Friday, May 09, 2008 [ manilatimes.net ]
ANALYSIS
By Likha C. Cuevas-Miel, Reporter
PROPERTY developers are about to raise prices—if they haven’t already —to cope with costlier raw materials, fuel and soon, labor, and prevent these from eating into their margins.
On Thursday, Vista Land and Lifescapes Inc. said the company may have to jack up prices in the “high single-digits” to account for higher inflation.
Manuel Paolo A. Villar, Vista Land corporate planning chief, said the company will adjust prices according to “the economic environment of the (project) area.”
But these increases will be accompanied by reengineering and specification changes in residential units so that buyers will feel they got their money’s worth, he said.
Megaworld Corp. said it has already raised prices to cover current development costs, but refused to say by how much they were increased. John Hao, Megaworld investor relations officer told The Manila Times that “price increases are done every new project or tower launch.”
Filinvest Land Inc. (FLI) said the company also adjusted its prices since the start of the year due to increasing demand for the company’s products and climbing construction costs.
“However, we can only adjust at a certain level since there is a certain affordability (for buyers),” Anabelle D. Arceo, FLI investor relations officer said.
This way, the company can still maintain its profit margin without hurting the buyer’s pockets. Last year, the company’s gross profit growth had slowed from 56 percent to 53 percent due to expanding mix of price points for its developments. Arceo said the company’s profit margin however remained flat at these levels.
Negotiate with suppliers
Besides raising prices, Ayala Land Inc. (ALI) said it is managing costs by consolidating its purchases. With several construction developments in the pipeline, the company can negotiate with its suppliers for raw materials to be sold below market prices, Alfonso Reyes, ALI corporate spokesperson. said.
Seeing that cement prices are creeping up—at P195 per 40-kilogram bag as of last count—ALI decided to lock in its price through a 2-year supply contract, which will expire by the end of this year, Reyes said.
The company however is selective about its hedging. In the case of reinforcement steel bars, which eat up 11 percent to 14 percent of construction costs, ALI decided to go for market prices, fearing the price spike may turn out too short-term.
“We are exploring the possibility (of locking prices) for that but it’s a difficult environment and I guess other developers are also facing the same situation,” Reyes said. Other than hedging, the Philippines’ largest property developer is shifting to cheaper imports from China.
Reyes said the level of price adjustments vary depending on the type of development and buyer demand so it is difficult to pin an average cost. For this year, ALI plans to develop about 56,000 residential units under Community Innovations, Avida and Ayala Land Premier, as well as several business process outsourcing (BPO) office spaces.
Villar said it also helps that Vista Land has economies of scale so it has enough leverage over its suppliers to control costs. The firm’s strength is in the affordable and low-cost housing and horizontal segments under flagship Camella Homes.
“Material costs are not the only costs. There is also the land cost. Obviously we have a land bank that mitigates that impact, which is the benefit of having a large land bank. In an inflationary environment, companies with large land bank obviously have an advantage over companies with smaller land bank,” he said.
At present, the company has about 1,795.6 hectares of land for development, 81 percent of which are in Mega Manila, which includes nearby provinces of Laguna, Batangas and Cavite.
Adjusting the lot size
Property firms are also adjusting their house-and-lot offerings on top of fiddling with their prices to maintain buyer interest.
“What we do is we sell a house and lot – let’s say the original price is P1.5 million but now its costs P1.8 million due to inflation. If P1.5-million can buy you a 120-square meter house and lot, now it will only be 100 square meters. It’s the same price for the same house albeit smaller in area,” Arceo of FLI said.
For its part, Vista Land markets different maturities apart from changes in lot size offerings.
“The other thing is borrowers can extend the maturities up to 25 years. You could borrow longer or you can decide to be a little more conservative in your purchase [so] instead of buying a P2.5-million house you can [buy] P2-million for the time being. We have over 15 price points [to choose from],” Ricardo Tan, the company’s chief finance officer, said.
Locking in rates
Rising home financing interest rates —as a result of rising inflation —has yet to deter buyers since there are several options laid out to them, Tan said.
Reyes of ALI said that buyers are also locking in home mortgage rates in the event that bank loan interest rates have bottomed out. He said that bank financing for the company’s developments have gone up from 22 percent during the third quarter last year to 31 percent so far this year -- proof that buyers are scrambling to get good borrowing rates.
In just a few months, the inflation rate jumped threefold to 8.3 percent largely due to skyrocketing fuel and food prices. Some analysts said inflation could easily hit 9 percent.
Rising prices of commodities have been integrated into companies’ strategic plans but the sudden spike may have been overlooked, a corporate planning officer told the Times.
“We’re still at the first quarter and let’s see after the first semester is over,” Reyes said.
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