IRR: Residential Construction Projects

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IRR: Residential Construction Projects

Insights into the residential construction projects in Europe indicate a varying pricing structure per square meter, with some cities charging as high as 12,910 euros per square meter for the case of Paris. Other findings show that the average size of housing stock in 2019 in Europe was about 478 units per 1,000 Europeans. The typical rate of return on investment for a construction company also varies from less than ten to as high as 27.45% for the case of NVR Inc.

I. Insights into the Residential Construction Industry in Europe

Financial Information & Data

  • According to Statista, Europe’s construction industry turnover, including both commercial, residential, and non-residential construction reached 1.64 trillion euros in 2016, of which, 267.1 billion euros came from the civil engineering sector.
  • A PR Newswire report indicates that the residential construction industry in Europe in value terms climbed at a CAGR (compound annual growth rate) of 4.2% during 2015-2019.
  • Business Wire notes that in Europe, multi-family housing units account for over 34% of total residential construction, and it is forecasted to grow to 39% by 2023.

Estimated Value of Residential Projects

Major Players within the Industry

  • According to a 2018 report by Deloitte on Global Powers of Construction (GPOC), the three major companies in the region are Strabag, Vinci, and Fluor, with 80%, 27%, and 25% of their total income, respectively, coming from Europe.
  • In 2018, Strabag generated sales of over $14.115 billion in the region, Vinci made approximately $13.813 billion, while Fluor made about $4.217 billion (22% of $19.167 billion).
  • The EBIT (earnings before interest and taxes) from construction and non-construction activities during 2018 averaged 5.5% and 8.3% of sales, respectively, for an average EBIT margin of 6.1%.

Estimates of IRR (internal rate of return)

  • Extensive searches through public resources did not return the estimated IRR for the residential construction sector in Europe; however, we found examples of previously completed projects with varying IRR estimates.
  • For example, a study published in the Journal of Property Research shows that during the 2016 construction of UK's Great Portland Estates, the company registered an IRR of 23.5% p.a. for a six-year construction period.
  • Other prominent companies such as NREP claim to achieve an average of +20% IRR on its investments since its founding.

Housing Stock

II. Companies Analyses

Bechtel

Taylor Morrison

D.R. Horton, Inc.

  • D.R. Horton, Inc. is a national home construction company that also provides DHI Mortgage, DHI Title, and D.R. Horton Insurance financing options.
  • The company typically deals with home construction services, in particular, residential properties, since its website does not mention commercial properties.
  • According to D.R. Horton, Inc.'s Q4 earnings report, the company had a return on equity of 17.2%. Equally, its homebuilding return on inventory reached 18.1%.

Lennar Corporation

  • Lennar Corporation is a home construction and real estate company based in Miami, Florida. It claims to construct new homes in 21 states covering over 78 national real estate markets.
  • The company focuses on home building and offers various real estate services, including financing and buying and selling of property.
  • According to Macro Trends, Lennar Corporation had a return on investment of 7.55% as of December 31, 2019.

Pulte Group

  • Pulte Group is a renowned home construction company based in Atlanta, Georgia. It currently sells Wi-Fi certified homes, which is a standard feature in their modern houses.
  • While the company focuses more on home building, its target market includes first-time buyers, move-up buyers, and active-adult home buyers.
  • According to Macro Trends, Pulte Group had a return of investment of 12.62% as of December 31, 2019.

NVR, Inc.

KB Home

  • KB Home is a home construction company based in Detroit, Michigan that focuses on residential construction services and the selling of homes.
  • KB Home focuses explicitly on residential projects and has helped over 550,000 individuals/families achieve their dream homes.
  • According to the company's annual report, it had a return on investment of 10.4% in 2018.

Meritage Homes

  • Meritage Homes is a real estate construction company that designs, constructs, and sells single-family homes across the U.S. Its projects feature both active adult communities and luxury real estate properties.
  • The company primarily focuses on single-family residential projects, along with active adult communities in its real estate locations spread across the nation.
  • According to Macro Trends, Meritage Homes had a return on investment of 8.11% as of December 31, 2019.

Toll Brothers

Century Communities

LGI Homes

Research Methodology

Your research team relied on industry and market reports focusing on European geography to uncover insights into the European residential property market. On that note, we relied on reports published by Deloitte, the UK Government, Statista, Business Wire, and PR Newswire. These reports featured in-depth coverage of the European residential property market, including hard statistics regarding the pricing per square meter, the total number of stock units, etc.

Next, to analyze the companies identified, i.e., Bechtel, Taylor Morrison, D.R. Horton, Inc., Lennar Corp., Pulte Group, NVR, Inc., KB Home, Meritage Homes, Toll Brothers, Century Communities, and LGI Homes, we had to look for the requested data on the respective company websites, which contained data about the company's offerings but not the internal rate of return per project. We tried checking the annual reports of these companies, along with their Form 10-K filings, but none appears to have indicated their IRR per project.

Attempts to check stock analysis platforms such as Macro Trends, Yahoo Finance, and CSI Market, etc. also proved futile as none featured information regarding the IRR per project for these construction companies. The lack of specific IRR data for these companies promoted us to include each company's rate of return on investment, which can as well indicate whether the companies' investment returns fall below or above the industry return on investment. In this regard, we have included the rate of return on investment for 2019 for these companies.
Sources
Sources