Since the Brexit vote many people have been asking me what I think it all means for house prices, the land market and property development. The answer is that I don't honestly know, and neither does anyone else. What I do know is that uncertainty creates opportunity.
When it comes to assessing development opportunities it's actually fairly easy to deal with. Whatever the market may or may not do, a sensible developer must always research and analyse any opportunity inside-out, based upon today's sales values (based upon very detailed marked research) and development costs. Making assumptions about what might happen in the future (particularly if you are assuming house price inflation) is usually wrong and will often end in tears.
When assessing opportunities in any market, and having got a firm understanding of current sales values and development costs, the key input (or output) that developers should be most interested in is the profit margin. The required (or 'target') profit margin can be adjusted accordingly based upon your view of the market and appetite for risk. It is this that will determine whether a development project (or land purchase) is financially viable to proceed or not.
Assessing developers' profit margins
Profit margins are assessed based upon a percentage of the capital value of the completed development or a percentage of the total costs involved, the allowance typically ranging from 10 to 30%. Industry standard development margins tend to be around 20% of Gross Development Value (GDV) or 25% profit-on-cost. These margins are 'industry standard' because they are deemed to be the minimum sensibly required to reflect the significant risks involved in property development. If a development proposal is showing margins much less than this then banks and investors will rightly get nervous.