The Hidden Costs in Development

The Hidden Costs in Development
December 3, 2018 Malcolm Ashby

To the new or first-time developer completing a development and booking a large profit looks simple.

Buy the land, carry out the development, sell the product – easy.

Even more simple if you already own the land and just say “lets develop and make a profit”.

To the experienced developer the costs involved in completing a development seem obvious.

But there are a multitude of costs that are not so apparent to the “newbie” developer, and these start right at the beginning.

First there is stamp duty and legal fees involved to the purchase of the development property. These can vary significantly, depending on where in Australia the property is located.

Once purchased the property starts to incur the holding costs. These include the rates and commonly overlooked land tax. Once a property shifts from being a primary residence, land tax is assessable.

In addition, there is interest cost, either in the form of borrowed money or opportunity cost on capital used to purchase the development site. These costs continue until the last block, apartment or dwelling is sold and settled. A project may take at least 18 months or several years from start to finish depending on the size and complexity of the project, until all units are sold, so these ongoing costs continue to eat away at profits.

To get the project under way and prior to producing construction plans, there may need to be obtained numerous consultants reports e.g. ground or soil analysis, town planning advice and market intelligence. This advice will need to be paid for up front and more capital will be required.

Once plans, and planning approval is obtained the local authorities start to be interested. The local Council will have an interest in more than one way. Depending which state you’re in, they have such things as Public Open Space Contributions, Development Plan Overlays, Plan Checking, Supervision and Certification Fees. Other Authorities include Water (for Water, Sewerage and Storm Water), Power, Gas, and Telecommunications.

Once constructed and ready for sale the agents become involved and their commission can vary depending on the number of units (blocks, apartments dwellings etc), as can their ability. Negotiating this aspect can be critical to profits.

Lastly but what probably should be an initial consideration is the accountancy aspect, and this is largely due to Tax. All developments will be taxed in some way and some knowledge of how the Margin Scheme works could be critical with the profitability of the project.

The profitability of a development is dependent on identifying and controlling all costs. Without the knowledge of all the possible costs the inexperienced developer could be in for a nasty experience and be dissuaded from ever dipping their toe into the development arena again.

However, with good advice and knowledge right from the “get go” a profitable and enjoyable experience could be had.

For a free, no obligation quote or a free initial meeting with one of our friendly development valuers, simply contact us today by sending us your details in the box below.