Lately, there have been many ongoing discussions on the topic of high property prices. It made me ponder on the various causes that might have contributed to the situation, including the question of whether developers are making too much.
As I took a sip of tea, many thoughts came to mind which I found interesting and worth sharing before we dwell further into the real factors of rising property prices.
Based on annual reports of three major property developers in Malaysia, namely SP Setia, UEM Land Holdings and Mah Sing Group, they are generating an average of 18% profit margin from their projects, and at the same time incurring a staff cost of about 7% of their total revenue.
These companies are major developers in mass residential properties which have high sales turnover, and therefore a good reflection of the average developers' profit margin in the residential market.
These findings may contrast with people's perception of the profitability of the property development industry.
Though it may sound like a fantasy, assuming I could convince these three property developers to give back their entire profit to their customers, it would mean an average of 18% discount on property prices for the year in question.
This would seem like a fantastic bonanza for the buyers of the properties in question. But would a 18% discount really make these properties affordable? I would imagine that people will still find these properties expensive.
Let's take an example of a terrace house that costs RM700,000 in Petaling Jaya. It would be priced at RM574,000 after the 18% discount.
If a home buyer is able to secure a 90% loan with a maximum repayment period of 30 years, the monthly loan instalment for RM700,000 and RM574,000 would be RM3,081 and RM2,526 respectively (based on a BLR-2.4% loan package with current BLR at 6.6% per annum).
From the above example, while the discount may seem substantial at absolute price, it is not significant in terms of monthly loan instalment for home buyers.
The debt commitment level for the latter is still considered high and out of reach for most people especially those who have just started their career.
Now, let's take a hypothetical scenario that the property developers decide to make their staff work for free that year.
It would mean another 7% discount to customers after deducting staff cost. Even with this total discount of 25%, property prices in many areas would still be considered unaffordable to many.
Anyhow, back to reality, it is impossible for any commercial enterprise to work for free or give up its profit if it was to run a sustainable business, as well as to satisfy its shareholders' expectations.
For the property development industry which has a product life cycle of four to six years (starting from land acquisition to handover of keys to customers), it is a challenge to further compress the profit margin after taking into account the risk and inflationary factors involved in such a long product life cycle.
Let us look at other industries as a comparison and review their profit margins.
For the banking industry, the three largest local banks that were selected are Maybank, CIMB and Public Bank. Likewise, the three major players from the mobile telecommunication services were Axiata, Maxis and Digi.
The results showed that the average profit margin for the banking industry is 35%, while the mobile telecommunication industry is enjoying an average profit margin of 26%. So, back to my question “are developers in Malaysia really making too much?”
Compared with the average profit margin of the banking and telecommunication industries, the profit margins of property development companies are significantly lower and definitely not on par in terms of the actual profit before tax figures.
Putting aside the profit margin for property development which is already relatively low compared with the other two industries, what are the other factors that are causing high property prices?
Many other underlying factors could be looked into in relation to the escalating property prices, instead of merely contemplating the issue as a market trend or as a result of developers' profits.
The Government, property developers, home buyers, as well as NGOs (non-government organisations) will need to work together to identify the root causes of inadequate supply of affordable homes in Malaysia.
Let's ponder this issue over the next few weeks and I welcome any suggestions and feedback to shed some light on it as I dwell further into this crucial topic in my next article.
● FIABCI Asia-Pacific chairman Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com - By Datuk Alan Tong (The Star)
11 comments
Datuk, does it mean that the cost of fund in the entire supply chain is the one causing escalation in price? Banks (the licensed tai-e-loong) have been charging interest in every stage, right from land acquisition, to development (to developers and the contractors), and then to the end purchasers like us.
While everyone is now talking about escalation in BLR, will that further escalate the property price?
What about the up and coming implementation of GST?
i don't think banks make a lot from the chain either. banks charge 4.2% for home loan, pay their fixed deposit holders 3.2%, that's 1% profit, or 23% (1%/4.2%)margin b4 anything else. the 35% margin in the banks' annual report could be from other biz eg. investment, fees, forex, etc.
i think it's the investors that make more, the investors or sellers of the land.
also, i think we got to look at public listed developers and private developers as the biz models are different.
