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High land costs may affect developers' profits: report

PropertyGuru

Increased land costs and falling home prices could hurt the profit margins of property developers in Singapore, while the intense competition for land hinders their ability to restock at a reasonable costs, a BNP Paribas report revealed.

In a report by The Straits Times, BNP Paribas analyst Chong Kang Ho noted that while this could slow down the growth of these developers, shares of listed property developers have taken into account the upcoming oversupply of private homeshelping maintain a stable outlook for the property sector.

The report, which analysed around 185 successful Government Land Sale bids between 2007 and September 2015, found that property developers have become more cautious with their bids.

In fact, this years margin bufferswhich is the difference between the plots development costs and the prevailing price of launches within the vicinityare generally above the mean, said Chong. A wider spread of bids for sites may be due to the growing uncertainty within the global economy. Thisimplies differing views among property developers.

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Nonetheless, the number of bids for every site tender increased from an average of seven in 2014 to 9.3 so far this year. This comes as more property developers try to restock their land banks.

Although winning bids softened in some areas, plum sites continue to attract more bidders. As such, a slower decline in land costs may hurt the profit margins of Singapore developers, particularly if prices within the primary sales market continue to fall.

According to Chongs estimates, the net margins of property developers sharply declined from its peak of 35.7 percent in 2009 to around 11.8 percent in 2014.

Given the increased competition for sites, even established Singapore developers struggled to restock their landbank.

Using Frasers Centrepoint and City Developments as proxies for developers, Chong said their success rate for securing land fell from 13 percent to 23 percent in 2010 to 2012, to 10 percent in 2013 and 2014, to zero so far this year, the report said.

This comes as these developers face intense competition from new players entering the land market, and eager to expand market share, such as foreign developers, boutique local developers and construction-related companies.

Nikki De Guzman, Editor atCommercialGuru, edited this story. To contact her about this or other stories emailnikki@propertyguru.com.sg.

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