Pricing Properties and Construction Costs

Real Estate and Housing Developers’ Association (Rehda) deputy president Datuk N K Tong said the latest survey conducted by the association showed that some developers expect housing prices to rise with increased construction costs. Respondents in the survey expect construction costs to surge on average of 19% in 2022 due to rise in prices of building materials, wages and financing costs. However, Tong said it is challenging for property developers to raise their property prices.

Additionally, Rehda vice president Zaini Yusoff noted that increasing property prices for future launches will be a difficult task for developers as this may curb housing demand. He also warned that the costs will rise further in view of the current inflationary environment.

Source: https://www.propertyguru.com.my 

Respondents to Rehda’s Property Industry Survey for the second half of 2021 (2H21) revealed that 79% of respondents remarked that overall cost of doing business had increased by up to 18% in 2021, the highest over the past five years. The average cost of doing business was up 8% in 2017 and steadily rose to 11% in 2020. To reduce operation costs, the respondents said they will freeze new recruitment, give less benefit/perks as well as undertake salary reduction. They will also reschedule the launching of planned projects, reduce the scale of launches and delay some projects. Additionally, 49% of the respondents stated they are not launching any property in 1H22, with most citing unfavourable market conditions (29%) and being affected by Covid-19/movement control order (26%) as the top reasons. 

Another 51% of the respondents said they are planning to launch projects in 1H22, totalling 24,557 units comprising 17,969 strata residential units, 5,997 landed residential units and 591 commercial units. Of those with planned launches, 77% of them were anticipating their sales performance to be 50% and below for 1H22. Most states aimed to launch residential units within the RM250,001 and RM500,000 price range. Johor, Selangor and Penang, on the other hand, will have mostly units priced between RM500,001 and RM700,000 in their 2022 offerings. Meanwhile, 96% of the respondents reported they will be affected by the current economic scenario, with the top three components affecting cash flow being material and labour costs, compliance costs as well as financing and land costs. Overall, the outlook for 2022 is largely neutral, but respondents are more optimistic for 2H22.

The other factor not mentioned is whether financing and financing cost remain unchanged. Access to finance for some potential buyers may be curtailed because of economic conditions. In addition, rise in OPR is envisaged in 2022, which will raise financing costs for purchasers.

What can the Government do? Labour cost need to be reduced with more automation/robotics; material cost could be reduced with alternatives; and land cost could be controlled by releasing agricultural land (or others) from Government ownership to developers at reasonable rates. The ultimate is always supply exceeds demand to curb prices. Is that possible?

Reference:

Rehda: Developers face balancing act in pricing properties as construction costs expected to spike 19%, Justin Lim, theedgearkets.com, 16March 2022