Golden Square Meters: How Much Developers Earn on Apartments

How much does a high-rise building cost? According to government officials – about UAH 12 thousand ($446) per square meter. Is this true and what is real developer’s markup?

Ministry of Regional Development and Construction calculates the average cost of housing construction on a quarterly basis. According to the latest data, building a square meter of housing in Kyiv costs UAH 13.8 thousand ($514), in the regions – UAH 10-12.4 thousand ($372-461). Does this indicator reflect the realities of the market, and what margin is used by developers in the sales of housing to investors?

Local authorities provide the Ministry of Regional Development with data that become the basis for determining the structure of the cost of building residential houses. The price per square meter of the total area of the building serves as an indicator of indirect value.

The cost structure is formed by building materials, salaries, machine operation, general production and administrative costs, design costs. Payments to architects, engineering preparation of the site, compensation of expenses to the previous owners of the site, deductions for development of social and engineering and transport infrastructure of settlements are not taken into account.

Why is this indicator calculated and where is it used?

Generally – for determining the volume of public investment in housing construction for citizens who need improvement in housing conditions and government support. Also, this indicator is used in determining the size of the share of public investment or the size of preferential loans for citizens.

However, does this data allow to calculate the share of the cost price in the selling price?

According to analysts of Lun.ua, in December 2018, the average cost of housing in new Kyiv buildings was UAH 23 thousand ($851), the minimum – UAH 16 thousand ($592). The average cost of a square meter of economy class housing is UAH 17.8 thousand ($658), “comfort class” – UAH 20.7 thousand ($766), business class – UAH 36.1 thousand ($1,336), “elite class” – UAH 58.2 thousand ($2,153).

Our paper tried to find out from the developers and construction companies how much they spend on housing construction and what share of cost price is in the structure of the price for a square meter sold to investors. However, they all refused to name exact numbers and generally were reluctant to speak on the issue.

Exaggerated ratings from KyivMiskBud

“The construction cost is approximately the same for all market participants. The overall cost increases because of the cost of designing, marketing, new technologies, software development,” says Natalia Reva from SAGA Development.

KyivMiskBud reported that the figures voiced by the ministry are “base level”. They should be added with value of land, share contributions and profitability.

“At the exit, the price of a square meter for the buyer in Kyiv is UAH 15-16 thousand ($555-592). This is the minimum economically-reasonable indicator. It cannot be lower than these figures”, – words of the Board Chairman Igor Kushnir were quoted.

According to the president of “KyivMiskBud”, purchasing real estate with a price of a square meter less than 15-16 thousand UAH, is very risky ($555-592). A developer can save on materials or unskilled workers. One more option for making housing construction cheaper is the lack of legally registered land.

“At best, the house will not be put into operation. In the worst case, there will be no house at all and the investor will be left without money and housing,” said Kushnir.

In fact, the cost of KyivMiskBud for housing construction is significantly lower. The company’s financial statement for 2017 published on its website said that the cost of sales was UAH 2.86 billion ($0.1 bn). By simple mathematical calculations you can get a figure of UAH 8.5 thousand ($314.5) per sq. m.

After a clarifying the question of our paper, the press service of KyivMiskBud recognized that UAH 8.5 thousand ($314.5) for a square meter – is the average cost of housing construction in the company. This indicator may vary depending on the class of real estate and other factors.

For comparison: for those willing to invest in housing real estate KyivMiskBud offers prices from UAH 14-15 thousand ($518-555) per sq. m. in case of full advance payment.

The cost price is growing and the corruption component as well

Information about the cost of construction can be found in open sources. So, the Kyiv communal enterprise ZhytloInvestBud-UKB ordered the execution of works on the completion of one of the residential complexes in Kyiv.

The contract value is over UAH 638 million ($23.6 m). The house “carcasses” are almost ready. The contractor will need to carry out dismantling and eliminate defects in the structures. The completion works will cost UAH 6,5 thousand ($240.5) per sq. m. for the customer.

In Poltava region, the city executive committee ordered the contractor to build a multi-storey apartment building for UAH 7,255 ($268) per sq. m. According to the Ministry of Regional Development, the average cost of construction in the region is UAH 10,536 ($390) per square meter.

The founder of KAN Development Igor Nikonov said that in 2018, the cost of construction increased by $70-80 or UAH 1,9-2,2 thousand per sq. m. due to the growth of builders’ salaries. The words of Nikonov are confirmed by the State Statistics Agency: over the last year, wages in the construction sector increased by 28.6%.

“The cost of construction is individual for each object. Depending on the place, class and concept, it can vary by factor of 1.5-2,” says Reva. According to her, in the low-quality and low-margin projects the construction cost can make up to 90% of the sales price.

For developers who pay attention to architecture, concepts, technologies of comfort and energy efficiency, the cost is significantly increased. According to the developer, projects that compete only in price risk to remain unfinished because of the low margin.

At the same time, none of the developers named such a significant component of the price as corruption.

Meanwhile, the majority of respondents polled during the survey conducted by the URE Club business association for the real estate market have noted the increase in corruption in the industry over the past two years. Most often developers face such problems at the stages of obtaining approvals, permissions and commissioning of objects.

Which developers are at risk

The real estate market is closely followed by the National Bank of Ukraine, because the state of the industry affects the financial stability of the country. “The increase in the cost of housing construction and the requirements for its quality, with the introduction of new state building codes, will put pressure on the profitability of the developers,” the National Bank warns.

The financial regulator acknowledges that former owners of foreign currency deposits remain the main investors in real estate. “Among high-income citizens there is a steady investment demand in a situation where the yield of foreign currency deposits is decreasing,” he states.

According to the regulator, among the citizens with lower incomes, the number of applicants for mortgages and installments is increasing. However, imbalances in the market still exist. The potential of buyers of “first homes” is still low and in the medium term, the primary market will reach equilibrium.

“In micro-districts with developed infrastructure, the demand for housing is higher, and it is difficult to stimulate sales of single houses with unsuccessful location even with aggressive advertising or discounts. The risk group includes developers focused on one price segment or one area”, – the National Bank says.

Source: https://www.epravda.com.ua/publications/2019/03/15/646112/

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