The Truth About Property Development: Why It Frequently Falls Short of Profit Expectations

If you ask the average person about the income of a property developer, you’re likely to hear a common refrain: they make too much money. Selling an apartment at R50,000 per square metre sounds like an easy way to profit.

After nearly ten years of financing small to mid-tier developers in this country, I can confidently say that this viewpoint is misleading. Most developers work diligently for compensation that is often less than what many other professionals see, and few outside the sector grasp this reality.

Consider the complex path they must traverse before a single brick is laid. The engineer understands regulations, the fire consultant knows their standards, the town planner is informed about what can be built on a specific erf, and the architect is aware of design restrictions.

The issue is that none of these specialists fully understand what the others bring to the table, leaving the developer to manage the intersection of their knowledge.

A decision as straightforward as placing a window in a bedroom overlooking a hallway can lead to disputes regarding fire safety, ventilation specifications, or even a complete redesign. Since plan approvals can extend for months—especially when an overlooked regulation is triggered—every professional involved is motivated to say “let’s double-check” instead of “let’s move forward.” This cycle occurs repeatedly.

As a result, designs are frequently over-engineered out of an abundance of caution, with the associated costs ultimately falling on the developer.

Moreover, time, in this field, equates to money. Aligning a professional team usually takes about six months just to prepare plans for submission. If the design strictly adheres to zoning rules—without exceptions—council approval can take an additional six months.

However, if you request deviations from the standard zoning, the wait could extend from 12 to 24 months, assuming no objections from neighbors. Throughout this period, someone is incurring interest on the land and paying the professional team, which can amount to 10-15% of the total development costs.

Breaking Down the Figures

Let’s use some actual figures to clarify this point.

Imagine a typical scenario in a middle-class suburb of Cape Town: a developer purchases a 1,500m² GR4-zoned plot for R10 million.

GR4 zoning allows for a height of 24 meters, but considering construction costs and timelines, most developers choose to build three or four stories—let’s estimate it at 2,250m² of sellable space.

At R50,000 per square metre, this results in R112.5 million in projected revenue, which seems promising.

Now, let’s break down the real costs involved.

Preparing land for construction typically takes 24 months, during which the R10 million purchase price incurs about R1 million in interest before any building starts.

A reputable contractor with quality finishes—such as vinyl flooring, standard 20mm granite, and basic joinery—will cost about R20,000 per square metre, leading to a total construction cost of R45 million for 2,250m².

The professional team, consisting of an architect, quantity surveyor, fire engineer, structural and mechanical engineers, and a town planner, will add approximately R10 million, around 10% of the project’s value.

The bank funds construction in stages, releasing the money only once value has been added to the land. Without other avenues to cover weekly and monthly payments to contractors and consultants, a developer risks delays and challenges with the construction crew.

At a prime-linked interest rate of about 10% in this example, along with a typical two-year construction period, interest on the construction and professional fees will amount to approximately R5.5 million, plus the R1 million annually accruing on the land.

Additional time for obtaining an occupation certificate after completion can take another six months (with the bank continuing to charge interest in this timeframe), leading to total interest throughout the roughly 54 months of the project amounting to around R15 million.

Then, there’s a litany of costs that often go unanticipated until they become significant hurdles…

Finance structuring fees, bond registration, marketing costs, construction insurance (including contractors’ all-risk coverage, public liability, Sasria, and development insurance), legal fees, plan review expenses, site development plan (SDP) approval, environmental impact studies, sectional title registration, the mandatory National Home Builders Registration Council (NHBRC) registration, connection fees for sewerage, water, stormwater, and electricity, along with bulk service contributions can add up to around 5% of the project’s value—R6 million in this situation, excluding VAT.

Once the units are finally sold, 15% of the sale price goes to VAT, and 5% compensates the estate agent—who assumes none of the risk.

Here’s a summary of the figures…
Line item	Amount
Projected 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
Construction 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 culminates in an estimated profit of R6.9 million after 54 months of undertaking risks, securing funding, navigating delays, and professionals consistently questioning one another—resulting in an IRR of merely 2.3% per annum. Personally, I wouldn’t even get out of bed for that return.

So, why do people continue in this industry?

Because the true returns in property development seldom arise from the construction itself; instead, they come from the appreciation of land during the waiting period.

A developer capable of retaining that land through a four-year process, rather than being pressured to sell at current market prices, is typically gambling wisely that land values will rise significantly by the time they are ready to begin construction.

That’s the core of the trade. The construction phase is largely a break-even endeavor shrouded as the main business.

At Geddes, we strive to bridge this gap by assisting developers in effectively structuring projects from the outset, acquiring land early, and providing working capital alongside banks to ensure ongoing construction instead of halting due to missed financial draws.

Ultimately, the figure that truly matters to a developer is not the R50,000 per square metre figure they showcase.

It’s about whether they can stay afloat 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.

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