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They pick up prime lots and build luxury homes in order to hedge - risks and raise profit margins

Burnt by the slump in their industry over the past few years, many construction groups are turning to property development as a way to hedge risks and boost profit margins.

Major contractors such as Chip Eng Seng and Straits Construction have diversified into a wider range of development work: from buying land plots to building residential projects to marketing and selling the finished units.

By not limiting themselves to their traditional contract-based work of designing and building homes, such firms are lifting profits and riding on the recovery in property development.

Chip Eng Seng, for one, has snapped up four collective sale sites in the past two years. Although construction still makes up two-thirds of the group’s revenues, two-thirds of its profits now come from development, managing director Raymond Chia said.

‘We first branched into development as a way of portfolio management, because contracting and property have different risks.

And right now, for us, property is more profitable than contracting.’

To reflect its greater emphasis on property development, Chip Eng Seng recently rebranded its real estate arm and signed a joint venture agreement with Lehman Brothers to develop a luxury project on the Venus Mansion site at Cairnhill, which it bought in April.

Straits Construction’s property arm, Hoi Hup, has launched eight residential projects since 2004, the most recent being The Bale at Telok Kurau.

Another contractor, Koh Brothers, will launch two condominiums at the beginning of next year. They will be built on prime collective sale sites that it has picked up during the past six months:

Hilton Towers at Leonie Hill and Alocassia Apartments on Bukit Timah Road.

The group’s real estate division, started in 1993, now contributes 30 to 40 per cent of revenues, said executive director Francis Koh, adding that the diversification ‘has given us very good income and is very profitable’.

‘Turnover in the construction industry has fallen since the late 1990s, and only started to pick up recently. But when construction volumes are down, our property development side will help out.’

Some of these contractors are not new to the business of property development, having dabbled in it as early as the 1980s.

However, increased competition and fewer jobs in construction - thanks to the property downturn in recent years - have led them to expand their development business.

These companies would rather pour their resources into property development, which is rallying as the property market turns around, than wait for the five-year slump in the construction sector to end.

Hoi Hup property manager Bridget Tan said: ‘The construction cycle is still in the midst of recovery, so we have switched more to development for now because the property market is picking up.’

Lured by the current upswing in the high-end residential sector, contractors are also becoming more ambitious in their property activities, acquiring prime sites on which to build luxury homes.

Over the past year, construction groups have purchased several collective sale sites in Districts 9 and 10: Hoi Hup bought Cairnhill Gardens and Kim Yam Mansion; Evan Lim & Co, The Esquire at Mt Elizabeth; and BBR Holdings, a site at St Martin’s Drive.

But instead of competing head-on with developers, some construction firms have also found it lucrative to cooperate on development projects.

Chip Eng Seng has co-developed several residential projects with NTUC Choice Homes, while Koh Brothers teamed up with developer Heeton Land to buy and develop Hilton Towers in March.

These partnerships also allow the contractors to spread their capital over a larger number of projects. Their construction business benefits from each project they are involved in.

One main advantage that construction firms have over developers is their ability to build more cheaply, they said.

‘We can control the construction costs very well as we have lobangs (contacts),’ said Ms Tan of Hoi Hup.

However, lower costs might not always translate into lower prices for the finished units.

‘We don’t want to spoil the market, so although we price competitively against the big boys, we still go by market rates, or price our units only slightly cheaper by 1 or 2 per cent,’ said Ms Tan.

Source : Straits Times - 31 Jul 2006