Cut property prices please, Mr Developer

A property industry observer has demanded that developers cut their profits and lower property prices. This demand was made in an article featured in edgeprop.my.

The argument was mainly that in order to reduce the price of properties in the market, developers must be willing to cut their profit margins. “This is the only component of development costs that a developer can control,” the property industry observer told The Edge Malaysia.

The demand was made as many public-listed property developers are currently enjoying fat profit margins exceeding even 20%.

One example given was that of Ken Holdings Bhd that registered a net profit margin of 45.86% in its financial year ended Dec 31, 2017 (FY17) and 47% in the first half of its FY18.

It showed a net profit that almost doubled from 29.9% in FY16 due to the completion of Ken Rimba Condominium 1 in the Ken Rimba township of Seksyen 16, Shah Alam.

The article also quoted the recent news about Finance Minister Lim Guan Eng, urging developers to lower the prices of property after the Sales and Service Tax as exemptions from the tax on certain building services and materials were expected to reduce property development costs. He said if property prices remained high, the waiver may be reviewed.

Analysts however expect the exemption to only result in a 3% cost savings, an insufficient amount to rectify current imbalances in the property market.

“Developers are looking at cost savings of 1% to 3% from the tax exemption as some of the items are now taxed at a higher rate than under the previous tax system while others are exempted.

“It [affordability of homes] is a structural issue that cannot be solved just by giving tax exemptions on construction,” said an analyst at a local investment bank who covers property development companies. The full article appeared on edgeprop.my.

Image source: edgeprop.my

The image above shows some latest numbers from listed developers in Malaysia. Generally the profit margins are in double digits except for a few developers.

However, profit margins on an overall basis are not a good enough gauge on whether property developers should reduce prices.

Every buyer of course, would prefer if developers reduced their prices. However, buyers must understand that the profit margins stated are not based on a project by project basis but more of a period under review.

It may also not be a good reflection unless the developer is only a pure developer and has just one project and no other businesses.

Perhaps someone could study actual profit margins on a project basis for a much clearer understanding of the issue.

A high density affordable project for example may have a lower profit margin per unit but may still be contributing a substantial number to the company.

On the other hand, a smaller project may have a higher profit margin but this will not necessarily mean it can cover the losses from other less popular projects for example.

Hopefully more good news for the market will be coming soon.

This article first appeared in kopiandproperty.com

Charles Tan blogs at property investment site kopiandproperty. He dislikes property speculators and disagrees that renting is better than buying. He thinks it’s either property or poverty. He is presently the CEO of an auction house auctioning assets beyond just properties.