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Published on February 1, 2008

The sluggish economy and fierce competition in the property market have put pressure on Thailand's large property developers to slash management and construction costs, to maintain business growth.

For most, there is a clear set of options in the face of rising construction costs and a business environment that prohibits increases in housing prices. Construction processes can be speeded up, long contracts can be negotiated for raw-material supplies, and firms can opt for smaller projects that sell rapidly.

A survey by The Nation has revealed the present difficulty of playing in the property market. Most developers, while hoping to record more sales this year, say their costs of construction, marketing and management have risen 15-20 per cent, but because of the intense competition, they are able to raise their housing prices only 5-10 per cent. Even then, many are ready to offer special discounts to achieve sales, because home-buyers have many choices in popular locations.

Most property firms are clinging grimly to gross margins of about 30 per cent and hoping to maintain net profits of 10-15 per cent of revenue.

Sansiri president Srettha Thavisin says his company plans to reduce construction, marketing and management costs by up to 10 per cent this year.

"We generated a lower net profit than other property firms because we spent more on marketing, in order to build our brand and create business credibility in competing with our rivals. But this year, we believe we've achieved our brand goals and are ready to reduce our costs and generate higher profits," he says.

Sansiri's net profit in the first nine months of last year was Bt217.07 million - only 2.5 per cent of its Bt8.7 billion worth of revenue.

Srettha says Sansiri plans to launch 15 new residential projects this year, a volume that will allow the company to negotiate long-term supplies of raw materials at lower cost.

LPN Development managing director Opas Sripayak says his firm will speed up construction of residential projects, in order to reduce its costs. Condominium projects will be completed and delivered to customers in one-and-a-half years instead of two.

"When we order construction raw materials, we'll make large-scale, long-term orders, enough for up to a year. That is one way of maintaining our construction costs. At the same time, speeding up the construction process will help us reduce our management costs, especially in terms of wages for construction staff. These things will help us maintain our gross margins at about 30 per cent, even though we're offering condominium units for the middle- and lower-income markets," Opas says.

LPN Development's net profit in the first nine months of last year was Bt853.09 million, or 16.41 per cent of its revenue of Bt5.2 billion.

Preuksa Real Estate CEO Thongma Vijitpongpun agrees that speeding up construction on residential projects is the best way to reduce management costs.

So far, the company has reduced the time taken to build a single-detached house from six months to less than four-and-a-half months, by using a prefabrication system. This reduces management costs from the construction process 15-20 per cent. Preuksa is currently pushing its construction technologies, in order to reduce the time even further, so that it can build a single-detached house in four, or even three-and-a-half, months. This will save another 5 per cent.

At the same time, the company is managing its cash flow by launching smaller projects for both single-detached houses and condominiums. It hopes to speed up delivery to customers so that presales can be booked to revenue within six months to a year of project launches.

Preuksa is another firm that hopes to maintain its gross margin at 30 per cent, and it expects to achieve presales of Bt20 billion this year. Its net profit in the first nine months of last year was Bt803.98 million, or 13 per cent of its Bt6.15 billion worth of revenue.

"We know we cannot increase our housing prices when the country's economy is suffering negative effects from a global slowdown and a possible US recession. Most home-buyers will limit their budgets and consider buying only those houses they believe are reasonably priced, so managing our costs is necessary to maintain our profit and drive sales to achieve our target," Thongma says.

SC Asset chairperson Yingluck Shinawatra says her company will reduce the size of its residences, in order to serve customers with limited budgets.

It has also signed long-term contracts of between three and six months for supply of construction raw materials, in a bid to save costs and delay the need to raise prices.

"We know our customers have limited budgets, so we must help them as well as maintaining our net profit, to serve our business growth," she says.

SC Asset recorded a net profit of Bt450.91 million in the first nine months of last year, or 17.55 per cent of its Bt2.57 billion worth of revenue.

Overall, home-buyers can expect housing prices to remain about the same as they were last year - or rise 5-10 per cent at most. Behind the scenes, developers are struggling to live with such prices. They face the possibility of achieving their sales targets but falling short on profit.

Somluck Srimalee

 The Nation