I have a small group of colleagues whom I lunch with on and off and the topic is usually property. One thing we have in common is our dislike for rebate. Why must the developer give huge rebates? Well, if it is due to the current slowdown and they are able to give rebates, does that mean the launch price too high? If they are able to offer a HUGE rebate, should we not wonder if they have a huge profit margin? If they do not have a huge profit margin, should we not worry about the quality then if they actually cut the price through offering huge rebates? I was walking past one developer in Ipoh Parade yesterday I heard one sales person telling the prospective buyer that the rebate is up to 20 percent! Huh?
I do not think any developer would start construction unless they have a healthy gross margin. The reason is very simply. From land acquisition to key handover, it is easily 4 years. Thus, even assuming that they have a 30% gross margin, the ROI per year remains to be low. The only thing in their favour is that the actual profit in number is huge. Assuming a RM500 million gross development project and a 30% gross margin, then their gross margin can be RM150 million which is very attractive since not many developers would have RM500 million cash in the first place to earn such a profit.
The typical net profit margins of the listed companies are also publicly announced and it’s definitely much lower. It does not change a lot. Read here for some of them: Developers and their profit margins, recent updates, Sept 2014 Be wary with any rebates which are double digits percentage in nature. Sometimes, the developer do offer some sweetener such as Angpow during Chinese New Year or even a small rebate and I think this is quite normal especially under current slowdown. However, anything significant needs further checking. Perhaps versus the property prices in the surrounding areas etc. Be careful and buy based on what you need and not what the sales person tells you. They are paid to sell but if you simply buy, you will have to pay for it for a very long time.
written on 22 Sept 2015
Next suggested article: Need more profits? Just become a developer