Return on investment in construction projects
- Simon Käslin
- Jul 25, 2025
- 10 min read
Updated: 2 hours ago
In brief: Two key figures matter in construction projects, and they measure completely different things. The gross sales yield measures a developer's profit against the project costs and realistically sits at 12 to 20 percent at the planning stage. The gross rental yield measures the annual rental income against the investment costs and, depending on location in German-speaking Switzerland, sits at 2.5 to 5 percent. Both are only a first filter. What matters is that yield is created in the planning, not at the point of sale.
This article on the return on investment in construction projects sets out both formulas with worked examples, the realistic ranges, the statutory upper limit under Art. 269 CO, how far banks actually lend and what destroys a nicely calculated margin. Indicative values as at 2026.
Table of contents
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1. The two key figures you have to keep apart
When people talk about "the yield" of a construction project, they usually mean one of two numbers, and confusing them is expensive.
Gross sales yield: For developers who develop and sell. It measures the profit in relation to the project costs and is realised once.
Gross rental yield: For investors who hold and let. It measures the annual rental income in relation to the investment costs and runs continuously.
Both are gross figures and assume the ideal case. For a decision you then need the net yield and the return on equity, which factor in maintenance, vacancy, administration and interest. Operating and maintenance costs, administration and vacancy risk eat up 0.5 to 1.5 percentage points of the gross rental yield.
2. Gross sales yield: formula and worked example
The gross sales yield shows how much profit a developer makes before tax and interest are deducted. You take the total sales proceeds, deduct all project costs, that is land, construction, incidental costs, fees and construction interest, and divide the surplus by the costs.
Formula: Gross sales yield = (sales proceeds minus project costs) divided by project costs, times 100.
Worked example: A developer invests 28 million francs in a new build project above Lake Zurich. Once the apartments are sold, 34 million flow back. The profit of 6 million corresponds to a gross sales yield of around 21 percent. A figure that banks rate as solid.
3. What sales yield is realistic
Experienced developers plan with 12 to 20 percent. Special situations, such as an unexpected upzoning or an extremely cheap land purchase, can make more than 40 percent possible. Conversely, a price drop of five percent already halves an originally comfortable margin.
Where an upzoning is to be achieved through a development plan, the value added levy belongs in the calculation from the outset. Depending on the canton and the municipality it amounts to 20 to 40 percent of the planning-related added value.
4. Why land and construction prices squeeze the margin
The price of land in the canton of Zurich has more than doubled since 2009, with prime locations above 3,000 francs per square metre. At the same time construction prices have risen by around 15 percent since 2021, because materials and wages became more expensive. Both raise the project costs and reduce the profit ratio.
On the cost side the biggest single lever is usually not where you would expect it. How strongly basements drive up the costs is regularly underestimated in the preliminary design phase.
5. Rules and taxes that reduce the profit
The 15-year demand rule of the Spatial Planning Act allows hardly any new building land. Proceedings drag on for months, sometimes years, because of objections, while the construction interest keeps running.
For tax purposes the holding period is decisive. If someone sells the property in the first year of ownership, the property gains tax in the canton of Zurich can eat up to 40 percent of the profit. Only after five years does it fall noticeably, and after twenty years it is halved. Anyone who does not plan the holding period gives away a double-digit percentage of the margin.
On the duration of the procedure and the evidence a building application has to carry, see building application and building permit.
6. How much debt capital the banks really provide
In regulatory terms a loan-to-value ratio of up to 80 percent is permitted. Most banks, however, only go up to 60 percent in order to preserve their own capital. Developers often fill the gap with mezzanine or private loans and thus get close to 80 percent after all.
As long as the construction interest rate is clearly below the project yield, this leverages the return on equity considerably upwards, in the example to more than 30 percent. This calculation reverses as soon as interest rates rise above the property result. So always calculate a scenario with higher interest rates as well.
7. Gross rental yield: what it says and what it does not
The gross rental yield sets the expected gross rental income of one year against the total investment costs. It assumes full occupancy and no costs and is therefore only a first filter.
Formula: Gross rental yield = annual net rent divided by total investment costs, times 100.
Worked example: CHF 60,000 annual net rent on a total investment of CHF 1,500,000 gives a gross rental yield of 4 percent. For the calculation you need three figures: the total investment costs made up of land, construction and incidental costs, the sustainably achievable annual net rent and the discount rate.
The key figure quickly sorts investments into "worth a look" and "not worth the time". Once a property has passed this first test, the detailed profitability calculation follows.
8. Typical rental yields around Zurich
In very sought-after lakeside municipalities new builds often only reach 2.5 to 3.5 percent. Further out, where the land is cheaper, 4 to 5 percent are possible. Some private investors even accept less and rely above all on the future increase in land value.
In a nationwide comparison, gross initial yields of 3 to 4.5 percent are regarded as the usual range in the German-speaking Swiss rental housing market. The return on property in Switzerland is moderate by international standards, but stable.
The reason for the pressure on the ratio is arithmetic: land prices above 3,000 francs per square metre and construction costs that have risen by 15 percent since 2019 push up the investment sum sharply, while residential rents grow only slowly.
9. Art. 269 CO: the statutory upper limit
Under Art. 269 CO the gross rental yield may be no more than two percentage points above the reference interest rate. At a reference interest rate of 1.75 percent that gives 3.75 percent.
Many new builds stay below that anyway. Anyone who wants to increase rents sharply later, however, quickly runs into this limit. For the calculation this means: a rental yield that only works with rents above this limit is not a calculation but a legal risk.
10. The debt leverage effect and where it tips
In theory a bank finances up to 80 percent, in practice 60 to 70 percent is usual. A property with a 4 percent gross yield and an 80 percent loan-to-value ratio at a 2.8 percent mortgage rate produces a return on equity of around 9 percent.
If interest rates rise above the property result, the leverage turns negative. That is the point at which an investment believed to be safe becomes an obligation to inject more capital. A structure that holds consists of realistic market rents, a vacancy assumption of at least one percent, provisions of around 0.8 percent of the building insurance value and a mixed mortgage with a fixed core and a flexible remaining tranche.
11. Renovation as a yield lever in existing buildings
Many older buildings change hands today with gross yields below 2 percent. Anyone who upgrades the building energetically, replaces the bathroom and the kitchen and charges market rents after reletting can reach a net yield of 4 to 5 percent.
Subsidies from the buildings programme pay back part of the investment, and deductions from income tax shorten the amortisation period further. The risks belong in the same calculation: vacancy during the construction period, limited scope to pass costs on to the rent and unforeseen damage in the existing fabric.
On the construction and operating side, modern methods help as well: prefabricated timber or hybrid modules shorten the shell construction by up to half and cut the costs by about a fifth, a consistent BIM model prevents planning errors and variations, and a recognised label such as Minergie lowers the operating costs and is rewarded by some lenders with more favourable interest rates.
12. What destroys a nicely calculated margin
A price slide in the market. Selling prices five percent lower halve a comfortable margin.
Cost jumps in steel and building services. Without fixed prices or price adjustment clauses they land unfiltered in your calculation.
Delays caused by objections. The construction interest keeps running while the procedure is at a standstill.
Missed tax planning. A sale in the first year of ownership costs up to 40 percent of the profit in the canton of Zurich.
Variations during the construction phase. How to keep these in check is set out in the article on cost control during the construction phase.
Anyone who calculates all scenarios with a buffer, concludes fixed-price contracts, involves several suppliers and spreads the financing broadly will still keep a double-digit profit even if two of these points occur at the same time.
13. Key figures at a glance
Key figure | Realistic range | What influences it |
Gross sales yield | 12 to 20 percent | Land price, construction costs, duration of proceedings, construction interest |
Gross sales yield in special situations | over 40 percent | Unexpected upzoning or very cheap land purchase |
Gross rental yield in sought-after lakeside municipalities | 2.5 to 3.5 percent | High land prices with slowly growing rents |
Gross rental yield further out | 4 to 5 percent | Cheaper land with comparable construction costs |
Statutory upper limit of the gross rental yield | 3.75 percent at a reference interest rate of 1.75 percent | Art. 269 CO, at most two points above the reference interest rate |
Loan-to-value ratio from the bank | regulatory up to 80, in practice 60 to 70 percent | Equity requirements, supplemented by mezzanine loans |
Return on equity in the rental example | around 9 percent | 4 percent gross yield, 80 percent loan-to-value ratio, 2.8 percent interest |
Deduction from gross to net | 0.5 to 1.5 percentage points | Maintenance, administration, vacancy risk |
The ranges are indicative values as at 2026. They shift with location, interest rate level and cost structure and do not replace a project-specific calculation.
14. Yield is created in the planning, not at the sale
In property investment in Switzerland the location is the decisive value factor. Properties in economically strong centres such as Zurich, Zug, Basel and Geneva are more expensive to acquire, but more liquid and more stable in value over the long term.
For construction projects, however, a second principle applies, and it is the more important one: yield is not created only at the point of sale but in the planning phase. Anyone who buys too dearly, plans too generously or chooses the wrong type of use will not achieve a market-appropriate yield even with a flawlessly built property. The role that floor plan quality plays here is shown in the article on usability and market success, and for apartment buildings the feasibility study for a multi-family house.
The most effective moment for an independent review is therefore before the design, the building application or the detailed design, that is before changes become expensive. The earlier the optimisation happens, the greater the lever and the smaller the effort. That is exactly where project optimisation comes in. Anyone working as a buyer rather than a developer will find the review steps in the article buying a new build in Switzerland.
15. Frequently asked questions about the return on investment in construction projects
What does the gross sales yield show and how is it calculated? It shows how much profit a developer makes before tax and interest are deducted. You take the total sales proceeds, deduct all project costs, that is land, construction, incidental costs, fees and construction interest, and divide the surplus by the costs. A project with 28 million francs of costs and 34 million of proceeds reaches around 21 percent.
What sales yield is realistic for a new build project? Experienced developers plan with 12 to 20 percent. More than 40 percent is only possible in special situations, for example an unexpected upzoning or a very cheap land purchase. Conversely, a price drop of five percent already halves a comfortable margin.
How do you calculate the gross rental yield? Annual net rent divided by the total investment costs, times 100. CHF 60,000 annual net rent on a total investment of CHF 1,500,000 gives 4 percent. The key figure assumes full occupancy and no costs and is therefore only a first filter. Maintenance, administration and vacancy risk then eat up 0.5 to 1.5 percentage points.
What gross rental yield can be expected around Zurich? In very sought-after lakeside municipalities new builds often only reach 2.5 to 3.5 percent. Further out, where the land is cheaper, 4 to 5 percent are possible. In the German-speaking Swiss rental housing market gross initial yields of 3 to 4.5 percent are regarded as the usual range.
Is there a legal limit for the gross rental yield? Yes. Under Art. 269 CO the gross rental yield may be no more than two percentage points above the reference interest rate. At a reference interest rate of 1.75 percent that gives 3.75 percent. Many new builds stay below that, but anyone who wants to increase rents sharply later quickly runs into this limit.
How much debt capital do banks grant in practice? In regulatory terms a loan-to-value ratio of up to 80 percent is permitted, but most banks only go up to 60 percent. Developers often fill the gap with mezzanine or private loans. As long as the interest rate is clearly below the property result, this leverages the return on equity upwards. If it rises above, the leverage turns negative.
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