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Apartments v Townhouses: Which is more Profitable?

by Damian Will, Sales & Marketing Manager

 

Apartments v Townhouses Developments: Which is more Profitable?

In the game of property development it pays to run the numbers, analyse the market demand and evaluate your options when it comes to maximising your profit.

A perfect example is our client who recently completed a townhouse development in Mt Pleasant.

He originally came to us looking at building apartments and was speaking with other builders on that basis.

As we do with all clients we did a full feasibility analysis of the project assuming we would build 10 new apartments on the site.

However after we looked at it in more detail and conducted more market research we pitched him the idea that townhouses would actually be more appropriate for the market and the type of buyer he was targeting.

So we got to work and completed a full feasibility, this time using 6 townhouses. As suspected the project showed a better potential return.

In fact the figures showed that building six townhouses for a total project cost of $2.4M would be more profitable than building ten apartments at a cost of $2.0M.

A 3D illustration of the proposed townhouses on the block

This may sound counter-intuitive, but it is a common misconception in property development.

Maximising your profit is not all about fitting the most amount of individual dwellings onto your block.

You must also consider how the end product will present to buyers and what the demand for that particular product will be, factoring in the suburb you are developing in.

In this case the returns from the higher sales prices our client could expect for 6 high quality two storey townhouses was much greater than the potential return from 10 smaller apartments.

You also have to factor in what else is being built in the area. Following the herd isn’t always the right decision

If there are already a large number of apartment projects being built in close proximity to your development then building more apartments may simply create a flood of similar product on the market, and that puts downward pressure on the sale prices.

It is a pretty simple equation - too much supply and not enough demand equals lower sale prices and less profit in your pocket.

 

A Quick Summary

So remember, greater yield in terms of product (in this case building ten apartments versus six townhouses) does not always generate greater profits.

Knowing where the demand is and what product type and price points are selling in a given area is critical for successful and profitable projects.

So do your homework, or ask us to help, we do it everyday and know the Perth property market better than most.

We are pleased to say that our client followed our advice and engaged us to create the townhouse designs - we handed over the project recently and our client is confident he will see a good return for his investment.

 

2019 HIA Finalist

As an added bonus the project was a finalist at the recent HIA Perth Housing Awards for Townhouse/Villa Development $1.5M+.

Here are some photos of the final product: