The perception in the general public’s mind that property developers make huge profits on their developments is way off the mark.
This off-the-cuff comment was made recently in a press interview given by Bill Rawson, Chairman of the Rawson Property Group, whose subsidiary company, Rawson Developers, has been one of the most active developers in Cape Town’s Southern Suburbs in recent years. They have recently completed three developments in this territory, which total 429 apartments and have a further four in the pipeline, which should keep them busy until late 2015.
Rawson said that although delayed transfers can sometimes be negotiated, in most cases the land acquired for development has to be paid for upfront. Then, he said, it can take anything up to 60 months to get the public’s consent for the proposed scheme and to obtain the required planning approvals and/or amendments from the “slow moving and understaffed” City Council officials. Then, initial bank funding will often be dependent on a certain sales target being met, by the developer. This, in turn, means that the bulk of the promotional and advertising campaign has to come from the developer’s pocket, again paid for upfront. Finally, before the building work can start, the services (electricity, roads, sewerage and water) have to be installed and paid for.
“When the public sees, for example, an 85 m2 apartment is selling at ± R900,000 they are inclined to look up the building’s statistics per square metre and calculate the price on that basis. This can lead to the perception that the developer is making exorbitant profits. What the public does not understand is that the holding, dead interest, planning and promotional costs can absorb as much as 20% of the developer’s outlay.”
Even on Rawson Developer’s fastest selling schemes today, said Rawson, the developer’s final profit is likely to be less than 5%. The profit that is made, he said, is generally on the construction work, not the development. This is why the Rawson Property Group have their own building team – but even here the profits will be “minimal”, i.e. a building contractor’s profit of 10%.
“The people who often do best out of our schemes,” said Rawson, “are those who purchase units two years in advance and multiple buy-to-let investors who can more or less cover their monthly bond repayments through rents at an early stage. Today they are seeing a 7 to 9% annual appreciation on their units. As their purchase price in many cases has been largely funded by the banks here, the real profit that such investors make on their own cash invested over, say, a ten year period is likely to be in the region of 100%.”