Calculating the return on a property project: indicators, methods and appraisal

ℹ Gross yield = (annual gross rent / acquisition price including costs) × 100

The simplest indicator for a first sift. A flat bought for 250,000 € including legal fees and let at 900 € a month gives a gross yield of (10,800 / 250,000) × 100 = 4.32 %.

Gross yield is useful for comparing several properties quickly but says nothing of the real return: it ignores charges, tax and risk.

ℹ Net yield = ((annual gross rent − annual charges) / acquisition price including costs) × 100

The charges to deduct include property tax, irrecoverable service charges, letting management fees at 6–8 % of the rent, landlord's insurance, and provisions for works and void periods, allow one to two months a year according to location. The difference between gross and net is typically one to two points.

The internal rate of return is the most complete indicator for evaluating an investment strategy over the period of ownership. It takes account of the net annual rents, the initial outlay AND the resale price at the end of the period. It is the discount rate at which the net present value is zero.

What it incorporates	The initial outlay as a negative flow, net annual rents as positive flows, the estimated resale price as a final positive flow, and tax on income and on the gain.
The reference threshold	A return above the cost of capital, the borrowing rate plus a risk premium, indicates a project that creates value.
The principal limit	Very sensitive to the resale assumption. A change of plus or minus 10 % on the resale price strongly changes the result.

Net present value measures value creation in absolute euros. It discounts all future flows at a target rate and deducts the initial investment. A positive value confirms the project creates value beyond the required return.

For a developer, the return is measured by the operating margin on turnover excluding VAT. The minimum threshold for obtaining bank finance is generally set at 8 % of turnover.

The structure of the appraisal	Income from sales, less the land cost, less the total construction cost, works, fees, finance costs, equals the gross operating margin.
Return on equity	Measures the return on the developer's own capital. Higher than the gross margin thanks to bank leverage.
The effect of duration	A 36-month project at 15 % margin can be less profitable than an 18-month project at 10 %, given the rotation of capital.

On the contractor's side, the return on a site is measured through its analytical account, a fundamental tool too many clients overlook, though it explains contractors' behaviour at tender.

ℹ The fundamental equation Margin = sums received less real direct costs. Gross result = margin less the head office overheads allocated to the operation. A positive result means a profitable operation; a negative one a loss, even where the margin is positive. Margin and profit must not be confused: a positive margin does not mean the operation is profitable if that margin is insufficient to cover the firm's overheads.

The analytical account compares the real gross result with the risk and profit allowed in the original offer. Three cases arise:

A result between zero and the allowance	A profitable operation, but the unforeseen has eaten into the margin. A satisfactory outcome.
A result above the allowance	A very profitable operation. Fewer risks materialised than expected, and the firm draws lessons for its next offers.
A negative result	A loss-making operation. The risks exceeded the allowance. The firm must analyse the causes: estimating error, site risks, delays attributable to the client.

Under-estimating net costs	Quantities badly measured, waste factors forgotten, material prices not brought forward. The most frequent cause of loss-making operations.
Drift in the hourly labour cost	Hiring more qualified staff than planned, resorting to costlier agency labour, a distant site generating unanticipated travel allowances.
A longer construction period	Every month of delay generates additional site overheads, crane, cabins, supervisory staff, not recoverable from the client save through its own fault.
Unfavourable variations	Changes of brief during construction that are not correctly valued can significantly erode the margin.
Damage and litigation	Site incidents tie up resources and generate unprovided costs where the risk allowance was too light.

Related articles: Financial risks in construction projects · Off-plan sale: investment and guarantees

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The formulas and worked examples are for illustration. Technical source: Widloecher and Cusant, Manuel de l'étude de prix, 5th ed. 2020, chapter on the operation account.

The nature of the figures quoted

The percentages and amounts quoted on this page are orders of magnitude for framing, not measurements. They illustrate mechanisms and proportions, and they substitute neither for a tender exercise nor for an estimate prepared on drawings.