% profit on new build properties.

beefster

I am seeking information regarding the expected income a builder / developer would expect to make from building a new house (not including the land purchase). I realise there are a few ifs and buts but generally... is there a point of information out there I can use as reference?


I am told verbally that in the South east (not inc London) 20% is a ball park figure but that's just verbal chatter. I need something to refer to with foundation.... excuse the pun. That does seem a little low to me???




Any pointers most welcome. Thinking of investing towards my pension but need to be able to approximate the worth of such a project. Possibly pie in the sky but looking for information.


Any help welcomed.


Thanks

CLAPTON

why not try the annual reports of the major builders - they usually give interesting figures for their costs although I no idea if they are honest

enator

Our builder built five houses & when I asked him what margin he was going to make he said the last house was the profit i.e. 20%.

Mind you, that was in 1999 and the market wasn't in great shape.

beefster

Thanks both.

chucknorris

It can obviously vary, but if you look at land residual value calculations, which establish the max estimated maximum value that a developer should bid for land, in a development economics text book, you will mostly likely find that the figure used for the developer's profit is 20%.

steampowered

The typical operating margin in the construction industry is more like 3-4%, rather than 20%.

It might be higher for developers.

chucknorris

steampowered wrote: »

The typical operating margin in the construction industry is more like 3-4%, rather than 20%.

It might be higher for developers.

It is massively higher for developers i.e. circa 20%. Main contractors overheads and profit mark up is completely different to development profit. Mainly because the contractors receive monthly interim payments, so they are only bankrolling the project for the current months costs plus retention on the previous months (even then there is also a time lag for the payment of suppliers and sub-contractors). Whereas the developer has to pay for the site, and also the professional fees and the building costs as it progresses. So the ROCE (return on capital employed) for the contractor is much higher than the 3-4% headline mark up percentage expressed on the contract sum, because the contractor never has to invest the contract sum.

Conrad

So I've arranged a lot of finance for developers, usually small projects, and there is no ball-park really, every case differs. For a start your borrowing costs could be anything from 2% (based on remortgaging your main resi) to 10% and more. If you get into bridging then the costs are significant.


You need to work out your costs, deduct from your expected selling price, and there's your projection, BUT, everyone underestimates the costs, it's Human nature, and don't assume you will complete everything inside 2 years as a rule of thumb (new builds I mean)


It's easy to come un-stuck by being over optimistic.


Don't forget stamp duty and sales tax if it's not designated your main resi


Trades people I find to be very busy these days and as such their quotes and rates reflect this demand


The people I know that do this successfully are very attuned to their local market and developing in a manner to produce max profits.

chucknorris

Conrad wrote: »

So I've arranged a lot of finance for developers, usually small projects, and there is no ball-park really, every case differs. For a start your borrowing costs could be anything from 2% (based on remortgaging your main resi) to 10% and more. If you get into bridging then the costs are significant.


You need to work out your costs, deduct from your expected selling price, and there's your projection, BUT, everyone underestimates the costs, it's Human nature, and don't assume you will complete everything inside 2 years as a rule of thumb (new builds I mean)


It's easy to come un-stuck by being over optimistic.


Don't forget stamp duty and sales tax if it's not designated your main resi


Trades people I find to be very busy these days and as such their quotes and rates reflect this demand


The people I know that do this successfully are very attuned to their local market and developing in a manner to produce max profits.

The way they start working it out is with a land residual calculation, usually to work out what the maximun bid for the land is. It works like this (simplified version):

GDV (Gross development value, i.e. what you sell it for/or if retaining, what its worth)

Less:
Building costs
Professional fees
Finance costs
Marketing costs (to sell)
Developer's profit (say 20% on costs, therefore 16.67% of GDV)

= Total land acquisition cost

Less land acquisition costs (i.e. stamp duty, finders fees, legal costs etc.)

= Maximum bid for the land

martinsurrey

chucknorris wrote: »

The way they start working it out is with a land residual calculation, usually to work out what the maximun bid for the land is. It works like this (simplified version):

GDV (Gross development value, i.e. what you sell it for/or if retaining, what its worth)

Less:
Building costs
Professional fees
Finance costs
Marketing costs (to sell)
Developer's profit (say 20% on costs, therefore 16.67% of GDV)

= Total land acquisition cost

Less land acquisition costs (i.e. stamp duty, finders fees, legal costs etc.)

= Maximum bid for the land

Which is why in most cases its the land owner who makes the most profit! especially when you add in an overage clause that kicks in over 24% margin (and is fairly common).

MrsTinks

Developers and large builders will have different numbers as they will be offering guarantees and warranties for the first x number of years that they need to either insure for or self insure for in the profit margin of the sale price.

Some builds will have a higher margin than others based on luck, some will be "loss leaders" but will probably bring in business through reputation or high profile in press etc. There is no easy answer for exactly what the profit margin is likely to be for every developer on every site as well as the longer term margin if providing warranties as a company vs a private build and then sale as seen if that makes sense...

Of course they will also have contractors at bulk rates most of the time that you won't have access to...