Maarten van der Spek: Why property development rarely pays off

December 16, 2025

_{This column was originally written in Dutch. This is an English translation.}

By Maarten van der Spek, Spek Advisory & Adjunct Professor Real Estate TIAS Business School

Does property development really deliver higher returns, or do we overestimate its potential? New research shows that property development generates only a limited incremental return, while being far riskier than simply investing in property.

Although property development is a fundamental part of our society and a common feature of investment portfolios, remarkably little research has been done into the associated returns and risks.

Real estate developments often involve a 20% to 30% profit margin for the developer. This sounds attractive, but for an investor, spread over three years and without rental income, it is quickly less impressive compared to a stable 6% direct yield per year. And this is precisely the essence of assessing property developments, namely comparing them with a realistic alternative. Property developments are often assessed on the basis of an absolute IRR, but it is much better to compare them with a similar property investment.

Anyone who makes such a comparison will immediately see that general market developments affect both forms of investment, while negative market developments have a number of additional negative effects on a property development, such as cost overruns and delays. The risk, compared to a property investment, is therefore skewed and downward, i.e. there is more downside risk.

This asymmetry in risks made it all the more striking that there is hardly any academic research into the returns and risks of property development. For this reason, I decided to conduct my own research together with a former colleague[1]. We analysed all British property developments since 2001, which yielded a number of important insights for investors.

The first and perhaps most confronting lesson is that the extra return that property development offers on top of regular property investments is limited in practice. Although the average “excess” return of 1.2% — the extra return above a comparable existing property investment — is positive, it is so volatile that statistically speaking, you cannot say that there is a difference.

As might be expected, the extra return increases in rising markets, but quickly turns negative when the market is down. Furthermore, the valuation of developments appears to be priced in remarkably quickly after completion. Almost all of the increase in value is realised within the first year after completion. Only for residential properties does this process take slightly longer, sometimes up to two years. It is therefore important for developers and investors in the housing market in particular to be aware of this.

Finally, the volatility of a property development appears to be 50% higher than that of a property investment. From the perspective of an institutional investor and portfolio construction, where stability of returns is crucial, this is a very important observation. The question is therefore whether property development is a suitable investment for such a party to increase returns and whether there are better ways to do so.

Property development remains crucial for urban renewal and can also add value as an investment. However, investors should realise that the actual additional return compared to an existing property investment is much smaller and, above all, more uncertain than is often thought. So anyone who wants to get involved in property development for the long term should do so primarily for strategic or social reasons, and certainly not just because of a perceived structural return advantage.

[1] van der Spek, M., & Younus, I. (2025), ‘Does Real Estate Development Add Value?’, Journal of Portfolio Management, 51(11).