Projected Annualised Return - What affects your return?
- The costs
- The sales values achieved on exit
- The length of time the project takes
The chart above shows how the factors of time and changes in property prices might impact the returns paid to investors. It is standard practice to base the Gross Development Value on current values so in a rising market you are likely to see better than projected returns and a shorter project time-frame because the units should sell more quickly.
In a falling market you tend to get the double impact of lower GDV and a longer project. This chart shows how these two things combine to either improve on or under perform against projected return.
The chart above shows how changes in the cost and the length of a project combine to effect the final returns. Costs are estimated usually before final designs are produced and are usually based on a 'per sq ft' calculation.
The Developer then needs to get final quotes from potential contractors and this can lead to significant variations in costs. We've modelled + or - 10% to illustrate the point.
The length of the project can also be influenced by the choice of contractor as well as changes in the market. Under estimate your costs and take longer than expected (which incurs further costs associated with finance)and the reduction in profitability can significant.
We encourage Developers to be conservative with the final sales values; the amount of time needed to plan, build and sell; and the development costs with the hope that we all enjoy better returns than we were expecting. However, when you are deciding whether to invest you should remember that these are just projections.
It's also worth remembering though, that it is in the Developer's interest to be cautious in budgeting and then to focus on completing the project for less costs, within a shorter time frame and to achieve the maximum sales price for the end units.
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