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JUST when the property market looked set to finally recover from a two-year debacle in the form of a pandemic, players within the sector are now faced with a new quandary – rising raw material prices.
As developers and contractors grapple with compressed margins due to rising construction costs, ultimately, what will this mean for the end-user?
AmInvestment Bank analyst Khoo Zing Sheng says the cost of construction typically forms between 50% and 55% of a developer’s total gross development value.
“In 2022, we anticipate a 19% increase in construction cost. If developers pass on 100% of the cost increase to buyers, the selling price will rise by between 9% and 11%,” he says in a recent report.
In light of the current softening property market, Khoo believes that developers, particularly those with lower pricing power, will absorb some of the cost increase and pass on only a portion of it to buyers to partly mitigate the margin compression.
RHB Research property analyst Loong Kok Wen says the rise in raw material costs actually started from the second quarter of last year.
“Cost of steel, copper and aluminium started going up in the first half of 2021. This year, it has gotten more significant,” she tells StarBizWeek.
Loong says property developers were better able to withstand the rise in costs last year.
Khong: Developers are facing a tough time juggling between sales and pricing against actual increase in construction costs and profits.
“The impact will be more pronounced in 2022. In fact, developers were already feeling margin pressures on their earnings since the first quarter of this year.”
Real Estate and Housing Developers’ Association (Rehda) acting president Datuk N.K. Tong says developers have been facing the effects of rising raw material prices “for a while” already.
“In the recent first-half 2022 survey on developers, raw material prices went up substantially,” he says.
According to Rehda’s survey, building materials have risen for all materials used in a typical construction and property project – aluminium rose 55%, timber 52%, steel 38%, cement 19%, sand 18% and concrete 16%.
Loong says developers’ margins could be affected by between 3% and 5% this year due to rising raw material costs.
“Some developers have said that they expect the impact to be minimal but I believe it will be progressive.
“This is because some developers have older projects that are ongoing. If new projects come on stream, the margin erosion could be higher, as much as between 10% and 20%.”