Focus on Affordable Homes May cause Developers to See Less Profit in 2018

26 Dec 2017

Experts believe that home builders will continue to struggle with low-profit margins next year due to rising construction cost and the shift towards selling low-cost houses.

“Affordable housing will continue to be the theme next year. Developers will get lower margins from this segment. But if they cannot sell properties at a higher price, they will have to follow the demand,” said Hong Leong Investment Bank Research (HLIB Research) Property Analyst Lee Meng Horng.

This is because the appetite for dwellings costing above RM1 million is expected to remain weak in 2018. As such, property developers need to shift their focus on residences priced below RM800,000 as demand for this type of housing remains healthy.

This is further bad news as the gross profit margins of nine major property developers in Malaysia have already fallen from 29 percent in 2013 to 24 percent in the year ended 30 June 2017, given the rising cost of land, labour and construction.

The nine major home builders whose profit margins were analysed comprised MKH Bhd, SP Setia, UEM Sunrise, KSL Holdings, Tropicana Corp, Mah Sing Group, LBS Bina Group and UOA Development, as well as Eastern & Oriental Group.

To cope with the low-margin environment, Kenanga Investment Bank Analyst Sarah Lim urged property developers to cut internal costs and improve efficiency by adopting new construction methods like the industrialised building system (IBS).

“As profit margins erode over time, developers need to seriously consider greater adoption of IBS. It may be more expensive in the short term, but it will definitely increase productivity in the long run.”

Meanwhile, Lim said the uncertainty over Putrajaya’s freeze order on new luxury properties costing over RM1 million has negatively affected sentiment in the real estate market.


Image sourced from Office Parrot.


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