What numbers to look at
❗️Do you know how much developers make?
Everyone says "a 15-25% margin", but nobody understands what that means, because "margin" means something different to everyone, and it isn't even the key metric in development
A year ago people talked about a "margin" of 20–30%; now, with the key rate near 20%, developers complain about 5–10%. What does the rate have to do with it?😄 It doesn't affect margin at all. It feels like everyone is talking about different things but calling them all margin.
As a certified economist🙈 this always grates on my ears.
What do people call margin?
When a developer says "my margin is 20%", he most likely means the sales margin: the property's price minus direct costs — construction, design, land, utilities. In Russia that's 15–25%. (gross margin divided by revenue)
Then marketing, the sales team, administrative expenses, project management and taxes are subtracted from that margin. Net margin (EBITDA divided by revenue) is usually under 10%.
Sounds like a modest business. Sell for 100, earn 10 (8 after taxes), and over 3 years at that (i.e. about 2% a year), not in a month (compare that with a trading business, which is actually where the word "margin" is used). Why get into it at all?🤷🏻♂️
Because margin doesn't really affect anything: this business is valued as an investment project, or as a sum of several investment projects
What matters to a developer isn't margin. It's the return on invested capital.
Sold for 100, built for 80. Your own money in the project — from 1 to 10, the rest is the bank's and the buyers' money. The cycle is three years.
Put in 1, earned 8. That's 800% per project.
Put in 10, earned 8. That's 80% per project, about 20% a year.
The same "20% margin". A tenfold difference in returns. And it depends not on how you built, but on how much of your own money you put in.
In Russia leverage goes up to 90% of the project cost. Returns grow thanks to the spread: the project yields more than the loan costs. As long as it does, everything is great. When sales stall, the same leverage works in reverse — and there you have it: "-5% margin" (whatever that means😂) and talk of bankruptcies.
In Sri Lanka there's no leverage: banks reportedly lend up to 50%, but that's not certain😜. But there's another lender — the buyer. You build on an instalment plan: 30% at signing, then in stages.
And now the thing developers don't tell you: how much they put in😉
On paper, the instalment plan covers almost all of the construction; I need just over $1M — a return of more than a thousand percent per cycle. Pretty, but useless: it rests on a sales schedule for sales that haven't even started yet.
Optimistically, I'm budgeting $1.5M with slower sales → profit ≈ $5.9M → ≈ 400% per cycle, ≈ 50% a year over four years.
If sales are half as fast as planned, which is quite realistic, there's a $5.5M gap, and I need another $4M of other people's money:
— a loan at 12%: interest ≈ $0.45M; on $1.5M — the same ≈ 400% per cycle, ≈ 47% a year. The loan is cheaper than the project, so leverage works.
— an investor puts in $4M for 50%: my share ≈ $3.3M — ≈ 220% per cycle, ≈ 31% a year.
My point
When someone tells you "a developer makes 20%", most often that's the sales margin. It's about how the thing was built. It says nothing about how much the developer earned.
A developer's income is the return on his own money. It depends on the pace of sales, on the interest rate, on who the lender is — a bank, an investor or the buyer. In my different scenarios it ranges from 20% to 400% per cycle, and it doesn't depend on "margin".
You need to count and divide completely different numbers. And nobody names them — because that would mean saying how much of their own money they put in.
What do you say: which scenario do you believe in?
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Everyone says "a 15-25% margin", but nobody understands what that means, because "margin" means something different to everyone, and it isn't even the key metric in development
A year ago people talked about a "margin" of 20–30%; now, with the key rate near 20%, developers complain about 5–10%. What does the rate have to do with it?😄 It doesn't affect margin at all. It feels like everyone is talking about different things but calling them all margin.
As a certified economist🙈 this always grates on my ears.
What do people call margin?
Gross margin
Operating margin
EBITDA margin
Net margin
Contribution profit / contribution margin
When a developer says "my margin is 20%", he most likely means the sales margin: the property's price minus direct costs — construction, design, land, utilities. In Russia that's 15–25%. (gross margin divided by revenue)
Then marketing, the sales team, administrative expenses, project management and taxes are subtracted from that margin. Net margin (EBITDA divided by revenue) is usually under 10%.
Sounds like a modest business. Sell for 100, earn 10 (8 after taxes), and over 3 years at that (i.e. about 2% a year), not in a month (compare that with a trading business, which is actually where the word "margin" is used). Why get into it at all?🤷🏻♂️
Because margin doesn't really affect anything: this business is valued as an investment project, or as a sum of several investment projects
What matters to a developer isn't margin. It's the return on invested capital.
Sold for 100, built for 80. Your own money in the project — from 1 to 10, the rest is the bank's and the buyers' money. The cycle is three years.
Put in 1, earned 8. That's 800% per project.
Put in 10, earned 8. That's 80% per project, about 20% a year.
The same "20% margin". A tenfold difference in returns. And it depends not on how you built, but on how much of your own money you put in.
In Russia leverage goes up to 90% of the project cost. Returns grow thanks to the spread: the project yields more than the loan costs. As long as it does, everything is great. When sales stall, the same leverage works in reverse — and there you have it: "-5% margin" (whatever that means😂) and talk of bankruptcies.
In Sri Lanka there's no leverage: banks reportedly lend up to 50%, but that's not certain😜. But there's another lender — the buyer. You build on an instalment plan: 30% at signing, then in stages.
My preliminary estimates, Mirissa Y, 238 units:
— sales margin — about 49%;
— net margin — about 24%;
— profit — about $6.7M on revenue of $28.5M.
And now the thing developers don't tell you: how much they put in😉
On paper, the instalment plan covers almost all of the construction; I need just over $1M — a return of more than a thousand percent per cycle. Pretty, but useless: it rests on a sales schedule for sales that haven't even started yet.
Optimistically, I'm budgeting $1.5M with slower sales → profit ≈ $5.9M → ≈ 400% per cycle, ≈ 50% a year over four years.
If sales are half as fast as planned, which is quite realistic, there's a $5.5M gap, and I need another $4M of other people's money:
— a loan at 12%: interest ≈ $0.45M; on $1.5M — the same ≈ 400% per cycle, ≈ 47% a year. The loan is cheaper than the project, so leverage works.
— an investor puts in $4M for 50%: my share ≈ $3.3M — ≈ 220% per cycle, ≈ 31% a year.
My point
When someone tells you "a developer makes 20%", most often that's the sales margin. It's about how the thing was built. It says nothing about how much the developer earned.
A developer's income is the return on his own money. It depends on the pace of sales, on the interest rate, on who the lender is — a bank, an investor or the buyer. In my different scenarios it ranges from 20% to 400% per cycle, and it doesn't depend on "margin".
You need to count and divide completely different numbers. And nobody names them — because that would mean saying how much of their own money they put in.
What do you say: which scenario do you believe in?