Purchasing an apartment is something that most people do, without ever really contemplating what factors make up the relatively substantial price tag

Ever wondered what makes up the purchase price of a brand new apartment?…2022 update

  • By Simon Taylor

In November of 2020, I wrote a piece breaking down the costs that go into the purchase of a new apartment. Given what has happened in the market since then, I thought it very timely to revisit this article and re-run the numbers. Ultimately, this illustrates why we are seeing a number of projects put on hold, deposits refunded, and even some inexperienced (and experienced) developers fall over. So, let’s jump in and take a look at what has changed and how it impacts things:

Let’s start with the end product…

In the November 2020 breakdown, the value of the off-the-plans, 45 square metre, 1-bedroom apartment with a carpark in Parnell, Auckland was referenced at $750,000. As has been well documented, house prices increased ±28% year on year through 2021, so it’s reasonable to factor in half of this increase for an apartment (typically the apartment market increases at half of the housing market, as (good) apartments typically provide a much higher yield, but lower capital growth). So, applying a 14% increase to the apartment in this example, would put the value at $855,000. However, the media keeps reporting that house prices are dropping, with some banks predicting a fall by as much as 10%. So, let’s now apply half that factor to the apartment (-5%), which would see the apartment reduced in value to $769,500. (Note, this is still above the value that you purchased it for in November 2020).

Just as was the case last time, this apartment is one of 70 in the project – each with exact same value, which creates an estimated total project value of $53.865 million dollars.
As a purchaser of an off-the-plans project, you put your 10% deposit ($76,950) down in January 2022, with an expected construction start of June 2022 and a targeted settlement date of January 2024. That’s two years from payment of the deposit to delivery of your apartment!

vault toproperty development

From the developer’s side of the equation, while the unit may now be considered sold, it will be another two years until the $769,500 is in the developer’s bank account. But for now, the 10% deposit from the purchaser of $76,900 will sit safely in a lawyer’s trust account for a two year period, out of reach from the developer. (Note – it should always be protected, in a lawyers trust account).

Now for the fun part! Let’s start eroding the $769,500, by working our way through the development process from start to finish:

Step 1: Land Purchase

  • While land cost varies widely, let’s make the reasonable assumption that our imaginary site is 1,000 square metres in size at a price per square metre of $6,500, which is a reduction from the $7,000 per square metre from November 2020 (distressed seller given the times). This would create a land purchase price of $6.5M. Add to this legal fees during the purchase, holding costs (rates etc.) and some interest for the required land loan, and our total land cost is set at $6,700,000. Note, if the land was purchased (or negotiated) over the course of 2021, then it’s highly likely that the developer has locked in a now overvalued piece of land, but we’ll assume a recent purchase from a distressed vendor.
    • This represents an apportioned cost per apartment of $95,714.
    • A 7% reduction from the land purchase value of $102,857 in Nov-2020.
Cost Breakdown Land Purchase

Step 2: Design and Consultants

  • In order to deliver a project, we need to engage a number of consultants. For example: Architect, Landscape Architect, Interior Designer, Structural Engineer and Peer reviewer, Civil, Mechanical, Hydraulic, Electrical, Wind, Traffic, Fire, Acoustic, Energy and Geotechnical Engineers, together with a town planner. For a project of this size, we can safely assume that this cost would be $1,320,000 vs $1,200,000 from November 2020, reflective of increased salaries (low unemployment rate and inflation), which of course means that fees go up for consultants.
    • This represents an apportioned cost per apartment of $18,857.
    • A 10% increase from the design fees of $17,143 in Nov-2020.
Cost Breakdown Design

Step 3: Permits and Fees

  • Once the design is set, we need to apply for a Resource Consent and Building Consent. In addition to this, we must pay fees that council and other government entities use to help recover the costs of infrastructure, necessary for growth. Construction Costs over the past year have increased by 21%, and with consents pegged to construction cost, we can increase the consent number from the November 2020 by 21% and the Levy’s by 10%:
    • Resource Consent and Building Permit Application: $181,500
    • Development Levy’s (Metro Water, DC’s):                 $1,430,000
    • This represents an apportioned cost per apartment of $23,021.
    • An 11% increase from the permits and fees of $20,714 in Nov-2020.

Step 4: Construction

  • As referenced in Step 3 above, the construction industry has seen cost increases over the past 12 months of around 21%, so let’s factor that in across the board for simplicity. As is the case with most developers, you need to hire a general contractor to look after the construction of the project (we build for ourselves, and this is where we have a huge benefit). For a 5-level residential building including 1 level of underground parking, we would need to increase the price per square metre from $5,500 in November 2020 to $6,655 (including a margin). Note – this number would need to be multiplied by the entire building area, to cover all non-saleable areas, such as the hallway, elevator core and stairwells. In order to cover off all other areas, we will inflate this number by 15% to $7,653, which is $1,328 more per square metre, and costs continue to rise. This would be a total build cost of around $24.1M, with is $4.1M more than it would have cost in 2020 prices. Note – construction costs keep increasing, and in this example, we are still 6 months away from start of construction.
    • This represents an apportioned cost for the apartment of $344,385.

