The fundamental return indicators
Gross yield
ℹ The formula: gross yield = (annual gross income / total investment cost) × 100. For example, a building whose construction and acquisition cost 2,000,000 € and which generates 100,000 € of annual rent shows a gross yield of 5 %.
Net yield
The net yield is the gross yield less all charges: property tax, insurance, management fees, irrecoverable charges, provisions for works, void periods. In France those charges typically represent 15 to 25 % of gross rent.
The internal rate of return
This takes account of every financial flow over time, the initial investment, the annual income, the final sale, and calculates the discount rate at which the net present value is zero. It is the reference indicator for comparing projects with different time horizons.
Net present value
Net present value measures the absolute value a project creates against a required rate of return. A positive value means the project creates value beyond the cost of capital. A negative one means it destroys value on the assumptions adopted.
The development appraisal: the reference tool
The appraisal brings together all the income and expenditure of an operation and measures its economic viability before any commitment.
| INCOME | Anticipated sales turnover, or the market value of the completed project |
|---|---|
| − Total cost | Land plus land charges, works, fees, finance costs, marketing costs |
| = Gross margin | The difference between income and cost |
| Margin over turnover | Below 8 %, the operation is generally regarded as unviable |
| Return on equity | The return on the capital invested, which must remunerate the risk taken |
Typical development margins
| 2015–2019, a favourable period | 10 to 15 % of turnover excluding VAT on standard operations |
|---|---|
| 2020–2023, inflation and rising rates | 7 to 12 %, with many operations abandoned below the viability threshold |
| Minimum viability threshold | 8 % of turnover, below which most funders refuse to commit |
| Institutional forward sales | Lower margins, 5 to 8 %, but lower commercial risk through the institutional buyer's firm commitment |
Off-plan sales: the economics
For the developer
Off-plan sale is the principal lever for securing bank finance. Buyers' staged payments progressively fund the construction, reducing the need for development credit.
ℹ The statutory payment schedule for off-plan sales 35 % on completion of the foundations · 70 % when the building is weathertight · 95 % on completion of the works · 100 % on handing over the keys, subject to there being no defects.
For the buyer
An off-plan buyer benefits from the completion guarantee protecting their payments if the developer fails, and from the statutory warranties on completion and on two- and ten-year liability. In exchange they take a market risk between signature and delivery, 18 to 36 months.
The financial risks of a construction project
| Cost overrun | The most frequent risk: a poor initial estimate, changes of brief, uncontrolled variations, material inflation. Recommended provision: 5 to 10 % of the works cost. |
|---|---|
| Programme extension | Every additional month generates finance costs and, on off-plan sales, late delivery penalties. |
| A slow market | An insufficient level of pre-sales can block bank finance. |
| Interest rate risk | A rise in rates can significantly increase finance costs and erode the final margin. |
| Damage and litigation | Construction defects, disputes with contractors, neighbours' challenges: provisions must be built into the appraisal. |
To go further: How to calculate the return on a project · Financing construction projects
Back to the main guide: Construction economics
Cost estimates, pricing schedules, bills of quantities, development appraisals, summary notes. Produce in minutes the deliverables you prepare manually today. → quostra.com · First project free
The indicators and ratios presented are indicative. The return on a project depends on many local and cyclical parameters. Consult a construction economist or a specialist financial adviser for an analysis adapted to your situation.
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.
Articles liés
Sources: the BT construction cost indices published monthly by INSEE on its 2010 base, used to update the figures · construction cost statistics from SDES, the statistical service of the ministry responsible for construction · regulatory texts published in the Journal officiel and consolidated on Légifrance for the requirements cited.