Land cost of 13% vs GDV? Higher flexibility for property prices

Last week, GAMUDA announced that it’s wholly-owned subsidiary, Setara Hati Sdn Bhd is in progress of acquiring a piece of 257.2 acre leasehold land in Tanjong 12, Kuala Langat. Total acquisition cost is RM392.2 million. For those who has not been following land acquisitions, this is considered quite a huge number, both the land size and the price of land. The reason is also because GAMUDA is considered a big developer and not the average ones. I did not write about it as I feel that there’s no new knowledge for my readers. This week however, the new announcement gives a very good knowledge of land cost versus gross development value (GDV) in Malaysia, today. It is said that the GDV is expected to be RM3 billion over a period of 20 years. In percentage terms this is around 13%. What does 13% mean to the GDV? Well, one thing is for sure, the developer has more flexibility in pricing of the properties it is developing.
Reason for this? Well, in some countries, the land cost can be 40% or even as high as 60%. Yes, in Singapore, the land cost vs GDV can be 60%. In other words, should the market plummets when the developer is ready to build, that developer may be building for free or else they have to pay interest for that piece of land and not do anything until the market recovers. If the construction costs are assumed to be almost the same except for the exchange rate, it meant that GAMUDA has much higher flexibility in the pricing of its projects compared to the developers in Singapore which may have a land cost of 60%. Oh yeah, the number has been increasing over the years. You may want to see Mah Sing’s land cost vs GDV here: Cost of Land increasing vs GDV It has shown an increasing trend of the land cost vs GDV.
Of course, do note that the GDV numbers may continue to increase because the property prices that the developers can price them would definitely be on an increasing trend too. In other words, the 13% land cost vs GDV for GAMUDA’s piece of land would be lower by the time they reach the year 10 of their development etc. Unless of course a financial crisis happen, then perhaps the property prices may go down etc but otherwise, 13% is a very good number indeed for land cost.
This brings us to a question. If it is indeed that good, then it’s best to be a developer in Malaysia than in Singapore or other developed markets, right? Haha. Yes, given a choice of developing in the Klang Valley vs Singapore, I think majority of all developers may choose to develop here. This is more so for the smaller ones because it’s quite impossible for them to buy the land in Singapore because it is in SGD which meant even the land cost itself is prohibitive. However, imagine this, for the same amount of work over 3 or 4 years, your earnings would be in SGD instead of RM. If you are a listed entity, your profits once converted back into RM meant a huge jump, easily even if the the investment is higher as well. That’s why there are still many Malaysian developers developing out of Malaysia including Singapore, Australia and even Battersea in London. Happy buying and knowing.
written on 3 Dec 2014
Next suggested article: Property Investment and the decisions we can make or delay