Why building new properties is profitable and likely to remain so; the gap between the costs of building and the profit potential thanks to rising property prices.
Larger and smaller builders enjoying increased profits from new builds
National house builders such as Barratt and Persimmon building thousands of new homes a year and smaller firms building a mere handful are showing increased profits in providing the properties to meet the country’s new housing demands.
Increased expansion of towns and cities and a rising population means the need for new homes is increasing; this leads to higher prices and initiatives such as the government’s help to buy scheme is helping boost demand and profits
Market driven pricing
Apart from the occasional blip, property price growth has been a constant over several years with profit margins generally outstripping what it costs to actually build a property.
The result is increased profits for self builders
and building companies in general.
The costs of building
There are basically three areas:
- Preliminary work - basically setting up the site such as providing scaffolding, fencing, putting security and safety provisions and equipment in place and providing site clearance facilities such as skips.
In a nutshell, the ‘prelims’ are temporary items that will be removed once the construction is complete.
- Professionals - naturally costs and fees are involved with engaging professionals to help gain the necessary permissions for a building project and providing a ‘construction blueprint’ through drawing up accurate designs.
The architect is likely to be the main expense. A trusted and competent architect may take responsibility to design a whole development, and their task will be to deliver work that makes for an interesting, aesthetically pleasing and perhaps innovative design while being as straightforward to build as possible.
Other professionals, such as structural engineers and quantity surveyors, may be required as might a professional to provide a measured building survey
to create a highly accurate record and blueprint for what has been constructed, or for a building that is going to be converted - a large house into flats, for example.
Other fees might be spent in areas such as energy efficiency assessment and health and safety compliance.
- Project management - good project management is very important whether for a one-off house build on a single plot of land or a major housing development. A project manager ensures the right steps in the construction process occur at the right times so as to meet deadlines; this is achieved by arranging for the relevant personnel and materials to be on site at the appropriate time.
Some self-builders or smaller building companies will undertake their own project management, and a one-off investor building one or a few homes may have their architect undertake the role (assuming they offer this as a service).
Project management, whether absorbed into the construction or charged out separately, can account for a good 12% at least of the cost of construction.
Once the above costs have been worked out, then it’s a question of adding the profit margin; this is mainly market driven so may not fit into a basic calculation of a fixed percentage on top as with many commodities.
Depending on the complexity of the build and its geographical location, a builder may quote anything from 25% to 75% over and above the basic building costs, although it’s possible it could be more like 5% to 50% once project management elements have been factored in - one reason why some builders may choose to do their own project management.
The beauty of a healthy property market from the constructor’s point of view is the ever-widening gap between the costs of building and the market value of the property. The costs of building, while they inevitably rise from time to time, aren’t keeping pace with the increase in property prices so providing higher profits for the builder.