Benchmark return on development costs: townhouses; apartments

I would like to know what seasoned developers expect for margin on development costs for:
(1) 5-10 townhouse developments;
(2) 7-10 apartments developments (focus on 3br given glut of 2br at present)

Spec of the developments to be consistent with income levels of the area (i.e. not super-duper luxury developments, just appropriate developments).

Assuming we are including interest costs, project management, but not paying the developer any wage. Assume that we seeking development approval (i.e. land without DA), but the plans are very achievable as per local council requirements/standards and have a very high chance that DA will go through within normal turnaround times.

When a seasoned developer is buying land, what is the typical return that he will consider for these types of developments?

My research suggests that both projects will take about the same time to deliver. Would you work on the same rate of return of the two types of projects, or would you shoot for higher returns on the apartments?

I am thinking around 16% return on development costs for townhouses and around 19-20% for apartments assuming around 5 months for DA approval (Brisbane). Is this correct?

 

Margins seem way too low for risk

Our current 5 town house project will deliver around 35% from our current figures perhaps more, being conservative.

My smaller projects deliver a minimum of around 20-25%.

I would also consider where you are playing if the market is rising then happy days, but you still need an estimate on todays end values.

 

You would want to have A LOT of experience and very detailed costings to want to go into bat @ 16% IMO.

Pretty easy for those margins to be eaten alive by some unexpected costs/delays or change in market.

 

Depends. I see many developers in that region who make great money. Others think they made a profit and then we find they didnt. Loads of issues impact. I argue the most import one is experience.

You may be surprised by how many people think that a dev is a guaranteed profit. Numbers are all ballpark and they don't cost things through. Even well established builders.

Many target 20%-30% knowing that its a great target but accepting it can end up less later. If you dont start with a budget / costing you wont finish on track. Nearly every dev client tells me tales of things that happen onsite that blow out a specific cost. Hopefully its minor and covered by contingency / allowance.

eg : Slab modifications, design defects, site / earthwork issues, council !!. One recent one had council advise a three lot land subdivision needed hand-dug kerb & gutter and driveway splays and hand poured / pumped concrete for 50meters - To protect specific trees. That issue added $75K to dev costs and council refused to budge. Required hand dug sewer main connection too - extra $45K.

I reckon the best way to lose money is race into a project with eyes shut. Better to find high margin and be patient.

 

I would not even bother touching anything with 16% just way too much risk.
Currently in Perth market am seeing even lower margins... No point developing if there is no money in the game, easiest way to lose money

 

High risk of this if developers get the timing wrong, could actually go from black to red.

I notice many investors focus a lot on the numbers but at the same time ignore market conditions, from my experience you need to understand both.

 

Even more risk in a stagnant or declining market - just playing with fire.

 

Just to clarify your comment - do you know of seasoned developers (even if you think it is utterly stupid) bidding at these levels (i.e. development margin of 16%)

Or do you mean that vendors have priced in such margins into their asking price and are being stubborn in coming down and the site is not selling?

I get the drift of this thread and will follow it - I will enter 25-30% into my feasibility numbers when calculating asking price.

You need to price risk appropriately - too risk averse and you won't get land, too risk seeking and you will buy land and be burnt later. There is some optimum that is achievable if patient.

 

I wouldn't get off my chair for a 16% projected gross return for any development. I generally look for 25-30% returns at least, otherwise the risk/reward ratio is not worth it for me.

 

I’ve personally done a development which had ‘comfortable’ 25%+ returns diminish to just break even following a failure to secure finance, then a change in market conditions.
I was stuck trying to finance $750k debt which generated zero income for about 5 years while I was a salaried worker. Interest rates climbed to over 8.5% at one point.

I’m with the ‘brains trust’ on this one. You wouldn’t catch me within a country mile of a development with initial Feaso of 16%.

Even one more recent development had cost blow outs of 17% from the early stage Feaso due to complex engineering and site works which were unknown at the time of purchase.

I guess it also depends on the complexity and time frames.
A simple duplex construction over 12months I may settle for 20%.

A multi unit development of 5-10 dwellings over a multi year period I would want a starting point of 30-40%.

Blacky