Land, Building Costs And Profit ....

[LuckyOne]

There are quite a few threads at the moment about possibly releasing more land for the development of newbuilds. I have always thought that newbuilds are quite important at the margin when it comes to determining the overall level of house prices.

After a lot of conversations with people, I have come to the conclusion that the price of a newbuild is made up of the following three components (based on intuition rather than fact) :

Land : 35%

Build Cost : 30%

Profit 35%

If land prices were halved by a more democratic planning process and developers' profits were halved by more severe market conditions for them brought about by more freely available land, the price of newbuilds could drop by 35%. The increase in supply would increase the marginal importance of newbuilds in the overall level of house prices.

In very poor market conditions, prices can drop below replacement costs.

Does anyone have a sense as to whether my intuition about the breakdown of the price of a newbuild is roughly right, especially with respect to the proportional breakdown of land prices versus build costs?

[Djini]

How I think they price newly built houses:

At the planning stage, they look at the market price for the area for the number of rooms, terrace type etc.

They then get teh price of the land, knowing roughly what I costs to build a house to see how much profit there is in the project.

If they can make 20% by building to the absolute minumin while keeping to the regs that's what they'll do. This is why new build '3 bedroom' hosues barely meet the standards compared to Victorian-era houses i.e. they have low ceilings (less bricks), microscopic bathrooms, thin partition walls, and all sorts of other milimalisations when they can do it.

The price they put a house onto market for (like all the other houses) has nothing to do with 'value'; it's simply how much they can get away with.

House price 'guides' are simply comparing the houses of a similar spec in the close area... Dumbest idea ever.

IMO, there should be some kind of universal calculation with proximitry to services, crime-rate, amenites, number of bedroom & cubit meter space. Then stuff like garage(s), garden size and all that.

Doesn't work like that though.

[neil324]

Depends on the market. During the boom they worked on low profit,high turn over. Now it's high profit, low turn over. Done by slashing wages. This is evident in all the builders yearly profit reports so even with severe market conditions they are improving.

The best way to reduce prices is for land to fall. Materials won't fall, wages can't fall any further.

[Brian Potter]

Having worked for developers - generally the profit is between 20-30% depending on the method of finance.

As a ball park - the cash rich developer with no borrowing costs - circa 30%. If its financed via a bank then the interest on the amount spent on the build starts as soon as a shovel breaks the earth (or before if the land is leveraged). This finance is directly taken off the gross profit margin. Hence the 20%.

The problem that has happened since 2008, especially in flat builds, is that the properties are completed and the finance interest clock is ticking. The developer cannot withdraw a penny until the bank is completely paid off - but he cannot sell for the original price. This leads to a situation where the interest becomes crippling to the developer and eventually he will run out of margin to clear the debt. At this point the bank takes owership. Sometimes the bank may pull the plug long before build completion to cut its loses. If you go around certain areas of Manchester (Hulme, Ancoats) you can see partially completed buildings , which have little chance of being refinanced unless the bank wants to off-load at a reduced loss.

House builds are broadly similar. There is only so far the developer can cut before they are effecively selling at a loss.

Most major housebuilders/developers have massively over-paid for land pre 2008 and so are totally bolloxed. Hence the still silly high asking prices.

My guess is that lots of new builds will be left on the shelf as the rest of the market finds its correct level. They are between a rock and a hard place.

[neil324]

Not saying they will, but there's definitely no such thing here as "can't". Especially in Sterling terms (which a lot of builders are interested in).

Maybe, most won't bother though.

[LuckyOne]

Having worked for developers - generally the profit is between 20-30% depending on the method of finance.

As a ball park - the cash rich developer with no borrowing costs - circa 30%. If its financed via a bank then the interest on the amount spent on the build starts as soon as a shovel breaks the earth (or before if the land is leveraged). This finance is directly taken off the gross profit margin. Hence the 20%.

The problem that has happened since 2008, especially in flat builds, is that the properties are completed and the finance interest clock is ticking. The developer cannot withdraw a penny until the bank is completely paid off - but he cannot sell for the original price. This leads to a situation where the interest becomes crippling to the developer and eventually he will run out of margin to clear the debt. At this point the bank takes owership. Sometimes the bank may pull the plug long before build completion to cut its loses. If you go around certain areas of Manchester (Hulme, Ancoats) you can see partially completed buildings , which have little chance of being refinanced unless the bank wants to off-load at a reduced loss.

House builds are broadly similar. There is only so far the developer can cut before they are effecively selling at a loss.

Most major housebuilders/developers have massively over-paid for land pre 2008 and so are totally bolloxed. Hence the still silly high asking prices.

My guess is that lots of new builds will be left on the shelf as the rest of the market finds its correct level. They are between a rock and a hard place.

Thanks for that.

Do you have a sense of the relationship between land costs and build prices (ex profit)?

[profitofdoom]

There are quite a few threads at the moment about possibly releasing more land for the development of newbuilds. I have always thought that newbuilds are quite important at the margin when it comes to determining the overall level of house prices.

After a lot of conversations with people, I have come to the conclusion that the price of a newbuild is made up of the following three components (based on intuition rather than fact) :

Land : 35%

Build Cost : 30%

Profit 35%

If land prices were halved by a more democratic planning process and developers' profits were halved by more severe market conditions for them brought about by more freely available land, the price of newbuilds could drop by 35%. The increase in supply would increase the marginal importance of newbuilds in the overall level of house prices.

In very poor market conditions, prices can drop below replacement costs.

Does anyone have a sense as to whether my intuition about the breakdown of the price of a newbuild is roughly right, especially with respect to the proportional breakdown of land prices versus build costs?

