Why property development isn’t nearly as profitable as people think

Ask the average person what a property developer earns and you’ll get the same answer every time: too much. Sell an apartment at R50 000 a square metre and surely you’re printing money.

I’ve spent the better part of a decade funding small and mid-tier developers in this country, and I can tell you the opposite is true. Most of them work harder for less than almost anyone else in business, and almost nobody outside the industry has any idea.

Start with the maze they have to walk through before a single brick is laid. The engineer knows the applicable regulations. The fire consultant knows their regulations. The town planner knows what can and can’t be built on a given erf, and the architect knows what they’re allowed to design.

The problem is that none of them fully knows what the other three know, and a developer is the one left standing in the gap.

Something as simple as putting a window from a bedroom onto a passage can turn into a fire-engineering debate, a mechanical ventilation requirement, or a redesign – and because getting plans approved can take months if you trip a rule nobody flagged, every professional on the team has a strong incentive to say “better check” rather than “go ahead”. So they do. Over and over.

Designs get over-engineered defensively, and the cost of that caution lands on the developer.

Then there’s time, which in this business is the same thing as money. Get a professional team aligned and it’s a realistic six months just to get plans submission-ready. If the design fits squarely within zoning – no departures – council approval takes roughly another six months.

Ask for anything outside the as-of-right zoning and you’re looking at 12-24 months, assuming your neighbours don’t object. All the while, someone is paying interest on the land and fees to a professional team, which can run to 10-15% of total development cost.

How this translates

Let’s put real numbers on it, because that’s where this stops being an abstraction.

Take a fairly typical opportunity in a middle-class Cape Town suburb: a developer buys a 1 500m² GR4-zoned site for R10 million.

GR4 zoning allows 24 metres in height, but by the time you weigh up build cost and time, most developers land on three or four storeys – call it 2 250m² of bulk, all of it sellable for simplicity.

At R50 000 a square metre, that’s R112.5 million in revenue. Sounds like a great trade.

Now work through what it actually costs to get there.

Land to shovel-ready, assuming no departures, is 24 months, so the R10 million purchase price is carrying roughly R1 million a year in interest before a spade goes into the ground.

A good contractor, decent finishes – think vinyl flooring, basic 20mm granite, average joinery – runs to about R20 000 a square metre excluding value-added tax (Vat), so 2 250m² costs R45 million to build.

The professional team (architect, quantity surveyor, fire engineer, structural and mechanical engineers, town planner) adds another R10 million, roughly 10% of project value.

The bank funds the build in stages, releasing money as it’s satisfied value has actually been added to the land, which in practice means a developer without other means to bridge the weekly and monthly draws to contractors and consultants runs straight into delays and, often, real friction with the build team.

At a prime-linked rate of around 10% for this example, and a typical two-year build, interest on the construction and professional fees comes to roughly R5.5 million, before you even add the R1 million a year still accruing on the land.

Add six months post-completion waiting for an occupation certificate before transfer (and the bank is still charging interest through all of it), and total interest across the roughly 54-month project comes to about R15 million.

Then there’s the list nobody budgets for properly until it bites them …

Finance structuring fees, bond registration, brochures and marketing material, insurance across the build (contractors all-risk, public liability, Sasria, property development cover), legal fees, plan scrutiny fees, site development plan (SDP) approval, environmental impact assessment costs, sectional title registration, National Home Builders Registration Council (NHBRC) registration (compulsory regardless of contractor), service connection fees for sewerage, water and stormwater, and electrical connection and bulk services contributions: easily 5% of project value – R6 million in this example, excluding Vat.

And when the units finally sell, 15% of the price goes to Vat and 5% goes to the estate agent – for taking on none of the risk.

Put it all together and it looks like this …

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%

That’s a profit of roughly R6.9 million after 54 months of risk, funding, delays and professionals second-guessing each other – an IRR of about 2.3% a year. I’m not sure about you, but I won’t get out of bed for 2.3%.

So why does anyone still do this?

Because the actual return in property development almost never comes from the development itself – it comes from what the land does while you’re waiting.

A developer who can hold that land through a four-year process, rather than being forced to sell at today’s price, is usually betting correctly that land values will be meaningfully higher by the time they’re shovel-ready.

That’s the real trade. The building is mostly a break-even exercise dressed up as the business.

At Geddes, this is the gap where we spend most of our time: helping developers structure projects correctly from the outset, securing the land early in the process, and providing the working capital alongside the bank that keeps a build moving instead of stalling on a missed draw.

Because the number that actually matters to a developer isn’t the R50 000 a square metre headline.

It’s whether they can survive long enough, on the right land, to be the one holding it when the market catches up.

Brent Geddes is CEO of Geddes.

Brought to you by Geddes Capital.

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