The Truth About Property Development: Why Profit Margins Are Often Overstated

If you ask a regular person about the income of a property developer, their common reply is likely: they make too much money. Selling an apartment at R50,000 per square metre appears to be a straightforward way to profit.

Having spent almost ten years financing small to mid-tier developers in this country, I can tell you that this belief is far from the truth. Most developers work incredibly hard for lower compensation than many other professions, and very few people outside the industry grasp this reality.

Consider the complex pathway they must traverse before they can even lay the first brick. The engineer knows the regulations, the fire consultant understands their requirements, the town planner is aware of what can be built on a particular erf, and the architect has insights into design restrictions.

The difficulty arises because none of these experts fully understand the scope of the others’ knowledge, placing the developer in a challenging middle ground.

A seemingly straightforward choice, such as placing a window in a bedroom that faces a hallway, can quickly escalate into discussions concerning fire safety, ventilation needs, or necessitating a complete redesign. Since the approval of plans can take months—especially if an overlooked regulation comes to light—each team member tends to prioritize “let’s double-check” instead of “let’s move forward.” This pattern repeats itself numerous times.

Designs are often overly engineered out of caution, causing the associated expenses to burden the developer.

Then there’s the aspect of time, which in this industry translates directly to money. Coordinating a professional team takes around six months just to prepare plans for submission. If the design fits seamlessly within zoning laws—without exceptions—council approval can take roughly another six months.

Should you request anything beyond the standard zoning, the wait could extend to 12 to 24 months, barring objections from neighbors. Throughout this period, someone is paying interest on the land and compensating the professional team, which can account for 10-15% of the total development cost.

Breaking Down the Numbers

Let’s apply some concrete figures to clarify this point.

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

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

At R50,000 per square metre, that amounts to R112.5 million in projected income, which sounds appealing.

Now, let’s analyze the actual expenses involved.

Converting land to a shovel-ready state typically takes 24 months, meaning the R10 million purchase price incurs around R1 million per year in interest before construction even commences.

A reputable contractor utilizing quality materials—such as vinyl flooring, basic 20mm granite, and standard joinery—would cost approximately R20,000 per square metre, culminating in a construction expense of R45 million for 2,250m².

The professional team, which includes 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 worth.

The bank releases construction funds in stages, verifying that value has been added to the land before disbursing money. Without other options to cover weekly and monthly payments to contractors and consultants, a developer could face delays and difficulties with the construction team.

At a prime-linked interest rate of about 10% in this case, along with a standard two-year build timeframe, interest on the construction and professional fees will be roughly R5.5 million, in addition to the R1 million annual interest accruing on the land.

Don’t forget the additional six months of waiting for an occupation certificate after project completion (with the bank continuing to charge interest during this period), leading to total interest across the estimated 54-month project of around R15 million.

Additionally, there’s a multitude of costs that often go unaccounted until they become problematic…

Fees for financing structure, bond registration, marketing materials, insurance for the construction (which includes contractors’ all-risk coverage, public liability, Sasria, and development insurance), legal fees, plan review fees, site development plan (SDP) approval, environmental impact assessments, sectional title registration, the compulsory National Home Builders Registration Council (NHBRC) registration, service connection fees for sewerage, water, stormwater, and electrical connections, plus bulk service contributions can easily contribute to 5% of the project’s value—R6 million in this example, excluding VAT.

Once the units are sold, 15% of the sale price is allocated to VAT, and 5% to the estate agent—who assumes no risk.

When totaled, it appears as follows…
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%

This results in an approximate profit of R6.9 million after 54 months of risk, funding, delays, and professionals continually questioning one another—yielding an IRR of just 2.3% per annum. Honestly, I wouldn’t even bother getting out of bed for a 2.3% return.

So why do people remain in this industry?

Because the genuine returns in property development seldom arise from the development itself; rather, they result from the appreciation of land while you wait.

A developer who can hold onto that land throughout a four-year process, instead of being compelled to sell at current market prices, is usually wagering wisely that land values will significantly rise by the time they are ready to start building.

That’s the real business. The construction phase is mostly a break-even process disguised as the core enterprise.

At Geddes, we aim to bridge this gap by assisting developers in effectively structuring projects from the outset, acquiring land early in the process, and supplying working capital alongside banks to ensure construction keeps moving forward rather than stalling due to a missed draw.

Ultimately, the figure that truly matters to a developer is not that eye-catching R50,000 per square metre.

It’s about whether they can endure long enough, on the right piece of land, to hold onto it when the market finally favors them.

Brent Geddes is the CEO of Geddes.

Sponsored by Geddes Capital.

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