Nan Fung finds ways to reduce construction costs

Facing soaring construction costs and falling property prices, Nan Fung Development has had to adopt new strategies to maintain its profit margins.

Donald Choi Wun-hing, the company's managing director, said: "Construction costs have surged from HK$1,000 to at least HK$3,000 to HK$4,000 per square foot over the past few years.

"About 50 per cent of construction cost is wages for labour. Unless there is a policy to solve the problem of labour shortage, construction costs will continue to rise."

Research from quantity surveyor Langdon & Seah shows the cost of building luxury flats rose to between HK$2,787 and HK$3,252 per square foot in the third quarter of last year from HK$1,195 to HK$1,413 in the third quarter of 2009.

Development costs are increasing, but the upside potential for home prices is limited.

"It inevitably affects profit margins," Choi said.

Nan Fung has its own construction firms to maintain quality control.

"We are trying to increase productivity and lower construction costs with different strategies. It could start from the design of the floor plan," Choi said. "We could standardise the dimension of toilets for each development. Then we could save the cost of materials through collective procurement. It could save time as well."

He said the firm would also choose materials suitable for cladding. Then it could save cost through bulk purchases.

"We want to systematise construction procedures to increase productivity. One example is enhancing the quality of prefabricated components," Choi said. This could also shorten construction times.

He said the government should review some building regulations, which could also help to lower development costs, ultimately benefiting the buyers.

"The regulations for open kitchens are too rigid," Choi said. "Developers have to provide fire sprinkler systems and firewalls. Other countries do not have such requirements."

Another factor driving up costs is the requirement that the content of sales brochures has to comply with the Residential Properties (First-hand Sales) Ordinance.

"We have to appoint lawyers and consultants to double-check the content even though we have a team to prepare the sales brochure. But the content is more than the buyers want to know," Choi said. "The government and developers should discuss and review [the law]."

In this week's C-Suite interview, Donald Choi reveals Nan Fung's commercial and residential development plans. He also talks about his outlook for the market