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Monday, July 14, 2008

Strategies to survive the property slowdown

A filepic shows the crowd at a property fair in Penang. The high cost environment will be here to stay for a while unless global demand and speculative activities for some of the key commodities such as oil and steel slow down

Mounting inflationary pressures following the sharp rise in the price of construction materials, oil and food are creating much anxiety among the property and construction industry fraternity.

To mitigate the adverse impact of the rising cost and softening market sentiment, developers are resorting to more ingenuous strategies and measures to ride out the tough times.

The threat of stagflation – high inflation without demand growth – is also looming and developers are faced with rising costs and slower take-up of their property products.

The big jump in the price of key construction materials, especially steel and cement by between 30% and 40% in the last six months, has resulted in slower progress of work on site.

It looks like the high cost environment will be here to stay for a while unless global demand and speculative activities for some of the key commodities such as oil and steel slow down.

According to SP Setia Bhd group managing director and chief executive officer Tan Sri Liew Kee Sin, the company has incorporated cost escalation clauses into fixed-price contracts for a few key construction materials (steel and cement) to alleviate cost pressures on contractors while avoiding over-pricing of overall contracts.

“We will also take advantage of our strong financial position to offer to purchase construction materials on behalf of our subcontractors to enable works to progress expeditiously on site.

“By doing bulk material purchase, we can enjoy the economies of scale and command better bargaining power with suppliers,” Liew told StarBiz.

Concurring with Liew, Sunway City Bhd managing director Ngian Siew Siong said: “To lessen the impact and to help contractors contain costs, we encourage them to buy materials in advance and have enough materials in stock so that there is a lesser impact on rising costs.

“We also leverage on our financial capability and pay our contractors in advance to buy their materials. In the long run, we want to ensure that all parties are affected as little as possible.”

Mah Sing Group Bhd president and group chief executive Datuk Sri Leong Hoy Kum said competitive funding costs and good payment terms for land acquisitions have helped the company to keep costs in check.

“We have set up a specialized material sourcing team which works together with suppliers and contractors to ensure the best pricing and bulk purchase discounts,” he added.

SP Setia's Liew said the company has restructured and streamlined its operations to strive for higher cost efficiency and productivity improvements.

“We are also expediting the provision of key infrastructure and amenities in the company's various townships and improve our product offerings to achieve greater value creation for customers.

“This will facilitate justifiable price increases to be passed on to purchasers,” Liew said.

Meanwhile, Glomac Bhd group managing director Datuk F.D. Iskandar has called for more proactive measures to address the country's high prices of construction materials and attract greater interest in real estate.

He said tax discrepancy between the import and export of steel has contributed to the high price of steel in the country. In the last six months, the price of steel bars jumped 45% to RM3,000 per tonne.

“While imported steel products are subjected to a 20% tax, steel products bound for the export market are not taxable.

“Political will and more concerted efforts are necessary to address the steel issue. More priority should be placed on local needs. It will certainly help if both import and export of steel are subjected to the same quantum of tax rates,” Iskandar said.

On measures to promote greater demand for the country's real estate, he said concerted efforts to attract more multinational corporations to set up regional offices in the country would create demand for a broad section of properties, including office space and residences.

“Malaysia My Second Home (MM2H) programme has great potential to attract high net worth and other potential foreigners to invest in the property market.

“However, to reap its full potential, the programme has to come under the purview of the Prime Minister's Department and get full co-operation from all the other agencies,” he said.

Another area that offers great potential is turning Malaysia into a reputable Islamic financial hub to attract the huge reserve of “oil money” from big institutions and investors in the Middle East.

“There is growing competition for these investments from other neighbouring countries and Malaysia should leverage on its position as a model Islamic country to attract more such funds,” he said.

By The Star (by Angie Ng and Eugene Mahalingam)

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