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Property prices and developer’s profit margin

Posted in Property Penang

I read in facebook that even with all the new levies to cool down Penang property prices it will not do much because the major reason why the price went up is due to the costs. land costs, material costs, labour costs and also all the state requirements of Rm120,000 in lieu of low cost units etc. Some are however saying that the developers should not profit too much and should sell their properties at a lower price. Actually, we do not need to argue. Let’s look at the actual numbers as some of these bigger developers are also listed entities and their Annual Report is available for the public to see. We look at three which has exposure to the Penang property market; SP SETIA, IJM and MAH SING.

SP SETIA is listed in Bursa and its 2012 Annual Report showed a revenue of RM2.5 Billion versus its gross profit of RM567 million. This gives a gross profit margin of around 22%. This is already 20% better profit than 2011!  It simply means the margin for 2011 was even lower.

IJM Land for its 2013 Annual Report stated a revenue of RM1.25 Billion versus its gross profit of RM320 million. This gives it a gross profit margin of around 25.6%. This is also 10% better than 2012.

Mah Sing’s revenue for year 2012 is Rm1.775 Billion. It’s gross profit was RM315 million. This gives it a gross profit of just close to 18%.

Surprised that the margin is not that high? Actually, if you are a developer, after adding all the usual costs and you are paying around RM350psf in building costs would you build if you have a gross margin of just 18-22%? Bearing in mind, there might be delays which you cannot control. Sales might also be slow and you are able to sell just 70% of all your units which meant that you are suffering losses if your margin is just 22%! Do not be surprised. These are the typical margins for the developers unless they cut a lot of corners in their construction. This is because the land cost, material cost and the price that the developers can sell are also dependent on whether the market can pay for it. Thus, no developers would price it so high that they may not be able to sell majority of their units.

Do not speculate. Buy what you need and what you can afford and property investment is a good investment. Be greedy once, you may be lucky. Greedy all the time meant that your luck might just run out one day. 🙂

Added on 15 Dec. A reader said if crisis happens, prices would come down. I agree.

written on 14th dec 2013

Next suggested article: Property investment – too expensive, too far and too soon.

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4 Comments

  1. Hui Yi
    Hui Yi

    Agree!

    December 14, 2013
    |Reply
  2. Reel James
    Reel James

    Without having to go into details , i share my opinion that the two assertions above are oversimplified:

    1.” High prices are caused by increase in cost” – .In land economics that we study, all things being equal, demand dictates property prices not cost.As an extreme example for clarity purposes, if you build a beautiful mansion , or a high cost office building in the middle of nowhere, eg the Malayan jungle, the cost will be high but the property cannot be sold because there is no demand for it.Therefore the price is low even though cost may be high.

    2.On profits of listed company developers- We do not know what is their basis of calculating profit.Actually, the profit calculated above is based on Gross Development Value , ie total sales price of the development units.The right way to calculate profit should be based not on GDV (Sales Revenue) but on the capital outlay – I repeat capital outlay not the Sales Revenue.In this way the true return or profit is reflected, which will definitely be much higher than the figures calculated above.

    December 14, 2013
    |Reply
    • Thanks Reel. Love your explanation. Concise and good examples. 1) Agree. Nevertheless, as you know, speculation happens not due to real demand but due to some distortion in terms of what is perceived to be the future value. 2) Agree. It’s a simplified version based on actual revenue and gross profit. I do not think any analyst would know the actual % except for the company management themselves. The reports are based on quarterly or annually but the development may not be completed within that same financial year / quarter.

      I have to clarify that my article is not to support any developer but to let everyone know that prices will not suddenly come crashing down because land cost, material costs, labour costs, compliance costs are already there and cannot simply be reduced suddenly. Until today, there are still projects abandoned by developers despite it being launched and sales started. Reason being the sales % just do not go high enough for them to at least break-even and start the project while they continue selling. Except if the developer has deep pockets.

      December 15, 2013
      |Reply
  3. […] Personally, I do not agree that the rating would give much of an effect. The reason is because even today, for some ‘clever’ developers, they use price to entice buyers. For example, a similar project in the same area from two different developers are never priced the same. For many buyers, especially the first timers, price is a key consideration and thus, a 10% difference would help the smaller developer to sell faster too. Rating or no rating, smaller developers have always have to price their projects slightly lower anyway. If I am not first time buyer, then I would be willing to pay a premium for the more established and top 10 developers because I think buying from them meant my investment is safe and chances of them running away is virtually none. Looking at the typical net margins, you would see that there are still rooms for developers to play with prices. Read here: Property prices and developer’s profit margin […]

    October 23, 2014
    |Reply

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