I have studied this in some depths over the past few weeks.A friend has an acre of land which he has applied for planning for four detached houses and it seems likely that it will be passed.I have offered to finance the build.He and I both want a house and we have a buyer for a third which will leave us one plot to sell.

Asking prices for plots are all over the place and agents have placed valuations on his plots at between £80 and £150k.However in the local area in a much worse position one seller is asking £130k for a plot that meaures 35m x 8m about a quarter of the area of these plots.I have had ball park figures to build in the range £150k-£200k depending on size and spec,but generally four beds and around 200sq metres.I think that it current market conditions these houses will have a valuation of around £375k and I am factoring in a 10% drop to around £340k. So on this basis your figures are not far out.Our safety margin is the profit.If it disappeared it would be all very sad but no big deal as three of us want houses to live in.

Planning as you rightly observe is the problem.It needs loosening so that these plots really are £80k not just a price put out by the agent who had his developer mate waiting in the wings.

[LuckyOne]

I have studied this in some depths over the past few weeks.A friend has an acre of land which he has applied for planning for four detached houses and it seems likely that it will be passed.I have offered to finance the build.He and I both want a house and we have a buyer for a third which will leave us one plot to sell.

Asking prices for plots are all over the place and agents have placed valuations on his plots at between £80 and £150k.However in the local area in a much worse position one seller is asking £130k for a plot that meaures 35m x 8m about a quarter of the area of these plots.I have had ball park figures to build in the range £150k-£200k depending on size and spec,but generally four beds and around 200sq metres.I think that it current market conditions these houses will have a valuation of around £375k and I am factoring in a 10% drop to around £340k. So on this basis your figures are not far out.Our safety margin is the profit.If it disappeared it would be all very sad but no big deal as three of us want houses to live in.

Planning as you rightly observe is the problem.It needs loosening so that these plots really are £80k not just a price put out by the agent who had his developer mate waiting in the wings.

Thanks.

Based on your and Brian Potter's responses, buying a newbuild (assuming that you can find one that doesn't make you vomit) at 75% of the asking price still leaves the developer with a little bit of profit and releases their stranded capital in a very slow market.

Perhaps developers are a 4th D (after debt, debt and divorce) to consider when looking for actual sellers rather than kite flyers (with my non-vomit inducing proviso).

[gimble]

Thanks.

Based on your and Brian Potter's responses, buying a newbuild (assuming that you can find one that doesn't make you vomit) at 75% of the asking price still leaves the developer with a little bit of profit and releases their stranded capital in a very slow market.

Perhaps developers are a 4th D (after debt, debt and divorce) to consider when looking for actual sellers rather than kite flyers (with my non-vomit inducing proviso).

I understand that a rule of thumb with build costs is about £1000 per sq metre, so using this number you can work out how much you're paying for the land and builder's/bank's profit and interest. This is corroborated by what profitofdoom says about his own project. I'd imagine that big volume builders cutting to the edges of building regs and quality might well get their costs quite a bit lower, though.

[Tired of Waiting]

(...)

Land : 35%

Build Cost : 30%

Profit 35%

(...)

I think the plots' market value is more variable than the construction costs.

If we imagine an auction for a building plot, with many builders present: They know what their construction cost will be (including their overheads and profit, for simplification here), say £1k/sq.m., for a 100sq.m house = £100k.

If it is a boom market, and they estimate the house market value at £200k, they will bid for the plot up to £100k.

If it is a cool market, and they estimate the house market value at £150k, they will bid up to £50k.

So, I think plots' share in the total cost is much larger during boom times, and much smaller during cooler times.

It appears that the builders' main problem selling new-builds now is that they over-paid for these plots 1 or 2 years ago.

-------------------------------------------

Table with building costs:

http://www.housepricecrash.co.uk/forum/index.php?showtopic=164408

We had a related discussion here:

http://www.homebuilding.co.uk/files/ascent-homebuilding/Costs%20Feb%2011_Layout%202.pdf

Edited June 6, 2011 by Tired of Waiting

[Venger]

It appears that the builders' main problem selling new-builds now is that they over-paid for these plots 1 or 2 years ago.

Acquisition prices they paid for land plots. Claims from developers that it's hard to get the financing they require to build new developments. Then unwillingness of developers to build and selling those newbuilds at lower prices.

Even if the Government run that scheme for plots to be given to preferred developers under 'build now, pay later', there is still going to be resistance against selling at lower prices. Probably to be offered under shared Ownership or other schemes to keep prices inflated.

3,205 new London homes stalled

However, CBRE said that difficulties in obtaining mortgage finance is hindering the sales market and contributing to direct financial constraints, which has resulted in many schemes with full planning permission not being progressed.

http://www.propertyw...5012553.article

Alternative link http://vision1investments.co.uk/up-to-3205-homes-in-london-are-on-hold/

[Executive Sadman]

I worked for a house builder during 2002. The profit ratio on a house then was nearer 15-20% at most, assuming they always got asking.

Basically, if it wasnt for the land bubble. Developers could and would throw up the same houses for 50% or less of current prices.

[Tired of Waiting]

I worked for a house builder during 2002. The profit ratio on a house then was nearer 15-20% at most, assuming they always got asking.

Basically, if it wasnt for the land bubble. Developers could and would throw up the same houses for 50% or less of current prices.

I agree. The builders' market is very competitive. Particularly if you consider the possibility of small developments or even self-build. The land's market (without planning consent) is as competitive. But the building plots' market (with planning consent) is highly restricted by the planning system, making building plots extremely scarce - here in the south - and therefore extremely expensive.

Around here (Sussex) 1 acre of agricultural land is worth between £10k and £15k. But with planning consent it goes up to £1 million or even more.

.

Edited June 6, 2011 by Tired of Waiting