LAYER UPON LAYER OF VALUE SHOULD CREATE YOUR LIST PRICE
As a property developer, when you are setting your list price, you need to get prospective buyers past a tipping point in their mind, so that buying a property on your development becomes a “no brainer”.
The way to do this is to add consecutive layers to your Value Proposition and not just list and hope.
According to Wikipedia your Value Proposition: “is a statement which identifies the clear, measurable and demonstrable benefits consumers get when buying [your property]. It should convince consumers that [your property] is better than others on the market.”
So, what components make up your property’s Value Proposition?
PRICING COMPONENTS THAT MAKE UP YOUR VALUE PROPOSITION
Here are some of the pricing components that go to make your Value Proposition.
- Size (internal living space, garden, garage)
- Build Quality
- Tenure (freehold/fee simple, leasehold, condominium)
- Running Costs (such as Rates, Utility Costs, Service Charges, Ground Rent
- Product Lifecycle Pricing and Phasing)
- Price Model
- Adding Value (vs Discounting)
- RoI factors (Return On Investment including Valuation, Rental yield, Resales value/Capital appreciation)
- Specialisation & Differentiation
Well there you have it. In the world of property – size matters!
Price per sq ft or per m2 is often the starting point for calculating list price based on comparable local property.
Typically, you take internal living space as the measure and add, but at a lower price per sq ft for terraces, garage space, storage space and garden.
Next to be taken into consideration is the spec.
As the developer, you build to the spec required by your Ideal Customer. The higher the spec the higher the price and vice versa.
HOW TENURE BRINGS VALUE
Although Size and Build Quality are what we all look at first, Tenure can have the most impact on list price. And yet it often seems to be overlooked by developers. I can promise you that it isn’t overlooked by buyers or whoever is conveyancing for them!
Tenure means “the conditions under which land or buildings are held or occupied”.
Freehold (or Fee Simple, in the US) is the permanent and absolute tenure of land or property with the freedom to dispose of it at will.
“Freehold tenure offers the most value to the buyer.”
This compares to leasehold: the holding of property by lease. Leasehold is typical if you’re selling apartments. Invariably, the developer of the building retains the freehold. In some cases, the apartment buyers (the Leaseholders) jointly own the Freehold e.g. through an equal share in a company (specifically formed for this purpose) that owns the building’s freehold. So the Leaseholders effectively own the Freehold, if you get my drift.
The length of the lease and the terms of renewal drastically affect the price point. For example, a non-renewable lease of 99 years with three years left to run has very little value. But a fully renewable 99-year lease with three years left to run has all the latent value of the original 99-year lease, providing someone gets off their backside and renews it before it times out!
Another example, a 999-year leasehold is close to freehold ownership, but with strings attached. In this case, property value depends on the strings!
On the other hand, freehold means you own the title and are free to do whatever you want with your asset, providing there are no covenants, building controls or laws governing your property.
It’s important to be able to demonstrate that it isn’t going to cost an arm and a leg to run the property you are selling. Monthly costs such as Rates, Utilities, Service Charges and Ground Rent can add up to an objection in the sales process. The more objections you have, the less sales conversions and the slower your sales pace.
PRODUCT LIFECYCLE PRICING & PHASING
If you have a development with a number of homes to sell, you might want to consider introducing construction and sales phases.
You will attract different types of people at the beginning of your project to the ones you’ll attract at the end. Innovators & Investors, Early Adopters, Early Majority towards the beginning and middle. Followed by Late Majority and Laggards towards the end.
Your pricing should reward and attract the Innovators, Investors and Early Adopters who are prepared to occupy whilst building is going on. The Late Majority and Laggards who wait until the job is more or less finished have less inconvenience and should pay more. That’s reasonable and to be expected.
“There is a reward for investors and early adopters and a premium to be paid by the late majority.”
A word of caution: as the developer, make sure your final phase pricing doesn’t exceed perceived market value or you will be in for a long wait to close out.
This one is more for the Vacation Home / Second Home sector, but the price model adopted for a second home makes a huge difference to its value both when it is being bought and, more importantly, when it is being re-sold by the owner. Options include Buy-to-Let, Sale & Leaseback, Condo-hotel, Investhotel, Fractional, Right-to-Use.
Rule of thumb here: the closer the price model reflects freehold, the higher the property value and the faster the sales pace. Conversely, the more conditions are placed on the buyer, such as usage restrictions and services charges, the more the value of a property will be eroded.
ADDING VALUE vs. DISCOUNTING
In a buyer’s market, discounting can end up being part of the negotiation. To be avoided if possible, but some people will always haggle. If you know you are going to have to discount, allow for this in the P&L.
It’s important to try to sell each phase out before launching the next phase or you will reach the end of the development with unsellable properties from earlier phases.
The last phase of sales in a development is where your profit sits, so this is the stock that you want to sell the most.
So, as you go through the phases, weaker stock (such as property with a weaker aspect) should be priced to sell. If it is still sticking, instead of discounting, try adding value. For example, offer to include an upgraded FF&E spec within the agreed price.
This is way better than discounting, particularly if you are offering quality product.
Return On Investment factors start with how your development property is currently valued. If you can demonstrate you have a property valuation over and above your list price you are on to a winner straight away.
For investor buyers, rental yield is important. If you are selling to this market, make sure that the yields your properties offer exceed investor expectations.
All buyers will be interested in the resales value of their property and how their capital investment will appreciate. Building in an up-and-coming area with demonstrable inward investment in “big infrastructure” like Crossrail or Hinckley Point in the UK, or the Fehmarn Belt Fixed Link between Denmark and Germany, will affect the 5-year perceived value of the property and help sales pace.
SPECIALISE AND DIFFERENTIATE TO ACHIEVE PREMIUM PRICING
If there is no difference between what you are offering and what everyone else is offering, you are basically selling a commodity – selling goods or services when the demand for them has no qualitative differentiation across a market. The only way you can then sell is by joining in a price war.
However, if you have chosen:
a superb Place,
a narrow niche of People to sell to,
a stand out Positioning in the minds of those People,
and a speciality Property Proposition…
… you have a stronger Value Proposition and can charge a premium over the competition.
In summary, when setting your list price, you should look further than just your competitors’ prices and your own build size and quality.
Your properties’ tenure, development phasing, how you add value to property that sticks, an up-and-coming location, a specific market niche, competitive stand out, monthly running costs, the perceived value of the property in five years, and a speciality property offering, are all part of your Value Proposition.