http://www.businesstimes.com.sg/arch...rgins-20140312

Published March 12, 2014

Better methods unlikely to hit developers' margins

Higher costs may be encountered in the short term for selected GLS sites

By Lynette Khoo [email protected]


[SINGAPORE] Costs may creep up for developers in the short run as they adopt productive technologies for selected Government Land Sale (GLS) sites but margins should still be protected, some analysts say.

"We believe margins will not be compromised," said Regina Lim, head of Singapore equity research and Asean property research at Standard Chartered. "As more developers adopt prefab components, costs could decline with economies of scale."

Developers are also expected to rein in land bids in anticipation of higher construction costs due to the latest requirements.

There will be switching costs for construction companies from technology and manpower upgrades and these will be passed on to developers through their tender pricing, noted DBS Group Research analyst Alfie Yeo.

Under new government measures meted out on Monday, developers have to adopt productive technologies for selected GLS sites from the second half of this year. The use of prefabricated bathroom units will also be mandated for all residential GLS sites; a minimum level of prefabrication will be required for industrial GLS sites.

There are only 10 to 12 major precast players in Singapore. Given the expected demand, precast costs will probably spike up in the near term, even though some manufacturers such as Tiong Seng and Koh Brothers unit G&W are ramping up production.

Koh Brothers, a construction company cum developer, set up a new precast facility in Iskandar in Malaysia late last year, doubling its production capacity from 75,000 cubic metres to 150,000 cubic metres. Its other three precast plants are located in Singapore. Managing director and group CEO Francis Koh said the company mainly supplies to other companies, while using 10-15 per cent of its precasts internally.

Separately, main contractor Logistics Holdings has joined the fray by setting up its first precast plant in Iskandar in a joint venture, to serve its residential and commercial projects in Singapore.

Land cost typically forms the bulk of development costs with construction costs accounting for the remaining 30 per cent - of which concrete construction, manpower and mechanical / engineering costs are the key components, Ms Lim of Standard Chartered said. "Thus, even if concrete construction costs increase, the impact on the total development cost is very manageable."

Others are less sanguine. "This is probably just the beginning. I expect the government to impose more requirements in the coming years to make the industry more productive and less labour intensive," said an analyst with a foreign brokerage.

"The disclosure of the profitability and profit margin for each project is so poor among the listed developers that the impact might not be discernible," he added. "Developers can only price what the market can bear. In the current soft market, they have almost no pricing power."

Developers point out some advantages too. Frasers Centrepoint Homes chief executive Cheang Kok Kheong said that with the use of productive technologies such as prefabricated railings and drywalls in its developments since 2007, the improvement in site productivity has more than offset the incremental costs.

Sydney-based developer Lend Lease, which has introduced cross laminated timber (CLT) in a residential project in Melbourne, said the costs of using CLT is comparable to conventional construction over time when costs related to shipping of materials and testing are reduced. "These costs would be balanced by the cost savings from faster construction time, reduced labour and foundation systems from the usage of CLT," said Mann Young, head of CLT Business at Lend Lease.

But prefabrication, generally deemed more suitable for mass market projects, is unlikely to be a major feature in luxury residential projects.

Singapore-based developer Tuan Sing will not be using prefabrication for Cluny Park Residence in District 10.

Group chief financial officer Chong Chou Yuen said: "It would be difficult to fathom how a boutique or luxury project like Cluny Park Residence (with only 52 units) could use prefab to increase productivity or bring the cost down and yet still retain the project's overall elegance which our architects take pain to ensure."