Rakennuslehti revived the debate about the profitability of foundation contracting in its story "Kovat katteet gryndiasuntoinna" (April 26.4.2019, XNUMX). The story sought to find out the formation of the price of new apartments in popular residential areas in Helsinki. However, the review was made with incomplete information, on the basis of which one-sided and even incorrect conclusions were drawn.
In the calculations, the average square footage prices of freely financed apartments were used and the average costs of Ara construction and the price of the plot were subtracted from them. The difference obtained in this way was interpreted as a margin for the construction business.
Expensive is also expensive to make
The review did not sufficiently take into account the differences in the costs of building apartments for premium locations. The Land Surveying Institute (MML) did in 2017 statement from the calculated share of the price of the land in the price of the apartment. According to MML, in the most expensive places, the plot's share of the price of the apartment can be moderate, but other costs can easily become exceptionally high. MML's report mentions, among other things, the additional costs of urban and dense construction, underground parking, often difficult ground conditions, and challenging construction site arrangements, especially if construction is built over traffic.
Rakennuslehti's investigation concerned precisely this type of area, i.e. Keski-Pasila, which is being built in connection with Pasila station, the Vallila machine shop area, Kalasatama and the Sompasaari area, and Jätkäsaari. The construction costs of Ara apartments in such areas are partly artificially low. They are largely built by the same construction companies as the self-financed projects, and sometimes the projects are connected to each other in terms of land transfer. In practice, the construction company may pinch the roofs of the Ara site to be able to realize independent owner-occupied apartments as well. In this case, the latter are used to compensate for the costs of state-subsidized rental apartments.
Autopaikat was completely excluded from Rakennuslehti's survey, because they are usually sold separately. In the areas in question, the construction costs of the parking spaces specified in the plans rise to 40–000 euros per parking space when they are implemented under a yard cover or in a rock cave. On the other hand, the sales prices available from parking spaces cannot fully cover their costs, but part of the construction costs have to be included in housing prices. In some cases, shares cannot be formed from parking spaces and they cannot be sold separately, in which case their costs in their entirety are allocated to all apartments.
There are other expensive solutions in non-profit production. Not only finishing materials and furniture, but also other equipment and, for example, large glazed balconies and terraces are more expensive than Ara production, especially in high-value properties.
It was not clear from the story whether the cost reviews included, for example, taxes and project development costs in their entirety. At least the general costs of self-financed production, such as marketing, sales and brokerage fees, as well as financial costs for, for example, the securities required by the Housing Sales Act, were missing from the comparative costs. When the object is built on its own plot, the plot also incurs expenses for several years before construction begins.
Above all, in freely funded projects, risk also has its price. If, for example, unexpected expenses accumulate in the project or the sale of apartments and parking spaces does not go as planned, a loss may arise instead of a profit. The more expensive the apartment, the bigger the selling risk.
Hard margins or just hard claims?
The story in Rakennuslehti talked about margins of 40-50 percent and mentioned as a "dramatic example" the housing stock company from Punavuori, where "a large apartment will make a calculated profit for the construction company of more than 7 euros per square meter". Profit refers to the difference that arises when all expenses and taxes are deducted from the income - not how the average costs of Ara construction are deducted from the selling price of a single item of value. The figures are mostly suitable for confirming the urban legend, but no factual conclusions can be drawn from them.
The margins that construction companies aim for and realize are completely site-specific and vary a lot. In order to get an overall picture, it is good to compare the calculated margins in euros and percentages presented in the article to other reports on the margin and profitability of construction. A few years ago, VTT made an input-output model tailored to the construction of new houses (VTT CR 03276 14). According to it, the construction company's margin in the price of a self-financed residential apartment building without the cost of the plot was in the order of 5 percent. The share of taxes and tax-related expenses was the largest, about 40 percent.
The building industry RT commissions annually profitability statement based on the actual financial statements. The profitability of member companies in the building construction industry, measured by operating profit, has been around 4–5 percent in recent years. The report, based on last year's data, will be published in June. On the other hand, the profitability of the housing segment can be viewed separately from the financial statement information published by listed companies.
Instead of regulation, more competition
The boom in the construction of studio apartments was also explained in the story by the fact that they have the highest margins on average in some places. Construction companies, however, make apartments that buyers want and are willing to pay for. So far, there have been more takers than bidders for the studio apartments. This can also be seen in the fact that in Helsinki, the share of studio apartments in the building stock has remained stable, while the number of people living alone has increased.
The price of a new apartment is formed in relation to demand and other supply. If the land transfer had an upper limit for the first sale price below the market price, the buyer of the apartment, for example an investor, would collect a profit by selling the apartment on. In desirable areas, the prices of old apartments also rise, and the price increase always ends up benefiting someone. The solution is not found in regulation, but the most important thing is to ensure a functioning market with the help of land supply.
This spring, Helsinki has re-aligned its land transfer principle. In the future, apartments in Helsinki will mostly be built on rental plots, and only plots located in particularly valuable and attractive locations will be sold. Price competition is increased in unregulated housing production also when the city hands over the plot by renting it out.
Helsinki wants to price plots according to market conditions and encourages operators in the construction industry for development and extension construction projects. Practice will show how this is realized.
Anu Kärkkäinen
Economic director
Confederation of Finnish Construction Industries (CFCI)
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