
@People
Yes, inflation, but property price has increase 100% in last two years, why the profit margin still so low? If only 18%, then how IJM can build coastal highway and widen the road/make U turn road for FREE! ???
@Ah Dog
Not free – cost included in project account, become part of land cost, cause the reclaim rights is in exchange with the building of coastal road.
He was talking as from the developer’s view.
Sorry la. From what i heard from architect n contractor in property development, 18% is just too ….. The 18 number is nice though.
So our salary should go up!
not possible. trying to comfort purchasers.
Only 18% profit margin is delcared issit? Another 18% lari tax?
Buy from croney after mark up 18%. Total 36%. He! He!
The property price is very cheap la, you all need to learn how to menabung sejak kecil… That is why some people can buy RM25millions ring while this cheap property you all cannot buy. Start to teach you all kids to menabung from small.
i think the profit margin is still very good…otherwise, no new developer would want to go into this business…i think what the writer want to pass the message is that if the developer uses provide good qualities product the margin is much smaller than expected…
He should also mention this…50% profit in 4 months…
http://thestar.com.my/news/story.asp?file=/2012/7/21/north/11704392&sec=
and they are talking about selling only RM33psf to developer…& i believe now at Balik Pulau the landed house is easily >RM360psf (~22×70 land area)…. so what is the profit margin????
Based on my analysis:-
In fact, the margin should be increased on yearly basis as the land cost for developer is fixed (if the developer bought land since few years ago). However, the property price will increase in tandem with inflation or higher. Most of the time, land cost is the most costly part to developer.
So, do you think developer making more profit or investor?
The PBT margin (%) average is 22%.
Mahsing 20%
UEM Land 21%
SP Setia 19%
IJM Land 23%
Plenitude 38%
Tambun Indah 24%
Ivory 23%
Hunza 32%
Sources:
http://www.bursamalaysia.com/market/listed-companies/company-announcements/975221
http://www.bursamalaysia.com/market/listed-companies/company-announcements/956925
http://www.bursamalaysia.com/market/listed-companies/company-announcements/745300
http://www.bursamalaysia.com/market/listed-companies/company-announcements/1026713
http://www.bursamalaysia.com/market/listed-companies/company-announcements/918022
http://www.bursamalaysia.com/market/listed-companies/company-announcements/959005
http://www.bursamalaysia.com/market/listed-companies/company-announcements/962605
http://www.bursamalaysia.com/market/listed-companies/company-announcements/917496
The profit is RM1.5bil (from all developers above with average margin 22%)
@Unknown
are u sure land cost is the most costly part to developer? in this case, the land sold to developer only RM33psf, and what do you think the selling price of houses by developer later? Let take Mutiara Residence@balik pulau as example, RM550K for 22×70 = RM357psf….
http://thestar.com.my/news/story.asp?file=/2012/7/21/north/11704392&sec=
if you cant beat them, then join them…by buying their shares…at least you can profit from their profit..
even you buy their shares, they show you only earn “only 18%”. House price already increase 50% but do their share price also increase 50%? Mobile telecommunication companies keep reducing price on the mobile & data plan but still making 26% profit, and house price increase so much in short time and they want to tell us the profit margin is much lower???
You buy shares in the developer firms, they can still cheat you. They can manipulate it that certain projects are under a separate entity, only some of the projects go through the listed company, the best ones they can handle through private company
if the share price is RM3000 per lot but when they distribute dividend if 18% at par only RM180 per lot the profit margin you get only RM180/Rm3000 is only 6%
how many develper will give dividend base on their profit the most they will declare 10% or 5% if 10% only RM100 the % is 100/3000 only 3.3% if they declare 5% we only get 1.75%
less than our FD.
Most of the developer not declare dividend at all.
A lot of land which developer bought from Penang previous Government at a very cheap price
They even made profit from 100 to 300% why they never include the land profit to the project?
The 18% is profit is definitely too low cannot believe
If you zoom in the financial reports of all those property developers, their profit from property development alone (revenue – cost of property development ONLY) are consistently around 30% across year 2010 & 2011, though the property price has been increasing like hell since 2009. If we factor in other cost like admin, advertisement, finance cost etc, profit before tax of around 20% is quite true. Then the only thing that can explain the increasing property price is the proportional increase in construction material & labour cost etc. I wonder whether this is the case…
Construction materials cost only increase in single digit % in 2011:
http://www.dcd.com/pdf_files/1207trends.pdf
housing price increase 30% (typical condo price from RM300+psf to RM400+psf). And yet the land price doesn’t seems that high (only RM33psf at Balik Pulau- transacted in Jan2012), while houses about same location priced at ~RM350psf….and expect people to believe the profit margin is 18% only??? Do the employee of the developers also enjoy 30% pay rise in 2011 to justify the building cost increase accordingly?