Building in Phases: A Worked Example of a 24-Unit Development

An illustrative calculation showing how a three-phase townhouse scheme funds itself, what the peak funding requirement really is, and how cost inflation affects later phases.

Phasing a development is usually described as a way to reduce risk, and it is really a way to reduce peak funding while accepting cost inflation on later phases. This worked example takes a 24-unit townhouse scheme through three phases and shows where the money is needed, what each phase returns and what the overall margin looks like. All figures are illustrative assumptions used to show the method.

The situation

An overseas owner holds a plot suitable for 24 townhouses in a Saudi city and intends to build and sell them in three phases of eight units. They want to know how much funding the first phase requires, whether each phase pays for the next, and what the development margin looks like after the land.

Assumptions (illustrative)

• Twenty-four townhouses of 220 square metres each, built in three phases of eight units.
• Land already owned, valued at SAR 6,000,000.
• Construction assumption of SAR 2,450 per square metre; site-wide infrastructure in phase one at SAR 1,400,000; site works of SAR 250,000 in each later phase.
• Design fees for the whole scheme of SAR 480,000 incurred in phase one; contingency at 8 per cent of construction in each phase.
• Sales price assumption of SAR 1,150,000 per unit in phase one, with both cost and price assumed 4 per cent higher in each following phase.
• Selling costs at 2.5 per cent of sales value, and Real Estate Transaction Tax at the published headline rate of 5 per cent, treated here as a disposal cost. Confirm the treatment for your structure with ZATCA or a licensed adviser.

Step 1: Establish the cost of one unit and of phase one

Each unit is 220 multiplied by SAR 2,450, which is SAR 539,000. Eight units cost SAR 4,312,000. Adding infrastructure of SAR 1,400,000, design fees of SAR 480,000 and contingency at 8 per cent of construction of SAR 344,960 gives a phase one cost of SAR 6,536,960.

Phase one carries the infrastructure and the design fees for the whole scheme, so it costs more per unit than any later phase. That front loading is the real cost of phasing.

Step 2: Work out the net proceeds from phase one

Eight units at SAR 1,150,000 gives SAR 9,200,000. Selling costs at 2.5 per cent are SAR 230,000 and transaction tax at 5 per cent is SAR 460,000. Net proceeds are SAR 8,510,000.

Disposal costs remove SAR 690,000, which is 7.5 per cent of the sales value. Modelling a development on gross sales price overstates the return by roughly that margin.

Step 3: Check whether phase one funds phase two

Phase two construction is SAR 4,312,000 uplifted by 4 per cent to SAR 4,484,480, plus site works of SAR 250,000 and contingency of SAR 358,758, giving SAR 5,093,238. Net proceeds from phase one of SAR 8,510,000 cover that with SAR 3,416,762 remaining.

Phase one does fund phase two, but only because it sold. If completions slip, phase two has to be funded from equity or debt while finished stock sits unsold, which is the real risk phasing carries.

Step 4: Complete phases two and three

Phase two sells at SAR 1,196,000 per unit, or SAR 9,568,000, less selling costs of SAR 239,200 and tax of SAR 478,400, giving SAR 8,850,400 net. Phase three costs SAR 4,663,859 in construction plus SAR 250,000 of site works and SAR 373,109 of contingency, which is SAR 5,286,968, and sells at SAR 1,243,840 per unit, or SAR 9,950,720, less SAR 248,768 and SAR 497,536, giving SAR 9,204,416 net.

Because price and cost are both assumed to rise at 4 per cent, later phases produce slightly more cash. That only holds while the market moves with your costs, which is an assumption to test rather than to rely on.

Step 5: Calculate the development margin

Total net proceeds are SAR 8,510,000 plus SAR 8,850,400 plus SAR 9,204,416, which is SAR 26,564,816. Total build spend is SAR 6,536,960 plus SAR 5,093,238 plus SAR 5,286,968, which is SAR 16,917,166. Profit before land is SAR 9,647,650. After land of SAR 6,000,000, profit is SAR 3,647,650 on total cost of SAR 22,917,166, a margin of 15.9 per cent.

The margin before land looks generous and the margin after land is what the project actually earns. Land is 26 per cent of total cost here, which is why development margins quoted without land mean very little.

Step 6: Identify the peak funding requirement

The worst case is phase one completed with no sales yet settled, which requires SAR 6,536,960 of funding excluding the land already owned. Every later phase is smaller, at SAR 5,093,238 and SAR 5,286,968.

Phasing reduced the peak funding from roughly SAR 16.9 million for the whole scheme to about SAR 6.5 million, at the cost of inflation on later phases and a longer overall programme.

What changes the answer

• Phase one units selling at SAR 1,060,000, about 8 per cent lower: net proceeds fall to SAR 7,844,000 and the surplus after funding phase two falls to SAR 2,750,762.
• Construction inflation at 8 per cent rather than 4 per cent between phases: phase three construction rises to about SAR 5,027,700, reducing total profit by roughly SAR 400,000.
• A twelve-month delay before phase one completions settle: phase two must be funded externally, and the interest on that funding comes straight out of the margin.
• Selling all 24 units at once rather than in phases: peak funding rises to about SAR 16.9 million while avoiding two rounds of cost inflation, improving profit but requiring far more capital at risk.

What the numbers tell you

• Phasing buys a lower peak funding requirement and pays for it with cost inflation and time.
• Front load phase one with the infrastructure and design fees honestly, or the later phases will look artificially profitable.
• Disposal costs remove a meaningful percentage of sales value, so model net proceeds rather than gross prices.
• Each phase only funds the next if it sells on time; plan the funding for the case where it does not.
• Quote development margin after land, because land is often a quarter or more of total cost.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.