Wednesday, July 9, 2008

Developers Offer Agents Fatter Cuts To Push Projects

Source : The Business Times, July 9, 2008

In some segments, commissions have doubled compared to a year ago

Developers are paying property agents bigger commissions - in some cases almost double of what was offered a year ago - to push their new residential project launches.

Tough task: The environment for selling homes is very challenging now and agents have to work much harder to convince buyers

This is because the environment for selling homes is far more challenging now and agents have to work much harder to persuade potential buyers to part with their money.

A modest-sized developer told BT he does not mind rewarding agents with commissions of 2 per cent or more as, to him, speed of sales is paramount. He needs to achieve enough cash flow to begin construction and move on to his next project. But even the big boys are having to pay a higher commission rate to agents these days - if they want their help to move units.

An established developer launching a big project these days could pay its appointed marketing agent 0.8 per cent of sale price - compared with possibly 0.5 per cent 12 months ago. To further incentivise agents, the commission rate may go up to, say, one per cent nowadays, once a certain number of units have been sold.

Developers of smaller projects, for instance in the Telok Kurau area, are understood to be paying even higher commissions - often up to 2 per cent - compared with around one per cent or less a year ago, BT has learnt from property agents and developers. On top of that, some developers are offering a bonus payout in the form of an additional 0.5 per cent commission if the project sells out within a certain time frame and at a price exceeding the developer's target.

BT understands that high-end projects have also not been spared. Their developers are having to reward agents with 0.7 to 1.5 per cent commissions - up from 0.4 to 0.5 per cent a year ago.

Teo Hong Lim, executive chairman of property group Roxy-Pacific Holdings, says: 'Speed of sales is most important to us. We don't want to target sales of just 30-40 per cent of total units in a project. We need to sell 80-90 per cent or even 100 per cent. We can then begin construction, and move on to our next project.

'At the end of the day, agents are also very much incentivised by commissions. It's a sort of a no-lose situation for us when we achieve speed of sales and the final net sales value of a development is higher than our initial target, even after we less the additional bonus commissions we pay the agents.'

While some market watchers may think that paying agents higher commissions will eat into the developers' profit margins, Mr Teo argues: 'Commissions are only part of our total project cost. It's definitely much, much lower than land and construction costs.'

A property agent says: 'Developers are more concerned with cash flow and sales take-up. The higher commission is a small amount to pay for boosting their cash flow. If they don't have the cash flow, higher interest expense will be a much bigger cost item than the commissions.'

Agreeing, Knight Frank executive director Peter Ow explains why agents need higher motivation today. 'The main reason for increasing our fees is that we're operating in a tougher market and, frankly, agents are highly motivated by fees. If you get two projects side by side, most agents will naturally push for the one where the reward is higher.'

Industry players acknowledge that agents have to work a lot harder to convince buyers, given the more cautious economic outlook, thinner foreign buying and the fact that fewer speculators are left in the market after the deferred payment scheme was scrapped last October.

BT understands that the extra work being put in by agents these days to realise sales at showflats includes studying the project's costing. 'We tell buyers the price we're offering is below current replacement cost, either because the developer bought the land cheap or locked in construction costs early.

'Sometimes we also use pressure tactics. We tell potential buyers that the developer will raise prices once it achieves a certain percentage of sales. And it works,' an old hand in the game told BT.

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