Posted on 29/05/2018 15:17:51   by  

Projected Annualised Return - What affects your return?

When you are deciding whether to invest in an opportunity or not, there is a high chance that the first thing you will look at is the returns you are likely to get. Posting a single figure for the return isn't as simple as one might think, and Investors are aware that returns are not guaranteed. What Investors don't see are the financial models we create in the background, where we try to understand the likelihood of each outcome, which we hope will help you make your investment decision by giving you an idea of the level of risk involved, and how long you would like to invest for. How we calculate Projected Returns We publish Projected Returns to make it easier to compare one investment with another. Importantly, we forecast them in the same way to bring consistency. The projections are based on the appraisal made by the Developer using the information available at the time and as the designs are completed the likely profitability becomes clearer. And then there are the external factors that can influence the outcome of any property investment.  There are 3 main things that are likely to impact the Actual Returns of a development:
  • The costs
  • The sales values achieved on exit
  • The length of time the project takes
And so Projected Returns should be seen as just that - projections. To give you an idea of just how much the Actual Return might vary from the Projected Return we have created a model for the Deepcut development. prjct-term-vs-return
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.