4% marketing and sales budget required for vertical retirement villages – why?

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This week we were discussing in our office how much an operator should allocate in the marketing and sales budget to sell a new apartment-style retirement village.

In residential real estate marketing the answer is 4%. We decided to check for retirement villages and rang Jeff McGarn, owner of specialist marketing agency GBD.

Jeff confirmed 4%, being 2% for real estate sales commission/fees and 2% for marketing and media activities. We asked if this included the display suite; he said the marketing fit-out yes but not the construction.

Why 4%? You need to go hard to sell an apartment development as fast as you can because with retirement villages all deposits are refundable, so you don’t have a hard sale until the contract is signed.

 

And you have committed all your money to build it in one go.

An example. A 50-apartment development with an average sale price of $600,000 and a development profit/margin of 20% (optimistic). Potential sale value $30 million. Paid out on completion $24 million.

From the day it opens every apartment that has not sold is carrying $480,000 in finance cost at say 6% which is $28,800 per apartment per year, plus overheads of monthly fees not collected, say $500 or $6,000 a year. Total $34,800 per apartment, which is $2,900 per month.

If 25%/12 apartments have firm sales at opening, then 75%/38 apartments are being carried at $2,900 per month. That’s $110,200 every month.

This also means your entire project which was planned to make $6 million profit is having the profit eaten away – fast.

On top of this, a project with low sales on opening gets a bad smell about it, making it even harder to sell. More marketing funds will have to be thrown at it, or worse prices will be discounted.

For marketers, the housing downturn will not be helping as potential customers hesitate to sell their homes at perceived lower prices.

There is another impact often not talked about. The Board of the operator will get increasingly anxious if sales are slow and may go negative on future developments. That impacts the future of the organisation.

So, while 4% of the retail price of apartments seems like a lot, perhaps it’s not enough if you want to make sure of early success and maximum profits.

Pricing strategies are another subject we will discuss at a later date.

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