Land Development Profit In UK – 40% of GDV
Jim J Davidson July 17, 2023
There is a prevailing misconception among property development training companies in the UK that solely focusing on making a 25% profit of gross development value is sufficient. However, this overlooks the importance of considering the profit from the land acquisition itself. In this blog post, we will explore this misconception and shed light...
Introduction:
There is a prevailing misconception among property development training companies in the UK that solely focusing on making a 25% profit of gross development value is sufficient. However, this overlooks the importance of considering the profit from the land acquisition itself. In this blog post, we will explore this misconception and shed light on the two profit centers that should be considered in property development. (For a fuller explanation please watch the above video.)
The Land Profit Center:
When purchasing off-market land without planning permission, there is an opportunity to make a profit from the land itself. While many companies fail to teach this approach, it is a crucial aspect that should not be overlooked. Taking the risk of acquiring land and going through the planning process deserves recognition and compensation.
The Gross Development Value (GDV) Profit Center:
If the land already has planning permission, allowing immediate construction, a 25% profit of the gross development value is reasonable. This profit center is based on the assumption that the necessary groundwork has been done in advance. However, if the land requires planning permission, there is an opportunity for additional profit due to the work and risk involved.
The Conventional Approach vs. A Different Method:
Most companies teach a conventional approach to finding land, which involves searching platforms like Rightmove and Zoopla, with minimal emphasis on off-market opportunities. However, this approach limits the potential for profitable land acquisitions. We advocate for a different method that deviates from the norm, enabling a clearer path to success.
Illustrating the Principle: A Case Study:
To demonstrate the effectiveness of the alternative method, let's examine a deal from 2005. While costs during that period were lower, the principles remain applicable. The case study involves a large house with detailed cost breakdowns, including groundwork, timber frame kit, masonry outer skin, plumbing and heating, electrical work, roofing, joinery, decoration, kitchen and bathroom expenses, totalling £131,008.
Understanding the Breakdown of Costs:
In addition to the construction costs, it's essential to consider the preliminary costs, including landscaping and selling costs. These often overlooked expenses, along with the build costs, contribute to the total investment. In this case, the total cost amounted to £151,290.
Land Profit and GDV Calculation:
The land, purchased for £40,000, required additional expenses for planning and preliminary work, totalling £4,398. A surveyor valued the land at £75,000, resulting in a profit of £30,602. This translates to a 40.8% profit on the uplift value, considering a hypothetical sale at £75,000.
Achieving Profit on the Build:
Stripping away the land-related expenses, the build itself incurred costs of £131,000. The sales value for the completed house was £220,000, resulting in a profit of £74,107. Thus, the 25% profit on the gross development value was achieved on the build, even when factoring in the profit from the land acquisition.
Conclusion:
To maximize profits in property development, it is crucial to recognise the two profit centers: the land and the gross development value. While many training companies focus solely on the latter, neglecting the former can hinder potential profitability. By adopting a different approach and exploring off-market opportunities, developers can unlock greater potential in their projects. To learn more about this process and gain a comprehensive understanding of property development, consider attending our free training session. Click the link provided to access the training and receive a process map detailing the steps involved in this profitable approach to property development.
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