Real estate developer (with case study at June 2018)

  1. The business model for a real estate developer is that of building and selling of properties. Hence, the key performance metrics of a developer is the ability to procure all raw materials (land, construction cost etc.) and sell to the end consumer at a reasonable margin (or otherwise known as the developer margin).Developer has to either possess the ability to procure raw materials at a cheaper price or have the ability to price their development at a higher price. Sounds simple?

The typical business cycle:

Purchase of land which can be done via Government Land Sales or en-bloc. Land cost is often the most expensive component of property development cost in Singapore. If obtained at an excessive level, it could render the whole development unprofitable. Hence, for property investor (be it investors on the equities of property developer or physical real estate), it would be useful to keep track of how much did the developer pay for the land (often quoted on a dollar per square foot basis). See below for a scenario analysis on a property development undertaken using some high level assumptions:

Digging back on a guest post done for 3Fs (aka B) about a year back, I did an analysis on the the land cost paid by The Garden Residences (By Keppel and Wing Tai) and Affinity at Serangoon (by Oxley) and price sold for their respective launch in June 2018 based on URA data. Readers can refresh the previous post from the link below:

Developer Land acquisition date land psf ppr Average sales price psf acheived District Bread to Flour Ratio
Keppel Wing Tai Jul-17 964.8 1,641 19 170%
Oxley Jul-17 835 1,585 19 190%

Based on the “Bread to Flour Ratio”, it would seem that Oxley is getting better margin compared to Keppel Wing Tai.

Lets dive in greater detail by constructing a project profit or loss statement on the basis all units are able to be sold at the average price psf achieved to-date:

Assumption of cost of construction psf: $500 psf

Assumption on cost of financing: 3%

What does that translate in the profit and loss for the whole development?

Garden Affinity
$ $
Revenue 759,000,000 1,318,000,000 GFA*average price psf
Cost of land (446,280,000) (694,000,000)
Cost of construction (231,280,500) (415,678,000) GFA*cost of construction psf
Cost of financing (10,710,720) (16,656,000) Cost of financing*80% of land cost *3%
Profit 70,728,780 191,666,000 (a)

The below would be the return on equity projection for the 2 developments.

Garden Affinity
Land cost financed by equity 89,256,000 138,800,000 (b)
Return on equity 79% 138% (a)/(b)
Average return over 3 year 26% 46% ROE/3

The high level return analysis is based on the following assumption:

  1. Equity is based on 20% of land cost
  2. The developer is able to maintain their pricing for remaining unsold units
  3. Cost of financing is based on 1 year financing cost. Financing cost will increase if there is slowdown in sales on the assumption the developer use the sales proceeds to repay borrowings undertaken.
  4. Cost of sales (i.e. agent cost) not factored in. Typically between 1% to 2%.
  5. The average development period is 3 years from date of obtaining land.
  6. There are no further unexpected increase in construction cost.
  7. The development managed to successfully ‘clear stock’ to avoid ABSD charges which amount to 15% of land cost within 5 years from obtaining the land


Based on the June 2018 URA data both developments are about 9% sold which is relatively low and reflect the cannibalisation of buyers eyeing for property in the same area. This potentially reflect buyer’s insensitiveness towards other factors within a develpment (e.g.reputation of developer, finishing, layout) compared to the location. With the influx of launch coming through from the huge en-bloc output from 2017, it is possible that the developers of Garden and Affinity cannot ‘clear stock’ without ‘cutting price’.

Being pragmatic, I would not bet that the developments will be able to rake in the profit numbers shown above. In fact, I will be more concern on the potential worst case scenario where the developers are slapped with ABSD 4 years down the road shown in the table below:





Potential ABSD in 2022 66,942,000 104,100,000

The above charges if eventuates will certainly caused the returns to suffer drastically and probably result in Garden making a loss.

Using the above case study, I would like to summarise the key learning points:

  • Cost of land paid relative to comparable plots is indicative of the project profitability
  • Excessive supply situation in the vicinity will result in slower sales
  • General rise in market prices will result in developer being able to increase price at subsequent phases of launch
  • Cost of financing could impact the project profitability
  • Cost of financing could be capped when developers use sales proceeds receive to repay borrowings
  • Ability to launch a project quickly will also alleviate financing costs incurred

Author’s take on current real estate market

Personally, I feel the slowdown in sales of new launch at Garden and Affinity is significant. The property bull cycle over the past year has been driven primarily by market sentiments with developers setting record bids with each government land sales or en bloc.  The myth that “developer must sell high because land cost is high” is a good sales pitch but must not be the primary indicator of property purchase. The unwillingness of buyers biting the high price that developer is offering at Garden and Affinity provides evidence that other factors such as comparable property pricing, supply situation or simply market forces do play a part. I have no crystal ball over how the property market will pan out. But what I do know is that 4 years down the road, unsold developments from the record en bloc season of 2017/2018 will be due for their ABSD. In such a situation, it will be a more attractive buyer’s market assuming other factors remain the same. In the meantime, interested investors could use the above metrics such as “Bread to Flour ratio” and percentage of units sold to monitor the specific developments and its impact to its owners if you are vested in property stocks.

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