Profit margins for DBSS developers 'look high' , 'Up to 76%'

[Mockngbrd]

The Business Times

30 June 2011

Profit margins for DBSS developers 'look high'

 

(SINGAPORE) Developers can make gross profit margins of up to 76 per cent from the public housing projects they develop under HDB's design, build and sell scheme (DBSS), data compiled by BT shows.

 

Five out of the seven DBSS projects launched since 2008 earned their developers gross profit margins of at least 28 per cent, BT estimates.

 

This is comparable to the 30-40 per cent gross profit margins that property groups can earn when they develop private mass-market projects.

 

But in some cases, DBSS margins were even higher. Sim Lian Group, for example, stands to make a gross profit margin of around 76 per cent from its recently launched Centrale 8 in Tampines - even after it announced prices that were lower than previously indicated.

 

In absolute terms, Hoi Hup Sunway reaped the highest gross profit for its 1,203-unit The Peak @ Toa Payoh - netting some $257 million in all.

 

On the other extreme were Sim Lian Group's 360-unit Parc Lumiere in Simei, and Qingdao Construction's 480-unit Natura Loft at Bishan, which earned the developers $45 million and $48 million respectively.

 

BT added the land cost and the building cost - using a generous construction cost estimate of $200 per square foot per plot ratio (psf ppr) - in order to calculate the total development cost for each project and arrive at the breakeven price. Industry watchers said that the construction cost could be as low as $160 psf ppr in some cases.

 

But the back-of-the-envelope calculations do not take into account expenses such as finance, marketing and administration.

 

The estimated total development cost was then matched against total sales revenue. For this, BT first took the average of the lowest and highest prices for each type of unit - three, four, or five-room flats - in a project, then multiplied the average cost of each type of flat by the total number of such flats available in the development.

 

Some of the projects still have unsold units, industry players said - although the numbers are not significant.

 

Analysts said that the profit margins look high. But they pointed out that since developers do not need to take 'public interest' in account, they will price the flats as high as possible.

 

'I am surprised that the margins are so high,' said International Property Advisor chief executive Ku Swee Yong. 'All the more reason for us to re-examine the raison d'etre for DBSS in view of the need for a massive supply of affordable flats to satisfy the past five years of pent-up demand.'

 

PropNex chief executive Mohamed Ismail Gafoor noted that private developers have a duty to their shareholders to maximise profit margins. 'So, I think the fundamental issue concerns HDB, which actually provides the opportunity for private developers to make this money.'

 

In particular, not having a check on DBSS flat prices skews the market, he said.

 

The DBSS scheme was first introduced by the government in 2005 to provide a more upmarket option for buyers as compared to basic build-to-order (BTO) flats, which are sold directly by HDB.

 

But DBSS flats are also supposed to be a more modest option compared to executive condominium (EC) units, at least in theory, Mr Mohamed Ismail said. This is because eligibility, ownership and resale restrictions for public housing cease to apply for ECs after 10 years - effectively making them private homes.

 

At Centrale 8 in Tampines, flats were initially priced at up to $750 psf - a price tag more commonly seen for private condominiums and higher than for most EC projects.

 

This contravenes the government's aim to provide various types of homes - from the most affordable BTO flats, to DBSS flats, then EC units and then finally private homes - for homeseekers with varying levels of financial clout, Mr Mohamed Ismail said.

 

Analysts have noted that the price gap between DBSS and EC units has narrowed in recent years.

 

Nicholas Mak, head of research at SLP International, noted that in addition to giving homebuyers more options, the DBSS scheme was also mooted to give private developers a slice of the public housing market (since the property market was in the doldrums six years ago) and also to allow for more innovative building and design for HDB projects.

 

'The government has to decide whether these objectives are still relevant today,' said Mr Mak.

The Straits Times

Time to slay the DBSS 'monster'

Only losers are developers, which have made big profits from public housing

June 24, 2011

By: Jessica Cheam

 

THREE years ago, when prices of flats under the Housing Board's Design, Build and Sell Scheme (DBSS) started hotting up, my colleague Chua Mui Hoong called for a stock-taking of the programme.

 

She warned that when public housing is built by the private sector, the Government will have a tricky time balancing the interests of home buyers and developers. The DBSS could become 'a monster of the market's making', she wrote, with developers profiting from high premiums slapped on homes and buyers seduced by unrealistic expectations of capital gains.

 

Today, the 'monster' is rearing its ugly head - in the form of a record-setting $880,000 five-room flat.

 

This was the 'indicative' price that developer Sim Lian Group had put on the highest-end units in its DBSS project Centrale 8 in Tampines.

 

A public uproar ensued over the prices. Three days ago, Sim Lian released a 'confirmed price range' of its Centrale 8 units with five-room units costing up to $102,000 less, at $778,000. Its three-room flats are now priced up to $445,000, down from $510,000 before.

