PROFITABILITY OF CONDOMINIUM DEVELOPMENTS IN SINGAPORE

Abstract

The presence of market power by firms often leads to allocative inefficiency. In the private housing market, including condominiums, the presence of market power by developers could have an adverse impact on the housing market as a whole leading to higher social cost. This research examines the relationship between developer’s profitability and market conditions at the time of land tender and the time of project launch for sale in the Singapore condominium market. It represents a first attempt at examining the profitability of homebuilders in Singapore. Using a Back-of-the-Envelope method, we estimate the profit margin of each project and its excess capital appreciation (over and above corresponding regional index) after the launch. Two linear regression models are used to estimate the influences of property market cycles and land bidding conditions on project profit margin and post-launch excess capital appreciation. The results show that the profit margin moves in the same direction, whereas the excess capital appreciation in the opposite direction, with the market cycle at project launch. The finding suggests that the developers are able to explore investors’ sentiment and the developers’ profitability depends importantly on their market timing ability. Big local developers are found more profitable than small local developers and foreign developers, partly due to the price premium derived from their strong brand name and partly due to their ability to procure land at a lower cost. Foreign developers are generally least profitable in Singapore due to the relatively higher land cost they have to pay. More contested land tender reduces project profitability but not post-launch excess capital appreciation, indicating little market power for developers to shift higher land cost to home investors. Furthermore, there is little correlation between residual profit margin and residual excess capital appreciation, suggesting that launch prices are competitive across projects.