Cost of Land increasing vs GDV

These days, every time we hear of new launchings in a popular area, the prices goes up. The developers said this is because of the cost of materials, labour, land and even compliance costs. The buyers said the developers are trying to maximise the profits they could. The government introduced cooling measures to deter speculators. Today, let’s see whether what the developers said is true, at least partially true. The cost of land. For any development to proceed, developers needs to buy the land that the property is to be built on.
If we look at Mah Sing’s land purchase since 2012 versus the estimated GDV, you can see a trend. A trend of increasing land cost. From their first purchase where the land cost is only 6.3% of GDV, it has been rising and their most latest purchase showed that the cost of land is now 13%. In other words, the land cost has doubled within just less than 2 years. In Singapore, Donald Han, managing director of the Singapore unit of Chesterton Singapore Pte said, ‘The increase in land prices has had a tremendous impact on developers’ profit margins. Developers that used to enjoy margins in excess of 20 percent will now have to contend with narrower returns.”
I remember over a year ago, REHDA Penang’s chairman, Dato Jerry said in a public presentation that the land prices in Penang has risen so fast that it was already two years faster than what it should be and that’s giving huge pressure to the developers which is not having an easy time. For land prices to drop, the whole property market must drop first, at least for 2 years or more. If this happens, then the land prices would drop.
If you ask the developers if they would prefer for this to happen versus land prices continue to go up from current level, I think the answer is clear, they’d choose the latter. At least they can still build even smaller units to make it affordable enough to sell. If we think of Penang island as the next Singapore within the next decade, I think we can safely conclude that ‘buying property in Penang’ is likely to be harder in terms of affordability. Land costs are going to continue to increase versus GDV.
written on 10 May 2014
Next suggested article: How to spot property bubble?