Slower sales after completion barely dent the profit margin. They do real damage to the IRR, and that changes whether a price cut is worth making.
A slower sales rate costs a for-sale developer more in IRR than in profit, because most of the damage is time. On an illustrative 100-unit scheme, falling from 6 to 4 sales a month after completion cuts profit by only £248,007, 3.8% of it, but cuts the equity IRR from 26.4% to 21.2%. In profit terms that is a 0.8% price cut; in IRR terms it is a 4.4% one.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Appraisals carry a sales rate as one line in the assumptions, often set from the agent's letter and left alone. Then the scheme completes into a softer market, units sell at four a month instead of six, and the question comes from the board: how much is this costing us, and would a price cut that restores the pace be worth it? The answer depends on which return you are protecting.
| Input | Value |
|---|---|
| Units / average price | 100 at £400,000 |
| GDV | £40,000,000 |
| Pre-sold off plan, completing at practical completion | 20 units |
| Land, month 0 | £6,000,000 |
| Build and fees over 18 months | £22,000,000 + £3,000,000 (£1,388,889 a month) |
| Equity, spent first | £9,000,000 |
| Development loan, interest rolled up | 8% a year (0.667% a month) |
| Sales and legal costs | 2% of price |
| Holding cost of each unsold unit | £250 a month |
| Base sales rate after completion | 6 a month |
At practical completion in month 18, the 20 pre-sales complete and bring in £8,000,000 less 2% of costs. The other 80 units sell at the chosen rate: at 6 a month that takes 14 months, to month 32; at 4 a month, 20 months, to month 38.
Each month: interest = opening loan × 0.667%; loan = opening + interest + costs not covered by equity − net sale proceeds. Holding cost = units still unsold × £250, £20,000 in the first month after completion.
In Excel, with months in columns: units sold =MIN(Rate, Unsold_prev), net receipts =Sold*Price*(1-2%), repayment =MIN(Loan_prev*(1+8%/12)+Costs, Receipts).
At 6 a month, net receipts are £2,352,000 a month and the loan is cleared in month 25. From then on, every sale goes to equity, and the cost of slower sales is the equity's own time.
| Sales a month | Months to sell out | Loan repaid, month | Interest | Holding costs | Profit | Profit on cost | Equity IRR |
|---|---|---|---|---|---|---|---|
| 8 | 10 | 23 | 1,430,170 | 110,000 | 6,659,830 | 20.0% | 29.8% |
| 6 | 14 | 25 | 1,520,304 | 143,500 | 6,536,196 | 19.5% | 26.4% |
| 4 | 20 | 29 | 1,701,811 | 210,000 | 6,288,189 | 18.7% | 21.2% |
| 3 | 27 | 32 | 1,890,859 | 276,750 | 6,032,391 | 17.8% | 17.5% |
Going from 6 to 4 a month adds six months to the sell-out, £181,507 of interest and £66,500 of holding costs: £248,007 in all, or £41,335 for each extra month, about £3,100 per unsold unit. Profit on cost slips from 19.5% to 18.7%, which nobody would notice in a board pack. The equity IRR falls 5.2 points, because the equity's profit arrives in months 29 to 38 instead of 25 to 32. At 3 a month the IRR loss is 8.9 points. The equity multiple barely moves, from 1.73x to 1.70x, which is the same story: the money comes back, just later. The general relationship between the two measures is in what IRR a 20 per cent profit on cost gives a developer.
The useful question is the break-even discount: the price cut on the 80 unsold units, keeping the pace at 6 a month, that leaves the developer exactly as well off as selling at full price at 4 a month.
| Slowdown to | Break-even cut, on profit | Per unit | Break-even cut, on IRR | Per unit |
|---|---|---|---|---|
| 4 a month | 0.8% | 3,130 | 4.4% | 17,630 |
| 3 a month | 1.6% | 6,359 | 7.5% | 29,925 |
On profit, a cut of more than 0.8% to hold the pace is a bad trade: the developer would make more by waiting. On IRR, any cut up to 4.4% is a good one. The two answers are more than five times apart, and they are both right; they describe different owners. A housebuilder with its own balance sheet and a land bank to feed may care about the margin. A fund or a JV partner priced on IRR, whose capital is held until the last unit sells, should accept the cut.
| Price cut, selling at 6 a month | Per unit | Profit | Profit on cost | Equity IRR |
|---|---|---|---|---|
| 2% | 8,000 | 5,902,337 | 17.6% | 24.1% |
| 4% | 16,000 | 5,268,478 | 15.7% | 21.7% |
| 6% | 24,000 | 4,632,401 | 13.8% | 19.3% |
A 4% cut that restores six sales a month just beats the slowdown on IRR, 21.7% against 21.2%, and loses £1,019,711 of profit. If the cut does not in fact restore the pace, it loses on both. Before cutting, the agent should be able to show that the price, not the product or the market, is what is slowing sales.
The common mistake is running the sales-rate sensitivity on profit on cost alone, seeing a move of less than one point, and concluding that the sales rate does not matter. It is the variable that decides how long the capital is tied up, and the loan is only the first part of that: once the loan is repaid, every month of slower sales is a month of equity sitting in unsold flats. The second mistake is forgetting holding costs: service charges, council tax and insurance on empty units are £66,500 of the £248,007 here. The finance side is worked in how to calculate interest on a development loan.
For the appraisal: show the sales rate sensitivity in IRR as well as profit, and state the break-even price cut for a two-unit-a-month slowdown. It is the number the board will ask for when the market turns.
A slower sales rate is a cheap problem in profit and an expensive one in IRR. Whether to cut price to keep the pace depends on which of the two the capital in the scheme is measured on. The book's own worked scheme, from site to disposal, is in the free workbooks for the book.
Because the extra costs are only interest and holding costs, while the whole profit arrives later. In the illustrative scheme, slowing from 6 to 4 sales a month adds six months to the sell-out and £248,007 of cost, 3.8% of profit, but delays equity's receipts from months 25 to 32 to months 29 to 38, so the IRR falls from 26.4% to 21.2%.
It depends on the return being protected. In the illustrative scheme, holding six sales a month instead of four is worth a price cut of up to 0.8% on a profit basis but up to 4.4% on an IRR basis, about £17,630 a unit. IRR-driven capital such as a fund or JV partner should accept a larger cut than a balance-sheet housebuilder.
Typically service charges, council tax, insurance and some marketing, while units sit empty. At an illustrative £250 a unit a month, 80 unsold units cost £20,000 in the first month after completion, and slowing sales from 6 to 4 a month adds £66,500 of holding costs over the sell-out.
This article is one calculation from The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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