Tuesday, July 11, 2017

Guest Post by CK - Insight Into The Real Estate Industry

I have the privilege of recently exchanging views with CK, who is currently a financial controller at a real estate company. He has relevant real estate experience gained from his previous background as a senior manager at one of the big 4 accounting firm which I'm sure we can learn something from.

I'm not going to do the usual interview of asking him generic questions about investing. Instead, I have asked him to share one of the many learning points in the real estate industry which will benefit us as readers, and to give specific example to illustrate his case.

Here we go and over to CK.

Guest Post

The intention of my sharing is very much align with B (i.e. to share thoughts on investment) and hopefully through this process enable fellow readers gain a better understanding on the real estate industry. Similar to B, my background is in the real estate industry and am currently a financial controller in the listed reits company in sgx. Previously, I was also the senior manager in one of the big 4 accounting firm.

Real estate development business is a popular business venture for a number of companies, from the traditional developers: Far East, UOL, Capitaland and Fraser Centrepoint to the “converts” which are usually from companies that operate in related businesses such as construction: Chip Eng Seng and Low Keng Huat. It is also not hard to find companies which operate in industry that has little relevance to the real estate business such as previously listed Popular to dabbled into the property development business.

Why the popularity? 

This sharing is intended to be in a series of bite size sharing with each post highlighting one key characteristic on real estate business. So we'll move on with batches.

The context of the analysis will be primarily focus on the Singapore real estate market and in this post I will use Oxley Holdings Limited as a case study - Quick sales cycle and potentially high return on equity


Personally, I would attribute the attractiveness to a property development business to the quick sales cycle and the potentially high return on equity. I highlight below one of the development project which Oxley Limited undertook, Suites@Bradell extracted from the 2011 annual report. 

Take note on the time between the site acquisition date and and launch date of 8 months and by 15 August 2011, the development is almost fully sold. The ability to execute a quick sales cycle on 97% of the development of less than one year after site acquisition as illustrated above translates to an attractive return on equity as Oxley will be entitled to receive the down payment of 20% on the sales price from the the buyer upon execution of the sales and purchase agreement.

Hence, the the likelihood is that Oxley has already recoup its equity invested (on the presumption land loan and construction loan was drawn down) on the development project by August 2011 as costs incurred till then would likely be incurred mainly for the downpayment of the land, the construction of the showflat as well as marketing expenses.

The remaining 80% outstanding (i.e. from date of August 2011 to date of TOP) will be paid to Oxley as the construction of the development progresses till completion. The proceeds received will then be use to fund the remaining construction of the development as well as paying off the interest on the loan drawn down. Do note the recovery on the outstanding payment is almost assured given the stable environment in Singapore and more importantly because the initial 20% downpayment would have been forfeited if the buyer is unable to service the progress payment.

Hence, the key takeaway on the above is that not all debts are bad debts and traditional debt to equity metrics might throw off a lot of investors from investing in real estate companies as they would view the high leverage ratio as risky. In this case, a better measure would be the percentage of sales of the development project which the Company undertook and expected margin on the project which would provide assurance to the investors that the Company has the ability to repay loan drawn down as the progress payment is received from customers with excess being translated to profit for the Company.

For the record, Suites@Bradell was completed on 5 June 2015 and the 33 residential apartments has a floor area of between 387 to 893 sqft.

CK is not vested in Oxley.

I'd like to thank CK once again for his invaluable sharing and we'll definitely see him share more about the real estate industry in the near future as a series batch.

Thanks for reading.

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6 comments:

  1. Thanks CK for the insight.

    As a retail investor, how and where can we find the 'expected margin' of the project?

    Thanks.

    ReplyDelete
  2. Hi Ray. The gross profit margin can be an indicator on the expected margin of the project. However, that could be convulated with other streams of revenue that the Company might have. So looking at the segment reporting might help.

    ReplyDelete
  3. Great post, thanks for sharing CK! I'm looking forward to the rest of the series!

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