Construction

Continues from: On IBS as the way to reduce cost

‘Every stakeholder has to play his or her part, not just developers’

Chong: We really need help from the government to reduce cost and prices. The government should be clear about the purpose of doing certain things, like, asking us to build more low-cost houses in Johor Bahru, but these houses were not welcomed by the locals. Hence, the government should review the measure and reduce the number of units to be built.

Soam: We hope state governments would be more caring and try to solve the problem of people who do not want to live in low-cost units especially the small-sized ones. In Negeri Sembilan, the state government asked developers to build affordable units with built-ups of 800 sq ft as they realised that the small 650 sq ft units were not welcomed by the public. So it makes more sense to both the government and the buyers to have bigger units.

Tan: If the government manages to help the lower income group get rid of poverty and live in better houses, these people will be more optimistic about their future in the long run.

Soam: We are also asking the government not to impose anymore new development conditions on developers given the current challenging environment. There are already a lot of conditions being imposed. For developers, the average net sellable area of their projects is now about 15% to 20% lower than 15 years ago. At that time, we could build 12 to 13 units of terraced houses per acre, but now the number is smaller, so our net sellable area has been reduced. Land input cost has increased.

Furthermore, compliance cost has risen as well, which adds to the cost of doing business. Compliance cost includes contribution to the infrastructure construction fund, road works fund and other tax contribution. In my opinion, the most important thing is to keep the cost of doing business low, given such challenging times.

Rick ChengCheng: In Kedah, to build a single storey terraced house, the percentage of compliance cost used to account for only 5% of construction cost in 2008. But this has increased to 13% this year. For these terraced houses, the compliance cost per unit is about RM20,000 today. On top of a hike in construction cost, this is about 546% higher than in 2008.

Tan: In urban areas in the Klang Valley, the percentage of compliance cost in a property development can reach 20% to 25%.

Soam: Actually, the government knows about the surge in compliance cost. We are trying to ask the federal government to address this issue and for the National Land Council and National Housing Council to standardise the cost in each state.

Zulkifly: Everyone is saying that house prices are high, but pricing comes from the cost, and the first thing you need to understand, especially the authorities, is about the cost structure and how it leads to pricing. Normally, half of the selling price of a property goes to construction cost, and we haven’t yet factored in the costly compliance cost.

Chong: Everybody thinks that developers are making a lot of money, but they don’t know that some of us are not doing well too. Developers are the only ones who have to subsidise the development of low-cost or affordable homes. If all sectors in Malaysia and not just the developers hold hands and contribute towards a fund for the development of affordable housing, I think prices will come down.

Tan: In many cases, the buyers actually make more money than the developer. We will be happy if we can get 10% of the margin but some buyers can easily flip and get a 20% gain.

Soam: Ultimately, as a developer, we are here to make money for ourselves and pay our taxes, so that the government can take our taxes to do social housing. However, if you look at some of the listed property development companies, you can check their profit margins and compare that with companies in other industries. Are we really making obscene profits? I don’t think so, we are not making the kind of profits that the banks are making. So the question is, why only single out developers to do all these social work? The banks, for instance, should be responsible as well.

Zulkifly: The government’s intention to bring property prices down is good, but the focus has been on the developers only instead of all the stakeholders. If we really want to bring house prices down, every stakeholder has to play his or her part, not just developers.

Cheng: If you look at the historical data that we have, compliance cost has been increasing every year, on existing items as well as fees imposed on new items. So it is impossible to see property prices dropping in the near future.

In a nutshell, we won’t be able to bring property prices down because of compliance cost, labour cost and many other reasons, including the efficiency of government departments. For instance, if you want to obtain approvals for a property development, it could take two to three years, and all this waiting time is cost for us.

Tan: The gestation period [to develop a project] is very long. From the time the developer sources for the land until project completion, it will take around eight years, and we just make a 10% profit margin. Don’t forget that we are subject to risks and inflation as well.

Zulkifly GaribZulkifly: Actually, it is possible to bring prices down if everybody plays his or her part.

Soam: According to the Securities Commission Malaysia (SC), in order for a property development company to be publicly listed, one of the conditions is the company must have a 15% profit margin. If you fail to comply with this requirement, the SC will not approve the application as they think this company is not viable. However, it takes at least five years for us to develop one acre of land, and that is considered very fast already, so it is very difficult to get a 15% margin in a short period.

Cheng: There are so many costs involved in property development. For example, we need to fork out RM100,000 to RM200,000 to build electric sub-stations on our land for Tenaga Nasional Bhd in order to get electricity supply for our project.

Actually, when we fund such infrastructure cost, it is subsidised by the purchaser. That is why house prices are increasing.

Over the last 20 years, we have built 100,000 units of low-cost houses in Kedah, but with the cost getting higher, we have to increase the price of other higher-end housing, but then we get blamed by the government for raising house prices. In addition, the price for these low-cost houses has been fixed at RM42,000 to RM45,000 from 15 years ago and it has not been adjusted since then.

Soam: Construction cost was only RM50 to RM60 psf 15 years ago, but today it has gone up 2½ to 3 times to RM150 psf, but we still see prices of low-cost homes being maintained at the RM42,000 level. Land price has also increased 3 to 4 times in the last 15 years.

Chong: I think the authorities should understand all these issues and try to bring the cost down. Look at all stakeholders instead of just focusing on a certain segment, I think this is the most important thing now.

Soam: All stakeholders, from the government to the private sector, should gather to discuss how to reduce cost. However, we also know that the country is facing the challenge of dropping oil prices, so it is probably not the right time for us to ask for this.

The federal government should also be aware that some B40 people are not able to afford any property. What this group of people really need is to rent houses instead.

Cheng: The stamp duty for buying property worth more than RM1 million will increase to 4% from 3% effective Jan 1, 2018. This will push up the cost of doing business also. In 2018, if we buy a commercial property worth RM1 million, it will be subject to 6% GST and 4% stamp duty charge. Let’s say we’re buying a commercial property of over RM1 million, we have to pay 10% in taxes. The cost of doing business has increased.

Tan: It has been reported that not enough has been done to curb speculation. There’s no speculation in the market now. Speculators are all dead. The market is trending down. Who dares to speculate now? I think that the stamp duty shouldn’t be raised.

Continues on: On ways to lift the market

This story first appeared in TheEdgeProperty.com pullout on Oct 28, 2016, which comes with The Edge Financial Daily every Friday. Download TheEdgeProperty.com pullout here for free.

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