STEP 5: FINANCING

In our previous example, we assumed prime bank funding, however given the challenges of achieving presales targets in today’s climate coupled with the general appetite from prime banks, developers are pushed into the non-prime bank realm. So, not only have interest rates increased over the past while, but we will now need to assume higher finance costs for non-prime. This comes with the benefit of not needing as much equity in the project (say 20% equity vs 30% for prime bank), together with less debt coverage from presales (i.e.: instead of presales covering say 1.2 x the debt borrowed, we might get as low as 0.8), which allows us to start construction sooner due to not needing as many presales.
  • Assuming non-prime funding for the construction loan, over a build period of 18 months (the developer must put in 20% of the total project cost as equity/skin in the game), then the interest during construction, bank fees and loan brokerage fees would amount to around $5M, which is significantly higher than the $3M cost back in November 2020, from a prime bank. It’s also important to note, that everything is taking longer, from trades spread too thin, to the well documented lack of GIB Board. These issues have a real cost, so to make things simple, we will assume our programme takes a $250,000 hit, due to inability to procure supplies or resources on time, which means we cannot repay the loan as early as we planned, so there is interest ticking away for a longer period (plus a range of other costs including the need for the construction team to remain on site for an extra few months, along with fence hire, toilets etc etc etc).
    • This represents an apportioned cost for the apartment of $75,000.
    • A 75% increase from the financing of $42,857, when prime bank funding and lower interest rates applied, in a market where GIB board was readily available.
Cost Breakdown Financing

Step 6: Marketing

  • Given cost increases and the added difficulty of counteracting the media messaging on values dropping and the general “Buyers’ market”, the marketing budget will need to increase from $500,000 to $750,000.
    • This represents an apportioned cost for the apartment of $10,714.
Cost Breakdown Marketing

Step 7: Sales & Commission

  • More often than not, a real estate agent would be involved in the transaction. And while commissions for off-the-plans are typically around 3%, there are a number of developers that are increasing the fees in order to incentive agents to prioritize selling down their stock (i.e.: Town Houses in average urban locations with lots of competition). So, to get agents interested, we will likely have to increase the commission on average to 3.5%.
    • This represents an apportioned cost for the apartment of $23,420.
    • A 4% increase from the commissions cost of $22,500 in Nov-2020.

Step 8: Miscellaneous

  • There are a number of smaller items that add up, including legal fees through the development process and at settlement, surveyor costs, property valuers etc. These costs were previously noted at $400,000, so let’s increase these by 10% to $440,000 which is reasonable over the past period.
    • This represents an apportioned cost for the apartment of $6,286.
Cost Breakdown Misc

Step 9: GST

  • As the purchase price has increased from $750,000 to $769,500, so too has the GST owing, with 15% of this amount immediately carved out for the government.
    • This represents an apportioned cost for the apartment of $100,370.

Step 10: Profit

  • Working through Steps 1 to 9 above, amounts to a revised total cost per unit of $697,767 which is 16% higher than the $601,379 in November 2020. (This increase has pushed the total project costs up from $42.09M to $48.84M – counting GST as a cost), which when deducted from your purchase price of $769,500 leaves a remaining amount of $71,733 (a serious downgrade in profit from $148,621 in November 2020). All things considered, this reflects a development return on costs of just over 10%, which has been amassed over a 2-year period. The profit as a percentage of the value of your unit ($769,500), represents 9% of your purchase price.
    • As this remaining amount of $71,733 is profit for the developer, it is income and therefore taxed at 33%, so we must split out the $71,733:
      • Tax represents an apportioned cost for the apartment of $23,672.
      • Net profit to developer represents an apportioned cost for the apartment of $48,061.
  • $48k per unit x 70 units ($3.36M) might sound well worthwhile, however it comes with an unbelievable amount of risk, with the developer also required to put in 20% or more of the total project cost as equity. In the case of your unit, the developer would need to put in $119,500 which equates to $8.36M for the 70 unit project.
  • Each step of the way, there are factors that the developer is working to control, most of which will negatively impact the profitability of the project. Very seldom, do projects finish on time, which means that interest costs and construction budgets blowout. So, this starts to paint a picture why we are seeing developers fall over, ask the purchasers for more money, handing back deposits and even cancelling projects. This is also a good exercise to show why it’s unlikely we will see a large portion of the record number of consented projects actually constructed over the next few years. The level of supply that was touted to be injected into the market will not eventuate, and ultimately (sadly) we will fall behind … again, with demand once again likely to outpace supply.
  • In this hypothetical development with 70 Apartments, and a total revenue of $46.84M (Excl GST) and total Costs of $41.82M (GST factored in revenue), then the total profitability to the developer would be $5.0M which represents 12% Return on Costs.
  • As a developer, if you are looking at this land as a potential development opportunity, you would pass.
  • If you already owned the land (you likely overpaid), and started selling your units almost 2 years ago (you likely undersold), and are now looking to start construction and seek funding, it would be all but impossible to get this project off the ground. Choose your developer wisely, as what can look great on social media, is often a disaster waiting to happen.
Breakdown of property development costs

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