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?…Safari Group Break It Down

  • By Simon Taylor

Purchasing an apartment is something that most people do, without ever really contemplating what factors make up the relatively substantial price tag. There are only a few purchases in a person’s lifetime at the value of property, so I thought it time we break down the costs.

Let’s start with the end product…

You’ve made the decision to purchase ‘off the plans’ a 45 square metre, 1-bedroom apartment with a carpark in Parnell, Auckland for $750,000. Let’s pretend that this apartment is one of 70 in the project – if we assume that each apartment has the exact same value, then the total project value can be estimated at $52.5 million dollars.

As a purchaser of an off the plans project, you put your 10% deposit ($75,000) down in January 2021, with an expected construction start of June 2021 and a targeted settlement date of January 2023. 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 be considered sold, it will be another two years until the $750,000 is received. That’s because, for now, the 10% deposit of $75,000 will sit safely in a lawyer’s trust account for a two year period.

Now for the fun part! Let’s start eroding the $750,000, 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 $7,000. This would create a land purchase price of $7M. 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 $7,200,000.
    • This represents an apportioned cost per apartment of $102,857.
land cost in property development

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 $1,200,000.
    • This represents an apportioned cost per apartment of $17,143.
design and consultants property development

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. For a project of this size, the following breakdown is what you could expect to pay, given some realistic assumptions:
    • Resource Consent and Building Permit Application: $150,000
    • Development Levy’s (Metro Water, DC’s):                 $1,300,000
    • This represents an apportioned cost per apartment of $20,714.
Financing in property development

Step 4: Construction

  • As is the case with most developers, you need to hire a general contractor to look after the construction of the project. For a 5-level residential building with 1 level of underground parking, we could reasonably assume a blended price per square metre of $5,500 (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 $6,325. This would be a total build cost of around $20M.
    • This represents an apportioned cost for the apartment of $284,625.
construction in property development

Step 5: Financing

  • Assuming prime bank funding for the construction loan over a build period of 18 months, and assuming that the developer must put in 25% of the total project cost, then the interest during construction, bank fees and loan brokerage fees would be around $3M.
    • This represents an apportioned cost for the apartment of $42,857.
Financing in property development

Step 6: Marketing

  • In order to successfully market a project of this size, a budget of $500,000 can be applied.
    • This represents an apportioned cost for the apartment of $7,143.
marketing in property development

Step 7: Sales & Commission

  • More often than not, a real estate agent would be involved in the transaction. This means that the developer pays a commission of typically around 3%.
    • This represents an apportioned cost for the apartment of $22,500.
sales and commission in property development

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 could easily add up to $400,000.
    • This represents an apportioned cost for the apartment of $5,714.
miscellanious in property development

Step 9: GST

  • The purchase price of a residential apartment includes GST, meaning that although the purchase price is $750,000, this number reflects 15% tax.

    • The net price is therefore $652,174 + 15% GST amount of $97,826.

gst in property development

Step 10: Profit

  • Working through Steps 1 to 9 above amounts to a total cost per unit of $601,379 (or $42.09M for the project), which when deducted from your purchase price of $750,000 leaves a remaining amount of $148,621. On the surface, this represents a gross development profit over the total cost per unit of 21.7%, which has been amassed over a 2-year period. The profit as a percentage of the value of your unit ($750,000), represents 20% of your purchase price.

     

    • As this remaining amount of $148,621 is profit for the developer, it is income and therefore taxed at 33%, so we must split out the $148,621:
      • Tax represents an apportioned cost for the apartment of $49,045.
      • Net profit represents an apportioned cost for the apartment of $99,576.
  • While this is not a small number, it comes with an unbelievable amount of risk, and let’s not forget step 5 above, which requires the developer to put in 25% or more of the total project cost as equity. (similar to needing >20% deposit for a mortgage)
  • In the case of your unit, the developer would need to put in $150,345 (25% of the total cost per unit), less the deposit that was collected up front ($75,000) meaning that $75,345 per unit is required from the developer, on every single unit, assuming all are presold prior to start of construction.
  • Each step of the way, there are factors that the developer is working to control, all of which will negatively impact the profitability of the project. When you consider the risks associated with the developer’s net return per unit of $99,576 and compare this to the purchaser’s risk/reward, it’s not as great as it might first appear. Making a reasonably safe assumption that values will go up 5% per year (REINZ advises it’s been more like 25% this year in Auckland), then the purchaser’s apartment will have increased over a 2 year period as follows:
    • Purchase: $750,000 in January 2021.
    • Yr 1 Value: $787,500 in January 2022.
    • Yr 2 Value: $826,875 in January 2023. (Settlement).
    • This represents a gain of $76,875 for effectively 0% risk, vs the developers gain of $99,576 for 100% risk.
breakdown of property development costs

Our Current Projects