 

Sim Lian insists the initial prices were just 'indicative' anyway. But property analysts say it is unusual for any developer to lower prices by such a big margin, and that the developer was bowing to public pressure.

 

Going by the complaints online and in letters to the press, the fundamental issue seems to be this: DBSS flats are built on HDB land and subject to HDB eligibility rules, and are public housing. If so, why are private developers allowed to profit from building them and charging sky-high prices?

 

And the nub of the issue: Who does the DBSS scheme benefit ultimately?

 

Back in 2005, the DBSS was announced by then National Development Minister Mah Bow Tan. The scheme essentially had three objectives.

 

First, to give private developers a slice of the public housing pie (the property market was in the doldrums then). Second, to pave the way for HDB projects to be gradually outsourced to the private sector. Third, to allow for more innovation in building and design, and give better value-for-money to flat buyers.

 

It was called a 'bold experiment'. For the first time, private developers would set prices for public housing. Previously, they could design and build them, but prices were set by HDB.

 

In the years that followed, the scheme won the support of the market. Developers were keen to bid for the land, often sited at excellent locations. They could price the flats to get buyers, who liked their designs and convenient locations.

 

The first DBSS project launched in 2006, The Premiere @ Tampines, also developed by Sim Lian, had flats priced from $138,000 for two-room units to $450,000 for five-room flats. Parc Lumiere in Simei launched in 2009 attracted long queues.

 

Why is the scheme in disrepute now?

 

For one, market conditions have changed. There was no supply crunch then. Families could buy new flats directly from HDB from its stock of unsold flats, or from its new Build-to-Order (BTO) projects. They could also buy from the resale market. The steady supply kept DBSS flat prices in check. Developers knew predatory pricing would leave them with unsold units.

 

Today, a tight supply situation has caused prices of new and resale HDB flats to soar. HDB's stock of completed flats are snapped up, and there are many buyers jostling for new BTO flats.

 

Developers naturally want to maximise profits and will price their flats at the highest levels buyers can bear.

 

Sim Lian paid about $260 per sq ft (psf) for the land. Analysts estimate the break-even cost for Centrale 8 at about $450 to $500 psf.

 

At this range, and at the original price of $880,000, or $750 psf, Sim Lian's mark-up was 50 per cent to 67 per cent. Even at the lowered price of $663 psf, the premium is still a hefty 33 per cent to 47 per cent.

 

Compare that to The Premiere, where land cost was about $114 psf, break-even cost was about $240 psf and the average selling price was about $300 psf - a profit margin of about 25 per cent.

 

So ,to answer the question of who benefits from the DBSS scheme, it seems that even if the HDB gets higher land tender prices from developers' bids, the developer is the biggest winner.

 

What of buyers? They were supposed to benefit from having more choices in HDB flat designs. But HDB flat buyers these days have many choices: Standard flats under the BTO scheme, or premium BTO flats with better finishes.

 

There is also the Design and Build scheme, where private architects design and build the flats. HDB has also built several high-profile BTO estates such as Dawson and the iconic Pinnacle at Duxton designed by award-winning architects.

 

Some buyers might have been lured into paying high prices for DBSS flats believing in their capital gains potential. But agents are sceptical about this, pointing out that DBSS estates are not gated like private condominiums or even executive condominiums. They do not have facilities like swimming pools.

 

The raison d'etre for the DBSS in 2005 must be reviewed in the light of today's market conditions and expectations.

 

That DBSS flats can still find buyers at prices of $700 psf is immaterial.

 

The bigger question is whether HDB should take back its role as developer of public housing. Implicit in the DBSS concept was the notion that HDB might eventually want to 'outsource' more of the developer's role - and risk - to the private sector.

 

While this may sound attractive, it ignores the reality that voters in an era of rising inflation and stagnating or slow wage growth want affordable public housing. They prefer the state, not the market, to provide this.

 

In any case, citizens will hold the Government - not private developers - to account if prices of public housing become unaffordable. It is thus politically illogical for the state to devise a scheme which lets private developers set high prices and enjoy fat profits from public housing, when the political price for those high prices will be paid by the Government.

 

The DBSS was indeed bold and risky. The risks are only beginning to be understood. The Government should just be bold again - and pull the plug on it.

 

The only losers will be developers, which can no longer look forward to 60 per cent profit margins from public housing.

 

[email protected]

 

The Straits Times

Jun 25, 2011

DBSS residents expect good resale prices

They think location will get them top dollar for units, and experts agree

By Cheryl Ong & Sia Lingxin

 

THEY may have paid high prices, but residents of Design, Build and Sell Scheme (DBSS) flats said they are confident that the better location of their estates will land them good resale prices in future.

