Development Margin

Development margin is the number that tells you whether a project is worth doing. It's your profit expressed as a percentage — either of total development costs (the more common method) or of gross realisation (total sales revenue). A margin on cost of 20% means for every dollar you spend, you make 20 cents profit. Simple.

But what constitutes an acceptable margin depends on the project's risk profile. A straightforward duplex on a clean site with pre-sales might be viable at 15% margin on cost. A complex mixed-use development with contamination risk, council uncertainty, and no pre-sales might need 25-30% to justify the risk. Your lender will have a view on this too — most won't fund below 15-20% margin on cost.

The trap with development margin is that it's only as reliable as the assumptions behind it. If your construction cost estimate is 10% too low, your actual margin will be significantly less than projected. If your sales prices are optimistic, same problem. This is why sensitivity analysis — testing what happens when assumptions change — is just as important as the base-case margin number.

Experienced developers also distinguish between margin on cost and return on equity. You might have a 20% margin on cost, but if you're only putting in 10% equity (with the rest funded by debt), your return on equity is much higher. Understanding this leverage effect is fundamental to structuring development finance.