Property developers : Rising construction costs may lead to higher house prices, unfinished projects
News Credit To New Straight Times
KUALA LUMPUR: Rising construction costs in the real estate and construction sectors will affect new developments and cause a cascade of events, according to industry players.
New home prices particularly will be affected if the prices of land, building materials and wages all rise, they said.
Rehda Malaysia president Datuk NK Tong said the rising costs brought on by sharp increases in building materials, land and labour costs, as well as redundant policies may be too much for property projects to become viable.
The Rehda Property Industry Study for the second half of 2022 revealed an average annual increase in building costs of 17 per cent as well as a more than 20 per cent increase in the average price of cement, steel, aluminium and bricks.
According to the Department of Statistics Malaysia, the average price per unit of steel in April 2023 was RM3,721.72 per tonne, up 0.8 per cent from the previous month (March 2023: RM3,690.90 per tonne).
The average price of cement recorded a lower increase of 0.4 per cent compared to March 2023 (1.1 per cent), with an average price of RM22.50 per 50 kg compared to RM22.41 per 50 kg in March 2023.
Jeffrey Chew Sun Teong, group chief executive officer and executive director of Paramount Corp Bhd, noted that building materials account for 40 per cent of total construction costs for the company.
This is followed by land costs (20 per cent), development and compliance costs (15 per cent), marketing costs (10 per cent) and overhead (five per cent).
He cautioned that industry players against hedging their raw material purchases by making future purchases at a fixed price because prices may decline.
"Are our raw materials hedged? Not at all. We must use extreme caution while hedging as a publicly traded company because doing so means you are taking a bet. Imagine that the price of steel bars has increased by 30 per cent, and you predict that it will increase by another 30 per cent. You hedge that price, but what if it decreases instead of rising?
"Who are we to blame? How will we address this at our AGM? Are you an expert in betting raw material prices? Not at all!
"We are experts in locating the ideal property at the ideal cost, designing the best product to command the best price, and identifying the best and quickest ways to market our goods. That is our area of expertise. We are in no business to forecast raw material prices and assume the associated risk," he told the New Straits Times (NST).
Chew said Paramount sometimes hedges interest rates to roughly predict its future interest payments or earnings.
He said after 21 years in the banking sector and six years as CEO of Paramount, he has a thorough understanding of how the environment works, where it's going, what the warning signs are, and when interest rates will stop increasing.
"I can say I am an expert in that field, and I can take a bet. But I am not an expert on commodities. We ought to focus on what we are best at to minimise the impact on our profit margin," he said.
SP Setia Bhd executive vice president Datuk Tan Hon Lim said the price of essential building materials such as steel, cement, tiles and bricks has continued to increase.
"All these main items constitute a lot of the construction cost. Another bad part is the manpower cost. Around 20 years ago, wages were RM20 to RM30 a day for general workers. The current market rate is RM100 to RM150 per day for general workers. The rates have increased after the Movement Control Order," he told the NST.
Tan, who is a Rehda Malaysia national council member, said as a result, many construction projects remain unfinished or abandoned as companies are unwilling to take on the financial risk of completing the work.
He hoped that the government will step in to help improve the situation in the real estate and construction sectors.
The Local Government Development Ministry had identified 481 'sick' projects and 112 abandoned projects across the country up to June this year.
Its deputy minister Akmal Nasrullah Mohd Nasir last month said that sick and abandoned projects were those that had exceeded their scheduled completion period, and taken longer to revive as extensive discussions were needed.
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