Thursday, June 30, 2011

Profit margins for DBSS developers 'look high'

(SINGAPORE) Developers can make gross profit margins of up to 76 per cent from the public housing projects they develop under HDB's design, build and sell scheme (DBSS), data compiled by BT shows.
Five out of the seven DBSS projects launched since 2008 earned their developers gross profit margins of at least 28 per cent, BT estimates.

This is comparable to the 30-40 per cent gross profit margins that property groups can earn when they develop private mass-market projects.

But in some cases, DBSS margins were even higher. Sim Lian Group, for example, stands to make a gross profit margin of around 76 per cent from its recently launched Centrale 8 in Tampines - even after it announced prices that were lower than previously indicated.

In absolute terms, Hoi Hup Sunway reaped the highest gross profit for its 1,203-unit The Peak @ Toa Payoh - netting some $257 million in all.

On the other extreme were Sim Lian Group's 360-unit Parc Lumiere in Simei, and Qingdao Construction's 480-unit Natura Loft at Bishan, which earned the developers $45 million and $48 million respectively.

BT added the land cost and the building cost - using a generous construction cost estimate of $200 per square foot per plot ratio (psf ppr) - in order to calculate the total development cost for each project and arrive at the breakeven price. Industry watchers said that the construction cost could be as low as $160 psf ppr in some cases.

But the back-of-the-envelope calculations do not take into account expenses such as finance, marketing and administration.

The estimated total development cost was then matched against total sales revenue. For this, BT first took the average of the lowest and highest prices for each type of unit - three, four, or five-room flats - in a project, then multiplied the average cost of each type of flat by the total number of such flats available in the development.

Some of the projects still have unsold units, industry players said - although the numbers are not significant.

Analysts said that the profit margins look high. But they pointed out that since developers do not need to take 'public interest' in account, they will price the flats as high as possible.

'I am surprised that the margins are so high,' said International Property Advisor chief executive Ku Swee Yong. 'All the more reason for us to re-examine the raison d'etre for DBSS in view of the need for a massive supply of affordable flats to satisfy the past five years of pent-up demand.'

PropNex chief executive Mohamed Ismail Gafoor noted that private developers have a duty to their shareholders to maximise profit margins. 'So, I think the fundamental issue concerns HDB, which actually provides the opportunity for private developers to make this money.'

In particular, not having a check on DBSS flat prices skews the market, he said.

The DBSS scheme was first introduced by the government in 2005 to provide a more upmarket option for buyers as compared to basic build-to-order (BTO) flats, which are sold directly by HDB.

But DBSS flats are also supposed to be a more modest option compared to executive condominium (EC) units, at least in theory, Mr Mohamed Ismail said. This is because eligibility, ownership and resale restrictions for public housing cease to apply for ECs after 10 years - effectively making them private homes.

At Centrale 8 in Tampines, flats were initially priced at up to $750 psf - a price tag more commonly seen for private condominiums and higher than for most EC projects.

This contravenes the government's aim to provide various types of homes - from the most affordable BTO flats, to DBSS flats, then EC units and then finally private homes - for homeseekers with varying levels of financial clout, Mr Mohamed Ismail said.

Analysts have noted that the price gap between DBSS and EC units has narrowed in recent years.

Nicholas Mak, head of research at SLP International, noted that in addition to giving homebuyers more options, the DBSS scheme was also mooted to give private developers a slice of the public housing market (since the property market was in the doldrums six years ago) and also to allow for more innovative building and design for HDB projects.

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