Are Property Development Costs Falling?
In recent days one of the most often asked questions I hear from people overseas and locally has been "are build costs seeing mass reductions, given the current slowdown?" While it is a very straightforward question, in reality it is much more complex, without necessarily a 'yes' or 'no' answer.
Firstly, it is important to differentiate between build costs and development costs. Added to that – whether you are building a single home or 100 of them – are 'hard' and 'soft' costs. Hard costs for the most part relate to the actual costs of labor and materials. Soft costs incorporate such things as contractor's overheads, consultants, architects, legal procedures and so on. The consensus among contractors and quantity surveyors on the island is that hard build costs have come down by 10-12%. The much anticipated price reductions for commodities such as steel and concrete are not, however, materializing on the scale that people believe they should be.
One of the bigger variable overheads is contractor's profit and while there is no sign of significant movement in this area, there is certainly some degree of flexibility. One of the consequences of the current economic crisis has been the suspension of ongoing projects, with many builders seeing delayed or in many cases defaults on projects.
Looking at the scale of the island's construction companies, there is not enough financial depth for them to cover these non-payments. Therefore, effective risk management has now become paramount as a means to remain solvent. The knock-on effect is that risk is being 'priced in', thus preventing a significant reduction in overheads. Notwithstanding, while demand is down in every sector, there is still building going on – much of it of the top-end villa type product funded by cashed up Thai companies with access to strong balance sheets and debt.
For larger residential and commercial developments, consulting fees can add significantly to the overall cost. For the likes of architects, project managers, quantity surveyors, civil engineers and landscapers, the contraction of supply will signal the survival of the fittest over the coming few years. Many of these are saddled with large fixed costs and continue to carry staff and other overheads from the boom years. We will now see many of them exploring all manner of opportunities to keep revenue streams coming in.
Other soft costs for projects for sale are mainly those related to selling – commissions, sales and marketing. There appears to be a trend emerging in which agents are now looking to compensate for the dearth of available buyers by upping their commission rates from 3% to 4-5% and even reaching double digits in some cases, where the seller is desperate to free up capital.
Legal services inevitably but necessarily bloat the bottom line, as these are required for sales and purchase agreements, registration of titles or leases and a host of other matters pertaining to the transactions. Legal fees are a bit like medical costs: they never seem to go down. A few of the larger firms I have spoken with have managed to buck the current trend and now see new work coming in as the current situation continues.
Which leads us back to where we began. Yes, there have been some decreases in the cost of construction materials and yes, many professional consultants do have a certain amount of pricing flexibility that was not present in the past. That said, in a macro market such as Phuket, the best and the brightest have and will continue to remain in demand. Ultimately, if you want the best, you will most likely pay a premium.
Over the longer term, it is doubtful whether there will be significantly lower build costs, due to market size and the sheer amount of work currently underway. This situation will likely continue until there is some sort of recovery in the next few years.
For those wanting to see lower build costs, the best option is to focus on the front end of a build by returning to intelligent design and employing a good professional team, ensuring quality engineering and preventing cost blow-outs at the end of the project.