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I constantly ponder this as I look around my home town. We're in Cornwall and so house prices have gone fairly batshit to the extent that local teachers (in fac

by dmje 3y ago

I constantly ponder this as I look around my home town. We're in Cornwall and so house prices have gone fairly batshit to the extent that local teachers (in fact, local GPs too) can't afford rents or house purchases. Meanwhile, a patch of land sold a few years back for £1m. On it, the developer built a block of retirement flats. There are maybe 30 of them. They each sold for north of £500k. The property owner also charges £20k per property per year for "maintenance". It's simplistic but he's basically printing money. Out of his £15m turnover he had to spend £1m on the land, maybe £1m on building the flats - so £13m clear profit, and an annual of £600k. So then he goes on and buys the next piece of land for £2m, this time makes a clear £30m, annual of £1.5 etc etc. So, yeh, success to the successful. Who needs teachers or GPs anyway, right?

jahewson 3y ago
Fairly basic flats cost more like £400k each to build. The developer isn’t making all that much profit. That’s one reason why all you see are luxury flats nowadays.
dvt 3y ago
> It's simplistic but he's basically printing money. Upvoted you, but I disagree. This is classic survivorship bias. You see the 10% of cases where this works, and you don't see the 90% of cases where the owner goes into crippling debt, can't sell the land, can't sell the condos, or vacancies are at 50%+. There's no such thing as "printing money" in capitalistic markets and it's naïve to think there is. I'm not an efficient market hypothesis guy, but markets tend to be efficient. There are cases of problematic monopolies (e.g. telecom companies, energy distribution, steel, Google advertising, "too big to fail" banks, etc.) and maybe you could argue those actually do print money, but, imo, that's far and few in between.
- waboremo 3y ago
  Where are you getting 90% failure rate for those with access to enough wealth to easily sweep up $1m land + development costs for several buildings? I can buy that for average folk, as they often do not have the expertise (nor the wealth to access the expertise) necessary to make better decisions for their business. For those substantially wealthier, it doesn't really make sense but maybe you're privy to more sources here that I would love to dive into.
  - deleted 3y ago
    [deleted]
  - dvt 3y ago
    Maybe 90% is a bit dramatic, but the spirit of my post is that, even with $1m, you won't be printing money any time soon.
    - ethanbond 3y ago
      Yes you can and yes it is as simple and nearly foolproof as buying land. It takes a lot of stupidity and/or misfortune to lose money on real estate in a stable economy.
  - _dain_ 3y ago
    Even when you own the land it's hard to get anything built. Planning permission, legal disputes, nimbys, nimbys, nimbys. Developers take on a lot of risk when they do this; they might end up owning a very pretty parcel of land that is a pile of shit in business terms, because they effectively aren't allowed to do anything profitable with it. Therefore, in the cases where it does work out, the profit is high. It has to be, to justify the whole thing. That's what "risk-adjusted rate of return" means. Btw this is why it's always "big developers" in the first place; they have to be big, because they have to spread out this risk over a large number of ventures, and have easier access to credit. Planning restrictions drives consolidation in the construction/real estate industry because it raises the level of risk above what smaller companies can endure. That's why it's so maddening to hear nimbys say they're opposed to profiteering big developers, and that loosening of planning regulations would be some kind of handout to them. Precisely the opposite is the case. They're unwitting agents of regulatory capture. Jeremy Clarkson's farm show is an accidental documentary about this. See here: https://twitter.com/NuclearBeacon/status/1630617164536332303 https://twitter.com/NuclearBeacon/status/1630617164536332303
    - waboremo 3y ago
      I'm still not seeing any sources to the high failure rates.
- deleted 3y ago
  [deleted]
- Supermancho 3y ago
  > This is classic survivorship bias. The analysis is not looking at the probability of the situation occurring (where survivorship would apply). The formula is applied, where it can be. The observation is pointing out the Success driving success paradigm in action.
  - dvt 3y ago
