I always smile whenever I read about non-developer listed companies announcing to the world that they are going to do property development. It will help to increase their profits. Truthfully, what happened to their core business? Why is the core business not doing as well nowadays? Is it because they are no longer competitive in that business that got them listed in the first place? OR is it simply because property development is EXTREMELY profitable?
Speaking about EXTREMELY profitable, the results from majority of all listed developers indicated that the actual net profit margin is only in the range of 10% – 20%. Anything higher is normally due to some special circumstances. For these newer developers, I am not sure if they can earn much higher than these more established developers. Without a great brand to begin with, premium pricing is out. Without a huge GDV, they are also likely to engage contractors who did not get businesses from the bigger developers. More often than not, higher costs to be incurred. In fact, everything points to much higher costs because they even have to hire a new team for this new property development venture.
Suddenly it does not seem like something worth doing, right? Haha. Answer is wrong. Let’s look at Gross Development Value (GDV) versus the margin of say, 15%. Assuming the developer is doing just a small project of 400 units of affordable condos at RM400,000 each. That would be RM160 million GDV, giving a profit margin of RM24 million. Many of these companies that are venturing out of their usual core business may not have such profit numbers. Thus, RM24 million may seem little for the existing developers but it is a logical step for these companies.
In fact, more often that not, the land that they are developing happened to be a piece of idle land in a very attractive location. Thus, the potential profits is much higher than the above because the land cost is very low when compared to buying pieces of lands today. Happy learning and understanding why many are jumping onto the bandwagon of becoming a developer.
written on 19 June 2015
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