Developers of very luxury condominiums could probably earn a very high profit on their developments. This is actually the market of the sellers not the buyers.
Dr.Sopon conducted a simple calculation to test the hypothesis of the market as follows:
The following are the figures for the analysis:
- Price of the luxury condominium, USD 3,600/sqm
- Net saleable area, 27,500 sqm (55% of construction area)
- Land area, 5,000 sq.metres
- Land price/sq.metre, USD 5,000/sq.m.
- Floor area ratio (FAR), 10 times of land area.
- Construction cost, USD 700/sq.metres.
According to the assumption above, a preliminary calculation can be conducted as follows:
- Value of the development. USD 3,600/sqm, 27,500 sqm (55% of construction area) or altogether USD 99,000,000.
- Land value, land, 5,000 sqm at USD 5,000/sqm, altogether USD 25,000,000
- Building value, 5,000 sqm, 10 times (FAR), USD 700/sqm or altogether USD 35,000,000
- Therefore, the hard costs (land and building) area totally USD 60,000,000
- Gross profits (soft costs) including the profit, operation costs, taxes, interests and the like) is = (Value - Hard costs) / Value or (99-60)/99 = 39.4%
That there appears a large amount of gross profits or soft costs of 39.4%, implies that on one hand, condominium prices are set very high. The net profit should be over 20%. If one would like to buy a unit for rent to quest for return on investment, the return should be quite low due to the high margin. On the other, the return of investment (capital gain) might be small as well.