Real estate is a booming market. Home developers are focused on delivering quality end product to the customers. However, at the same time, they also aim to generate healthy profit levels from the sale of the property. Though the real estate business is volatile and the market is unpredictable to some extent it is important to get a good estimate of the launch prices for a good property investment whether it is a new landed price or a new condo price. Let’s understand this better.
Elements of Property Price:
What are the various components of the property price? Out of all the various components of property price, the most expensive component is the land cost where the property is constructed. Therefore, we see changes in the cost of the house as per the locality where it is present. After this, the second cost to follow is the construction cost that is needed to build the condo. In the accounting context, the construction cost of a property is equivalent to the Cost of Goods Sold (COGS). The other miscellaneous costs that are added to make the launch price of a property are the administrative, sales and marketing expenses, finance costs, profit margin etc. This finally gives the selling price of the property whether it is the cost of the new condo price. In short, the costs involved in determining the launch price of a property include:
- Cost of Land where the property is constructed
- Construction Cost/ Cost of Goods Sold (COGS)
- Administrative/Legal cost
- Sales and marketing expenses for promoting the property
- Finance costs
- Profit margin
The first two make the major chunk of the developer’s launch price. Knowing the above costs will give you a fair idea of the same.
Break-up of the developer’s launch price elements
After the two primary Costs involved in deriving at the developer’s launch price which is the: Cost of Land where the property is constructed and Construction Cost / Cost of Goods Sold (COGS), the other miscellaneous expenses encompass of the following elements.
The Administrative expenses included in the property launch price includes the Staff costs, office rents and other admin related expenses.
Sales and marketing expenses costs are those costs that are incurred in advertising for the development, Show-flat building costs, commission for the real estate agencies, lawyer fees etc.
Financial costs include the interest expense paid to the financial institutions or banks that fund the development of the property.
Last but not the least the most crucial component of the developer’s launch price is the Profit margin which is the percentage of profits that the developer intends to make for the construction and sale of the property.
Other factors affecting the developer’s launch price
These estimates are best and remain unchanged when the market sustains in a low-price volatility environment. However, in a VUCA (Volatile, uncertain, complex and ambiguous) market various external factors can impact the developer’s launch price. For instance, in case the land price has increased between the award of tender and launch date there are chances that the property developer can increase the total launch price in lieu of earning more profits. This also holds true in scenarios where the land prices are decreasing wherein the profit margin will also decrease. Another factor that can impact the developer’s launch price is the price at which their close competitors are selling their constructed property. Thus, developers make it a point to chalk out a competitive market analysis that in turn impacts the developer’s launch price.