    But there's plenty of cases where success drives failure (look at Bezos' Fire Phone as a low hanging fruit example, or more recently at Branson's Virgin Orbit), so, again, it's classic survivorship bias, as there are plenty of counter-examples.
    - Supermancho 3y ago
      > But there's plenty of cases where success drives failure That's a separate issue, under different conditions. Land development is the most common way to grow wealth, historically. It's mostly a matter of probability consideration and access to capital. It's not no-risk, but it's low risk until you start building.
      - dvt 3y ago
        > It's not no-risk, but it's low risk until you start building. Building is kind of.. the whole point. And risk profiles vary. For example, I'd rather build/invest in a startup rather than buying land where I may or may not be able to build anything profitable over the long term. Development also has a very long horizon, tying up liquidity in the process. Saying "just buy land bro, making money is ez" seems like a very TikTok Investor kind of take.
        Supermancho 3y ago
        > Building is kind of.. the whole point. Land development is not limited to "build anywhere you can". Purchases of land for later resale, when armed with knowledge about likely events, is a common strategy. In cities, you often have to deal with municipal pressures to do more. Parking lots filled empty plots in southern california 1980s and since 2015ish the number of Car Washes in Fargo, ND has grown to 80... a cash business with minimal overhead and a flimsy construction, which does not have to cover the entirety of the plot. > Saying "just buy land bro, making money is ez" seems like a very TikTok Investor kind of take Just like interest on large amounts of liquidity, land ownership generates a meaningful passive income, over time. There's nothing trivial about it...unless you buy wasteland in Arizona (which many people hold).
JackFr 3y ago
If I understand your back of the envelope estimate, you believe he had a 650% return on investment. It seems far more likely that some of your assumptions are wrong. Regardless, assume this guy had couple of million pounds — building the flats is a productive use of the capital. We know that because he sold them at a profit. That means buyers valued the output more than the cost of the inputs. That is good. (I understand that markets are not perfect, and monopolists, monopsonists and rent seekers can make profits without creating value, and I agree that is bad. But the fact that an enterprise is profitable is not a bad thing.)
- ForHackernews 3y ago
  > We know that because he sold them at a profit. That means buyers valued the output more than the cost of the inputs. That is good. This is a very naive interpretation. Perhaps (maybe even more likely) the value of the land skyrocketed according to rising demand, regardless of the capital invested in building flats. They could have built single-family homes, or a parking lot, or even nothing at all and still profited handsomely. Please read up on Georgism, land value tax (LVT) and ground-rents: https://www.strongtowns.org/journal/2020/1/16/the-power-of-the-land-value-tax https://www.strongtowns.org/journal/2020/1/16/the-power-of-t...
timerol 3y ago
The builder in this case is a good example of what the article mentions. One way to deal with it in this case is to lower the barrier to entry for construction - every landowner should be able to build more a small apartment building on their property, leading to profits shared more broadly among those who own land, and more housing units available for sale and/or rent for people who don't currently own land.
hackerlight 3y ago
> So, yeh, success to the successful. Who needs teachers or GPs anyway, right? You are wrongly framing the builder as the bad guy, and not the homeowners that lobby for SFZ that causes a scarcity of flats which then causes the possibility for abnormal profits. Study the causality and place the blame at the correct place if you want to enact real change instead of just making people angry.
- adammarples 3y ago
  There isn't SFZ in Cornwall, England. As far as I know.
renewiltord 3y ago
People often have tales like this. For instance, in Denver, they tell tales of developers who greedily sell homes for high prices. But the local Democratic Socialists of America lobbied hard with many other people to preserve a local golf course over allowing someone to build a home. It is a natural characteristic that the demand curve takes effect with fixed supply. Some folks like to lament greed or profit, while adamantly refusing policy that makes markets efficient and erodes margins. It is an interesting dynamic.
RhodesianHunter 3y ago
30 flats built for £1m? I think not.

