Some of Singapore’s largest companies in the stock market have significant residential property development businesses – Keppel Corporation Limited (SGX: BN4) and CapitaLand Limited (SGX: C31) are two examples with their respective market capitalisations of S$9.8 billion and S$13.3 billion.
Given their size, they are likely well-known companies to investors here. But even so, there are some investors who do not know how residential property developers actually account for their revenue. Knowing how such companies do so can help investors make better investing decisions. So, I thought it’d be useful to have a brief look at the topic.
Basically, residential property developers are subjected to three revenue recognition methods:
- The Percentage of Completion (POC) method
- The Completion of Contract (COC) method when residential properties are sold under a progressive payment scheme. This shall be abbreviated as PPS-COC.
- The Completion of Contract (COC) method when residential properties are sold under a deferred payment scheme. This will be known as DPS-COC.
The first method, POC, applies if a property is sold under the following payment schedule:
Under the POC method, developers get to recognize revenue with the completion of certain construction milestones.
As for the second method, PPS–COC, the payment schedule involved is the same as in the table seen above. But, the key difference is that the developer can only recognise revenue when the property is handed over to its owner. Developers that utilise the PPS-COC revenue recognition method are likely to have a sharp increase in revenue when the property is completed and control is transferred to the buyer.
We’re down to the last method, the DPS–COC. The table below shows how the payment schedule looks like under a deferred payment scheme:
As you may have noted, the majority of the payment for a property under a deferred payment scheme is only made at a very late stage of the property’s construction. A key risk here would be that the developer might not get paid for a large chunk of its properties’ value if the buyers were to default before the 65% payment is made.
So there it is, a brief outline on how property developers in Singapore recognise their revenue. You may get some interesting insight on a property developer’s future revenue if you look through its portfolio of ongoing and future developments.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.