Also the agents/brokers quitely make much more nowadays. They got the biggest increase in earning. A house was RM 40K 30 years ago and now is RM 800K, 2% commission now is RM 16,000 compared to RM 800.00 20 years ago. These are the people who got increase in earning up to 1,900 %, who else can get such huge increase ?
It depends how you look at it.
Just use BLR as a comparison.
During 1976 to 1999 BLR fluctuates between 8.50% to 12.75% without BLR-x.xx package. During this time property prices were not sky rocket and not gradually increasing more than 10% a year.
From 2000 onwards BLR has steadily fluctuates 5.50% to 6.60% with BLR-x.xx package. Property prices are sky rocket and gradually increasing 10% a year.
Given the world economy outlook and Malaysia heavily subsidizing on O&G to the rakyat time will tell when BLR will increase. If BLR increase by 1% to 2% we will see fundamentals property stay strong but the rest where most speculator are holding surely will sell at a ridiculous price just to let go the property.
You can choose which you believe. If we are heading towards higher nation income you can know what is the answer.
Hi Rafael,
If we are moving towards higher nation income, then what is the answer?
For a noob person like me in finance/properties, i really don't understand what the answer could possibly be.
thanks.
I sincerely think that Datuk misled people through this analysis which sided the developers. Most people go into business to "minimize" tax. Thus 18% profit is not true representative of the profit as most are expensed out creatively. We need to go back to basics. Look at how median income for a fresh graduate, senior exec, manager and analyse the affordability accordingly. The MAIN question is how long does a person need to enslave himself/herself to pay off a decent home???????
Hi Andy,
You have a point. Example in Penang in 2005 when I started working fresh engineer salary a month average RM2500 and today 2012 still the same. Looking at the 2012 price of car, property, credit card interest, roti canai, petrol and etc is it still the same?
If we take Melborune the property within CBD cost AUS$360k for 550 sqft. Standard labour are paid AUS$15.00 per hour works 8 hours a day. If you take 8 hours a day for 6 days and for a month = AUS$2880 but weekly tax around ~ 15%. Their BLR fluctuates ~ 7% for the pass 2 years.
In Malaysia you work McD you will get paid RM900 basic plus OT probably RM500 more but 12 hours a day for like 6 days work a week for a month.
Andy
I agreed with you there are mainly misleading and speculative analysis. developers are speculators themselves one way or another and make money after causing the house price sky rocketed.This money made is not declared in the company but goes into individual pocket. No matter how many new lauching, the good units are always sold before lauching and you can who actually snatched them.
Since escalating property price is affecting every body, we will see how the government handles this in the coming budget. With regards to one vote per person, developers, speculators, investors are minority numbers. Majority of people are affected by the escalating price and paying unnecessary excessive debt. If the coming budget does not favour the majority, then the majority should know what to do with your vote to change for the better
Rafael
I tried very hard to understand what you mean by 2005 & 2012 is still the same, what do you actually mean ?
Are you telling there is not much increase in term of salary but the price of every thing else will always incease exponetially ?
If this is the case, do we face the same crisis one day like what is happening in US & Europe ?
Of course Malaysia will be the 1st Asian nation like Greece if the trend of big Government spending continues. We are already in the red.
I hate to bring politics here. But the escalating cost of living is the doing of the current Barisan Government. We pay too much taxes for what we get in return. Everything is privatised by UMNO by Mahathir reign. To have our own national car we all pay heavily on foreign car taxes, electric charges goes up and now water(even it is now undrinkable unlike 50 years ago). Most of these taxes do not go back to the public but into connected UMNO pockets.
Time for change!
Most of the time I feel sad on how our tax monies being channelled. Do you really think they are really sincere in giving out $ to those old folks/ students in need? It's all about buying people heart/votes. I would rather have my tax monies go to support charity organization every month.