by dmje 3y ago

jahewson 3y ago

Fairly basic flats cost more like £400k each to build. The developer isn’t making all that much profit. That’s one reason why all you see are luxury flats nowadays.

dvt 3y ago

> It's simplistic but he's basically printing money. Upvoted you, but I disagree. This is classic survivorship bias. You see the 10% of cases where this works, and you don't see the 90% of cases where the owner goes into crippling debt, can't sell the land, can't sell the condos, or vacancies are at 50%+. There's no such thing as "printing money" in capitalistic markets and it's naïve to think there is. I'm not an efficient market hypothesis guy, but markets tend to be efficient. There are cases of problematic monopolies (e.g. telecom companies, energy distribution, steel, Google advertising, "too big to fail" banks, etc.) and maybe you could argue those actually do print money, but, imo, that's far and few in between.

waboremo 3y ago
Where are you getting 90% failure rate for those with access to enough wealth to easily sweep up $1m land + development costs for several buildings? I can buy that for average folk, as they often do not have the expertise (nor the wealth to access the expertise) necessary to make better decisions for their business. For those substantially wealthier, it doesn't really make sense but maybe you're privy to more sources here that I would love to dive into.
- deleted 3y ago
  [deleted]
- dvt 3y ago
  Maybe 90% is a bit dramatic, but the spirit of my post is that, even with $1m, you won't be printing money any time soon.
  - ethanbond 3y ago
    Yes you can and yes it is as simple and nearly foolproof as buying land. It takes a lot of stupidity and/or misfortune to lose money on real estate in a stable economy.
- _dain_ 3y ago
  Even when you own the land it's hard to get anything built. Planning permission, legal disputes, nimbys, nimbys, nimbys. Developers take on a lot of risk when they do this; they might end up owning a very pretty parcel of land that is a pile of shit in business terms, because they effectively aren't allowed to do anything profitable with it. Therefore, in the cases where it does work out, the profit is high. It has to be, to justify the whole thing. That's what "risk-adjusted rate of return" means. Btw this is why it's always "big developers" in the first place; they have to be big, because they have to spread out this risk over a large number of ventures, and have easier access to credit. Planning restrictions drives consolidation in the construction/real estate industry because it raises the level of risk above what smaller companies can endure. That's why it's so maddening to hear nimbys say they're opposed to profiteering big developers, and that loosening of planning regulations would be some kind of handout to them. Precisely the opposite is the case. They're unwitting agents of regulatory capture. Jeremy Clarkson's farm show is an accidental documentary about this. See here: https://twitter.com/NuclearBeacon/status/1630617164536332303 https://twitter.com/NuclearBeacon/status/1630617164536332303
  - waboremo 3y ago
    I'm still not seeing any sources to the high failure rates.
deleted 3y ago
[deleted]
Supermancho 3y ago
> This is classic survivorship bias. The analysis is not looking at the probability of the situation occurring (where survivorship would apply). The formula is applied, where it can be. The observation is pointing out the Success driving success paradigm in action.
- dvt 3y ago
  But there's plenty of cases where success drives failure (look at Bezos' Fire Phone as a low hanging fruit example, or more recently at Branson's Virgin Orbit), so, again, it's classic survivorship bias, as there are plenty of counter-examples.
  - Supermancho 3y ago
    > But there's plenty of cases where success drives failure That's a separate issue, under different conditions. Land development is the most common way to grow wealth, historically. It's mostly a matter of probability consideration and access to capital. It's not no-risk, but it's low risk until you start building.
    - dvt 3y ago
      > It's not no-risk, but it's low risk until you start building. Building is kind of.. the whole point. And risk profiles vary. For example, I'd rather build/invest in a startup rather than buying land where I may or may not be able to build anything profitable over the long term. Development also has a very long horizon, tying up liquidity in the process. Saying "just buy land bro, making money is ez" seems like a very TikTok Investor kind of take.
      - Supermancho 3y ago
        > Building is kind of.. the whole point. Land development is not limited to "build anywhere you can". Purchases of land for later resale, when armed with knowledge about likely events, is a common strategy. In cities, you often have to deal with municipal pressures to do more. Parking lots filled empty plots in southern california 1980s and since 2015ish the number of Car Washes in Fargo, ND has grown to 80... a cash business with minimal overhead and a flimsy construction, which does not have to cover the entirety of the plot. > Saying "just buy land bro, making money is ez" seems like a very TikTok Investor kind of take Just like interest on large amounts of liquidity, land ownership generates a meaningful passive income, over time. There's nothing trivial about it...unless you buy wasteland in Arizona (which many people hold).

JackFr 3y ago

If I understand your back of the envelope estimate, you believe he had a 650% return on investment. It seems far more likely that some of your assumptions are wrong. Regardless, assume this guy had couple of million pounds — building the flats is a productive use of the capital. We know that because he sold them at a profit. That means buyers valued the output more than the cost of the inputs. That is good. (I understand that markets are not perfect, and monopolists, monopsonists and rent seekers can make profits without creating value, and I agree that is bad. But the fact that an enterprise is profitable is not a bad thing.)

ForHackernews 3y ago
> We know that because he sold them at a profit. That means buyers valued the output more than the cost of the inputs. That is good. This is a very naive interpretation. Perhaps (maybe even more likely) the value of the land skyrocketed according to rising demand, regardless of the capital invested in building flats. They could have built single-family homes, or a parking lot, or even nothing at all and still profited handsomely. Please read up on Georgism, land value tax (LVT) and ground-rents: https://www.strongtowns.org/journal/2020/1/16/the-power-of-the-land-value-tax https://www.strongtowns.org/journal/2020/1/16/the-power-of-t...

timerol 3y ago

The builder in this case is a good example of what the article mentions. One way to deal with it in this case is to lower the barrier to entry for construction - every landowner should be able to build more a small apartment building on their property, leading to profits shared more broadly among those who own land, and more housing units available for sale and/or rent for people who don't currently own land.

hackerlight 3y ago

> So, yeh, success to the successful. Who needs teachers or GPs anyway, right? You are wrongly framing the builder as the bad guy, and not the homeowners that lobby for SFZ that causes a scarcity of flats which then causes the possibility for abnormal profits. Study the causality and place the blame at the correct place if you want to enact real change instead of just making people angry.

adammarples 3y ago
There isn't SFZ in Cornwall, England. As far as I know.

renewiltord 3y ago

People often have tales like this. For instance, in Denver, they tell tales of developers who greedily sell homes for high prices. But the local Democratic Socialists of America lobbied hard with many other people to preserve a local golf course over allowing someone to build a home. It is a natural characteristic that the demand curve takes effect with fixed supply. Some folks like to lament greed or profit, while adamantly refusing policy that makes markets efficient and erodes margins. It is an interesting dynamic.

RhodesianHunter 3y ago

30 flats built for £1m? I think not.