The investment bank said land now accounted for 60 per cent of development costs, up from 50 per cent three years ago, with the rise in land costs bolstered by low interest rates and an increasing number of new bidders.

"We expect gross margins to fall from 25 per cent to 10 per cent or lower through this down cycle," it said.

Developers' pricing power has been eroded as property markets slowed following successive rounds of government measures designed to cool them in Singapore and Hong Kong.

"The situation of Singapore is similar to that of Hong Kong, with developers' margins falling to 10-15 per cent from 15-20 per cent," said Thomas Lam, the head of research and consultancy for Greater China at Knight Frank.

Lam's calculation is based on the percentage of sales income left after developers subtract all costs, such as land, construction and financing, at present levels.

"You could still see some developers reap big profit margins from individual projects," he said. "That could be because the plot of land was bought many years ago and the cost was lower than the current level.

"But in the general market, the margin has been declining, and it will continue to deteriorate."

In Hong Kong, Lam said, labour was a major reason for rising construction costs because of a restriction on importing workers.

Wheelock Properties chairman Stewart Leung Chi-kin said construction costs had risen by 60 to 70 per cent since 2011 to as much as HK$4,000 per square foot. He urged the government to import workers for public projects, which would relieve the labour shortage in the private sector.

The government and MTR Corp are building railway lines, with peak completion due next year, while casino operators are building six mega properties in Macau, with peak completion in 2016.

The public sector could absorb more construction labour and drive construction costs up further, Morgan Stanley said. Last month, a unit of mainland-backed Poly Property beat heavyweights such as Cheung Kong and Henderson Land Development to win a Kai Tak site for HK$3.92 billion, or HK$6,530 per square foot. Morgan Stanley estimated that Poly Property might only be able to achieve a gross margin of 9 per cent.

Developers also faced declining margins on the mainland, Lam said, but while they were looking at 20 per cent or less in first-tier cities, they could still earn margins of 20 to 30 per cent in second and third-tier cities.

China Overseas Land & Investment chairman Hao Jianmin said: "I think a developer gets a pass with a gross profit margin of 20 per cent in consecutive years, becomes excellent when gross profit margin improves to 30 per cent, and superb if gross profit margin stays at 40 per cent.

"With our sales topping 100 billion yuan (HK$125.6 billion), a gross profit margin of 35 per cent is already superb."

Sino-Ocean Land said its gross profit margin dropped to 24 per cent last year from 27 per cent in 2012.

"Our gross profit margin is at a record low now," company president Li Ming said on Friday.

Li said this was mainly because of soaring land prices in cities it entered last year and the pricing of projects there at low levels to stimulate demand.

"I think our gross profit margin has bottomed out," he said.

The company has sold more than half of the land it had bought at high prices, and it had stepped up cost controls, cutting marketing expenses last year and construction costs this year.

Gross profit margin at Powerlong Real Estate fell to 28.3 per cent last year from 39.7 per cent in 2012, mainly because residential properties delivered last year had mostly been sold in 2011 at lower prices, and also because a lower proportion of non-residential properties, which are usually more profitable, was delivered last year.