When establishing a budget for a property development, the issue of build costs is hugely important. An accurate build cost value is a vital component of the residual valuation.
Build costs are not just for the construction of new build properties. If an existing property (for example) is to be renovated and the usage changed, or a residential property needs a lot of work to bring it back to a habitable state, the costs of work will be very similar to building from new. So to use new build costs is appropriate in the majority of cases.
Build costs are calculated using the gross internal floor area. This is essentially the area of the internal space measured between the inside of the outside walls. This includes all common areas such as hallways and toilets etc.
Build costs are generally available from 2 sources. The first source is the subscription website BCIS (Building Cost Information Service), the second is SPONS (available in book format and updated every year). Both sources are well-regarded in the construction industry as being accurate enough to use in detailed development appraisals but are expensive when you are beginning your venture (both sources are a fairly similar annual price). When using the resources, you will find that a particular rate per M² or M³ is provided. For example, when demolishing a building up to 50M³, a rate of £49.92 would be appropriate per M³. The larger the building, the less expensive the work per M³ is to have carried out (economies of scale).
One of the recognised shortcomings of the residual method of development appraisal, is that the output (the land value) differs a great deal through only small changes in one of the inputs (in this case, build costs). The larger the project, the more likely it is to happen. For example, if 30 houses of 100 M² each are being constructed at a rate of £1,000 per M², the total build costs will be £3m. If the build cost rate were to increase to £1010 per M², total build costs would increase to £3.03m. So for just an increase of £10 per M², the total build costs would dramatically increase by £30,000. Therefore it is important to get as accurate a figure as possible. Fortunately the sources mentioned above are regarded as very accurate.
It should be mentioned however that the values provided in the sources referred to are based upon an average across regions and nationwide. Clearly substantial economies can be achieved through shrewd research and good contacts. It is certainly possible to reduce build costs if you know where to look and who to speak to. This perhaps is one of the secrets and ‘art’ of making a healthy profit in property development.
It can be a time consuming process reading through the construction cost guides if you are unfamiliar with them (I don’t profess to be an expert myself). They are extremely thorough and specific, however if you simply want to know how much it will be to build a 3 bedroomed house (at a rate per M²) then a far cheaper (free) option exists. A regularly updated source of inclusive build costs is at: www.homebuilding.co.uk/buildcosts. It obviously depends on how deeply you want to go into the analysis of costs, but this alternative provides accurate information if it’s an inclusive rate you’re looking for. It’s compiled for self-builders, not really private property developers but it offers a good indication and shows the degree of variance across regions. If you do need to go into the deeper intricacies of building costs then I suggest purchasing either the SPONS book or taking out a BCIS subscription (incidentally, SPONS books are available ‘used’ at a discount at places such as Amazon Marketplace but obviously the accuracy suffers as they age).
At the last update on the ‘homebuilding-buildcosts’ site (Dec 2011) a large 2-storey house being built in the South-East to an excellent standard by main contractors would be in the region of £1291 per M² to build. At the opposite end of the spectrum, a small single storey house built to a reasonable standard through a combination of DIY and sub-contractors in the North-East or Wales would be in the region of £793 per M². These values have been put together by experts using the more detailed costs guides.
The more detailed guides (BCIS & SPONS) allow the reader to obtain far greater information. For example, according to the 2011 version of SPONS:
- High quality Inner London apartments would be in the region of £2350 – £2850 per M² to build.
- Large budget student schemes with en-suite bathroom would be £1025 – £1275 per M² to build.
- Warehouse conversion to apartments would be £1025 – £1275 per M².
- Minor office refurbishment in Central London would be £435 – £530 per M².
Clearly some interpretation has to be applied to this information, as regional variations on prices can move beyond the ranges listed. It should also be remembered that these prices are inclusive of builder’s profits and overheads, but not of professional fees associated with the work.
For the more specific prices:
- For machine-excavated trench fill foundations at 600mm wide x 1 metre deep, a rate of £79.00 – £100.00 per metre.
- For facing-brick walls, single skin and pointed both sides would be £81.00 – £105.00 per M².
- For a cement and sand screed floor of 50mm thick would be £12.40 – £16.80 per M².
The SPONS books and the BCIS provide a huge amount of information (the SPONS book is over 1,000 pages). You must remember though, that looking into the specific works and simply adding the costs together is risky because without experience, it’s easy to overlook some vital work component. This can have a significant effect on the overall build costs.