Developer profit margins fall significantly: study

Profit margins of new leasehold condominium launches in 2014 have fallen by more than 50 percent from 2013 and 2012, according to a Knight Frank study reported in the media.

In 2012, developers posted an average minimum margin of 14.4 percent, while the average maximum margin stood at 22.2 percent. By 2013, the margins were between 15.6 percent and 22.5 percent, but this year the margins have fallen to 5.0 percent and 10.3 percent.

This year’s average take-up rate also dropped to 32.3 percent from 67.2 percent in 2013 and 96.9 percent the year before.

Moving forward, further margin reductions are expected if developers continue to cut prices of units amid rising construction and financing costs, said Alice Tan, Research Head at Knight Frank Singapore.

In agreement, Savills’ Alan Cheong added: “It is not just an issue of margins but also the pace of sales. If the pace of sales is slow, the developer needs a higher margin because it cannot use the sales proceeds to fund the development.”

Knight Frank’s study looked at 99-year leasehold sites acquired through the Government Land Sales (GLS) Programme in the last two years. It involved a total of 24 condo launches, of which four were unveiled this year, 12 last year and eight in 2012. They are all situated outside the Core Central Region (CCR).

As for the computation, the margin estimates took into account different cost factors like condominium type, a project’s gross development value (GDV) and the average transacted prices based on URA data from 2012 to July 2014.

The study focused solely on GLS sites due to their price transparency and good demand. The development costs of such sites are also more predictable than those which are bought privately, as the latter considers other costs such as legal liabilities, development charges and brokerage fees, noted Tan.

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