Friday, March 16, 2012

Developers' bids signal likely dip in home prices

Straits Times: Tue, Mar 13
DEVELOPERS here are becoming more cautious with how much money they are willing to pay for private home sites.


They seem to be getting more worried that private home prices could fall, perhaps by up to 8 per cent this year, according to a new research report.


So they have to factor the potentially lower prices of the homes into their sums when deciding how much to offer for a plot on sale.


The BNP Paribas research report analysed about 100 government land sale bids since 2007 up until last month.


When developers look at how much to bid for a site, they consider the likely 'break-even' figure. That is, how much they would have to pay for the project, taking into account the cost of building the condo and various other finance, marketing and administration costs.


Then, of course, they add a bit on top to make it worth their while, in terms of profits - which means they would offer less for the land than break-even.


The report said developers were lowering the figure they are willing to pay for land, as they can no longer feel sure that prevailing home prices will hold up by the time they are likely to sell the project.


Starting in mid-2011, the difference between the expected break-even price and current selling prices started to widen to 19.8 per cent, well above the mean of 12.1 per cent, the report said.


The mean of 12.1 per cent would tend to represent the profit margin developers have been achieving, on average.


This difference of about 8 percentage points is likely to represent developers' efforts to guard against the possibility of future average selling prices heading south...

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