Developers offer agents fatter cuts to push projects

July 9, 2008
Developers offer agents fatter cuts to push projects
In some segments, commissions have doubled compared to a year ago
By KALPANA RASHIWALA

(SINGAPORE) 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.

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.