 

Industry observers and academics agree that it is the location - and not so much the touted better fittings and design - that could help the owners command a premium in the resale market.

 

DBSS flats have been in the news after the developer of the Centrale 8 project in Tampines drew flak for pricing units at high prices.

 

PropNex chief Mohamed Ismail said: 'Today, it is a DBSS flat, but five years from today, it will be another ordinary HDB flat. The valuation then will focus on the good location of the flats and the market sentiment.'

 

Agreeing, SLP International head of research Nicholas Mak said: 'No one knows what the market will look like in five years' time.'

 

Associate Professor Yu Shi Ming, who heads the department of real estate at the National University of Singapore, said the distinction between a DBSS flat and a Build-To-Order (BTO) one will narrow when both enter the resale market in years to come.

 

Read the full story in Saturday's edition of The Straits Times.

Edited June 30, 2011 by Mockngbrd

[Windwaver]

That's why I'm rather surprise by the enthusiasm of DBSS flats when after 5 years, they are the same as any flat

[Autobat]

i agree its quite dumb.

 

there shouldn't be a middle tier.

 

public housing should be affordable.

the brand and mission of HDB is to house Singaporeans.

 

Why should developers be allowed to ripe large profits from these schemes?

 

Thank you 60.1%

[Kingcopa]

600-800k HDB is not affordable.... Can someone tell them this!!!!

[Zak7182]

i agree its quite dumb.

 

there shouldn't be a middle tier.

 

public housing should be affordable.

the brand and mission of HDB is to house Singaporeans.

 

Why should developers be allowed to ripe large profits from these schemes?

 

Thank you 60.1%

 

HDB also under gov. Mission 1, their own rice bowl/interests. Next, maybe to house Singaporeans. OR got other missions to accomplish too?

During the early years of independence, their mission looks/sounds true.(Sowing some seeds first?)

Its just my opinion...

[Joseph22]

wah gross profit of up to 76%.. that is over profit liao.

[Jman888]

wah gross profit of up to 76%.. that is over profit liao.

 

 

where got such thing as over profit !!

[Soya]

That's why I'm rather surprise by the enthusiasm of DBSS flats when after 5 years, they are the same as any flat

 

 

some tink dbss is 'higher' class. why, i dunno.

 

the developer will juz piak piak give the lowest grade of everything as hdb's own army of engineers & technical staff do not check on dbss.

[Hoppie24]

if like that, the cost of nearby public housing will be driven up and well public housing becomes "Afforable" lor

[Dirtbike]

HDB should never be assest appreciation.....it is public housing and shld never ever be used to speculate...

 

[Windwaver]

if like that, the cost of nearby public housing will be driven up and well public housing becomes "Afforable" lor

 

That's the problem but still the project is 2x subscribed right?

[Slowman]

That's why Tampines ppl want to vote MBT mah..

 

Thanks to MBT policy lor.. Profit first, others talk later. Not even comes second.

[Ahseng]

600-800k HDB is not affordable.... Can someone tell them this!!!!

 

might not seem worthy buy for most of us here, but then again it's 2X oversubscribed. Certainly there are ppl willing to pay that price!!! buy! buy! buy!

[Windwaver]

That's why Tampines ppl want to vote MBT mah..

 

Thanks to MBT policy lor.. Profit first, others talk later. Not even comes second.

 

Problem is I don't think this is sustainable in the long run.

[Old-driver]

So what happens to the doctrine of affordable HDB housing? it was not meant to be profit-making in the 1st place

[Stanchiam]

might not seem worthy buy for most of us here, but then again it's 2X oversubscribed. Certainly there are ppl willing to pay that price!!! buy! buy! buy!

ya and those who cannot get it, will be ready for second batch

when i said dont be surprise by how many people will queue up to buy,

i mean it cause i know there is still lots of ignorant/stupid singaporean who have no sense in money

thanks to these small batch of people contribution that our economy grow more

[Soya]

ya and those who cannot get it, will be ready for second batch

when i said dont be surprise by how many people will queue up to buy,

i mean it cause i know there is still lots of ignorant/stupid singaporean who have no sense in money

thanks to these small batch of people contribution that our economy grow more

 

 

many of these buyers are prob young, first-timers who hv never tasted hardship or a recession. wun be surprised if their view is that property prices can onli go up.

[Beachboy7718]

Why let the private to bid the land and built. HDB shall built it owns then the pricing is much controllable. When come to biz, it is common sense to make minimum margin or most out of it. This is like 2nd developer when HDB award to someone.. if 2nd devoper mark up 40% then how is the pricing? If there is 3rd developer mark up another 40% then how... For affordable housing, it better to run under HDB to minimize those mark ups.