The 1/3 Rule in Development
A common rule of thumb in property development is that one third of the GDV covers the land, one third covers the build costs, and one third is profit.
When assessing a potential ground-up property development, developers need a rapid way to filter out bad deals before spending thousands of pounds on architects and quantity surveyors. They often rely on the 'Rule of Thirds'.
This traditional heuristic states that the Gross Development Value (GDV) of a project should be split three ways: roughly 33% for the cost of purchasing the land, 33% for the total construction and finance costs, and 33% for the developer's gross profit margin.
Modern Realities
While this rule is a fantastic quick-filter, modern realities such as rampant build-cost inflation and high interest rates have squeezed margins. Today, many developers are happy to proceed with projects projecting a 20% to 25% profit margin on GDV, meaning the land or build costs must consume a larger slice of the pie.