build – as I understand it it used to be 1/3 for land, 1/3 for the build and 1/3 for profit, but I’m guessing the profit has dropped somewhat with land, particulalrly in the south east, being so expensive?

No where near 33% profit in the South East post 2008. Last time I spoke to a developer friend he was basically buying a plot with a breakeven build and then relying on a rising property market to provide his profit. By profit that was after he’d paid everyone and taken a “salary” himself so even breakeven he was making a living.

Land costs has killed it. Materials have been creeping up steadily. However labour has seen a big rise in the last two years. So many dropped out the trade 4/5 years ago when the industry was on its arse. So unless you’ve a list of good subbies get ready for some wallet pain in that area too, unfortunately some brickies are back on four figures a week which makes them more insufferable than normal.

There was a thing on the telly I caught the end of the other day – a big developer in Elephant and Castle was getting a kicking for factoring in a 25% profit in their affordability statement.

It depends on the manner in which the purchase and build is financed, the type and size of development involved and the developer profile, you won’t find a common rule of thumb figure these days.

Big-time developers will model the cash-flows of the development in quite a sophisticated way, looking at when cost will be incurred, and when receipts (sales) can reasonably be expected. They will price the cost of capital at around 10 – 15% and may also price risk.

E.g If a developer has to put an average of £7.5m into a 1 acre deal for say an average of one year, the cost of that capital will be £1.125m.

A risk allowance might be 5 – 10% of construction cost say 25 houses @ £100k each @ 10% = £250k

The developer will want to make a profit on the scheme: say 5% of the cost of 25 houses x £350k @ 5% = £440k

The point I’m making is that folk often can’t differentiate between ‘Profit’ and the cost of capital/ risk allowances etc

Thanks everybody, this is building in a garden/infill plot in the south east if that has any bearing on it.

Big-time developers will model the cash-flows of the development in quite a sophisticated way

Always amuses me what constitutes “sophisticated” in the property world.

Always amuses me what constitutes “sophisticated” in the property world.

I take your point!

Would ‘Sophisticated when compared with general construction companies’ be OK for you?

If you work on 20% of total costs – including land, all fees, construction, contingency, interest, marketing etc – you should be about right. Usually works out to around 15% of gross development value. Adjust down by 1 or 2% if strong demand.