Developer margins shrinking amid cost concerns

PETALING JAYA: The Real Estate and Housing Developers’ Association Malaysia (Rehda) says property developers’ margins are shrinking, and are now at around 15%.

Rehda Institute chairman Datuk Jeffrey Ng said this has been the case in recent years because of rising costs especially compliance costs with regards to property projects which are seeing profit margins being squeezed.

“It is idealistic to talk about house prices coming down. If property developers’ profit margins are very high then the developers can absorb some of these costs for house prices to be contained.

“But in reality this is not the case,” Ng said in a statement at the launch of the Housing Forward Understanding Costs and Sustainable Prices research book yesterday.

“If you take an average of 15% margins, and it takes a project excluding townships of an average of three years to build – developer margins are at 5% to 7.5% per annum. These margins are not worth the risk that the developers are taking,” he added.

According to the research book, generally a feasible property development should provide investors with a return of between 15% to 20%.

A housing development spans over a minimum of five to six years from the first ringgit invested for land purchase to the closing of a project account, it noted.

“By industry practice, a 15% to 20% margin on such high risks and capital-intensive investment is fair as it gives a buffer against various risk factors and is acceptable to financial institutions for funding purposes,” Rehda Institute said in its report.

Notably, compliance costs, which are necessary costs that are associated with a particular property project that are paid to the authorities such as the local, state and federal government, are higher than the developers’ margins now.

“This is one area that few people talk about and the authorities do play a significant impact.

“If we can mitigate compliance cost impact – then there is a higher chance that house prices can be kept at a sustainable level in terms of price as other costs such as labour costs with the recent minimum wage hike are rising,” Ng said.

Meanwhile, he also highlighted that there should be an orderly and planned way to release the bumiputra units that are still unsold after many years.

“The number of bumiputra units’ unsold stocks are huge – this is in the report.

“There should be an orderly way to release this in a very transparent way back to the developer so it can be resold again on the market as these are currently unproductive stocks and it adds on to our costs.

“We can follow the (bumiputra) policy, but not at the expense of having the units being unproductive to the developer,” Ng said.

Rehda Institute in its survey found that some 30% of unreleased and unsold bumiputra units are five years or older.

“These are usually stuck at the state or local authorities. The release mechanism is not transparent.

“If you think about it logically, the holding costs are not borne by the developers – but these costs are borne by future property buyers as we have to make it up from somewhere else (to balance the finances),” Rehda Malaysia’s acting president Datuk N K Tong said.

He said that with the resources the government has access to, they should fund the affordable housing projects for the B40 group.

https://www.thestar.com.my/business/business-news/2022/03/25/developer-margins-shrinking-amid-cost-concerns