Ask an average person about the income of a property developer, and you’ll likely get one answer: they earn too much. Selling an apartment for R50,000 per square metre may seem like an effortless way to generate profit.
With nearly a decade spent funding small to mid-range developers in this country, I can confirm that this viewpoint is far from true. Most developers labor diligently for less compensation than almost anyone else in the business, and few outside the industry truly grasp this reality.
Think about the complex path they must traverse before even laying a single brick. The engineer understands the regulations, the fire consultant knows their requirements, the town planner is aware of what can be built on a specific erf, and the architect is familiar with design limitations.
The difficulty arises from the fact that none of these professionals completely grasps what the others know, positioning the developer squarely in the middle.
A seemingly straightforward decision, like placing a window in a bedroom that opens onto a hallway, can escalate into a discussion over fire safety, ventilation requirements, or necessitate a total redesign. Given that plan approvals can take months—especially if an overlooked rule comes into play—every team member tends to prioritize “let’s double-check” over “let’s proceed.” This cycle repeats itself.
Designs are often excessively engineered out of an abundance of caution, leading to increased costs borne by the developer.
Time in this industry equates to money. Coordinating a professional team usually takes about six months just to prepare plans for submission. If the design aligns perfectly with zoning regulations—without any exceptions—council approval might take another six months.
If you require anything outside the standard zoning, the timeline could stretch to 12 to 24 months, assuming no objections from neighbors. Throughout this period, someone is paying interest on the land and fees for the professional team, which can total 10-15% of the overall development cost.
Understanding the Numbers
Let’s use some concrete figures to illustrate this point.
Imagine a typical scenario in a middle-class suburb of Cape Town, where a developer acquires a 1,500m² GR4-zoned plot for R10 million.
GR4 zoning allows for a height of 24 meters, but after assessing construction costs and timelines, most developers settle on three or four stories—let’s approximate this to 2,250m² of sellable space.
At R50,000 per square metre, that equates to R112.5 million in revenue, which sounds appealing.
Now let’s dissect the actual costs involved.
Bringing the land to shovel-ready status typically takes 24 months, meaning the R10 million purchase price incurs around R1 million a year in interest before construction even starts.
A reliable contractor providing good-quality finishes—think vinyl flooring, basic 20mm granite, and standard joinery—will cost approximately R20,000 per square metre, leading to a construction cost of R45 million for 2,250m².
The professional team, which includes an architect, quantity surveyor, fire engineer, structural and mechanical engineers, and a town planner, will add about R10 million, roughly 10% of the project’s value.
The bank finances construction in stages, releasing funds only after verifying that value has been added to the land. Without other means to cover weekly and monthly payments to contractors and consultants, a developer risks encountering delays and complications with the construction team.
At a prime-linked rate of about 10% for this scenario, along with a typical two-year construction period, interest on the construction and professional fees will approximate R5.5 million, in addition to the R1 million annual interest accumulating on the land.
Additionally, don’t forget the extra six months required for an occupation certificate after completion (and the bank continues to charge interest during this time), resulting in total interest across the roughly 54-month project of about R15 million.
Moreover, there’s a host of costs that often go unplanned until they lead to major issues…
Finance structuring fees, bond registration, marketing materials, insurance for the construction (including contractors’ all-risk coverage, public liability, Sasria, and development insurance), legal fees, plan scrutiny fees, site development plan (SDP) approval, environmental impact assessments, sectional title registration, the mandatory National Home Builders Registration Council (NHBRC) registration, service connection fees for sewage, water, stormwater, and electrical connections, along with bulk service contributions can easily sum to 5% of the project’s value—R6 million in this instance, excluding VAT.
Once the units are finally sold, 15% of the price is allocated to VAT, and 5% compensates the estate agent—who assumes none of the risk.
|
When totaled, it appears as follows… |
|
| Line item | Amount |
| Expected revenue (including VAT) | R112 500 000 |
| VAT | R14 673 913 |
| Estate agent fees | R4 891 304 |
| Land acquisition | R10 000 000 |
| Professional fees | R10 000 000 |
| Build cost | R45 000 000 |
| Interest costs | R15 000 000 |
| General costs | R6 000 000 |
| Profit after 54 months | R6 934 783 |
|
Internal rate of return (IRR) |
2.3% |
This results in an approximate profit of R6.9 million after 54 months of risk, funding, delays, and professionals continually re-evaluating each other—yielding an IRR of only 2.3% per year. Personally, I wouldn’t even rise for a 2.3% return.
So why do people persist in this business?
Because the true profits in property development rarely originate from the development itself; they arise from the appreciation of land as time passes.
A developer able to hold onto that land through a four-year process, rather than being compelled to sell at current prices, is generally betting wisely on a substantial increase in land values by the time they are ready to start construction.
That’s the real trade. The construction phase is mainly a break-even endeavor disguised as the core business.
At Geddes, we aim to bridge this gap by assisting developers in effectively structuring projects from the outset, acquiring land early on, and providing working capital alongside banks to ensure construction continues progressing instead of stalling due to missed drawdowns.
Ultimately, the figure that truly matters to a developer is not that headline R50,000 per square metre.
It’s about whether they can endure long enough, on the right land, to possess it when the market finally aligns.
Brent Geddes is the CEO of Geddes.
Sponsored by Geddes Capital.
Moneyweb does not endorse any products or services advertised in sponsored articles on our platform.
