“Don’t ask barbers if we need a haircut.” – Famous quote by A Singaporean Stock Investor (AK)
This simple quote by popular investment blogger – A Singaporean Stock Investor, makes a lot of sense. Most of us have this kind of skepticism, especially when we deal with the salespeople. When a property developer or agent tells you that new launches are selling fast and property market is going to move higher, you will probably take their words with a pinch of salt. You might be thinking that they are just trying to sell you a property and make money out of it.
Nothing wrong with this thinking. There is always a possible conflict of interest between the seller and the buyer when the seller is trying to get sales for his own benefit without considering the interests of the buyer.
What if the actions of the seller are aligned with his words? Or when the seller is putting his money where his mouth is?
Last week, Lian Beng Group announced that it was awarded a contract to construct a condominium at Potong Pasir Avenue 1. This project is the former Raintree Gardens site that was acquired by UOL Group and UIC for S$334.2 mil in October last year.
So, what is so interesting about this contract award? In most situations, the construction contracts are awarded around the time when the project is launching for sale. This is when there is greater visibility on the demand and pricing for the project and developers can then lock in their cost with a better confidence of protecting their profit margin.
In contrary to the norm, UOL and UIC are now locking in their construction costs months before the project is expected to be launched. Why are they doing so? There are a couple of reasons that SPK can think of. Firstly, UOL and UIC are confident that they can the pricing and demand for this new project will be strong and hence they are willing to take the risk to lock in their construction costs early. By doing so, UOL and UIC can deliver the project earlier to buyers, receive the sales proceeds faster and hence, shorten their project cashflow cycle and improve capital efficiency.
The second possible reason could be that they are expecting construction costs to go up and hence they are locking in their costs early. If this really happens in future, other developers might sell their projects higher to cover the higher construction costs, and for UOL and UIC, they will have more flexibility in their pricing.
Is UOL and UIC’s action an indication of their outlook of the property market going forward? Looks like the developers are putting their money where their mouth is.