Environmentally Sustainable Design Economics

The economic, environmental and social benefits of green building are becoming increasingly obvious as more and more buildings show success in redevelopment strategies towards sustainable outcomes. The drivers and barriers for commercial buildings are also well understood.

Major stakeholders in environmentally sustainable design of building

  • Developer: An entrepreneur who engage in the process of packaging a property development
  • Investor: Looks for completed development packages with a view to obtaining the benefits of property ownership
  • Occupier: User of building (owner and tenant)
  • Community: Social costs and benefits
  • Builder: Sustainable practices, waste management
  • Consultant: Sustainable design
  • Agent: Market views
  • Regulator: Planning and construction
  • Speculator: Gambler

 

Property Development Process: Acquire an unimproved or under improved property and carrying out improvements in order to release the full potential of the land

Example: Property Development Process

Example: Property Development Process

  1. Inception – Acquire unimproved property
  2. Pre-Construction – Feasibility study covering market supply and demand; allowable private property rights after legislative and other restrictions
  3. Engage consultants to document the improvements
  4. Enter into construction contract to build improvements
  5. Construction
  6. Assume risk that costs and timing will be greater than planned
  7. Marketing – Market property to attract building users
  8. Assume risk that users will not be found or will require substantial incentives to be attracted
  9. Market property to attract buyer
  10. Holding – Time and cost associated with keeping and maintain a stock of goods in storage.
  11. Development
  12. Investment
  13. Assume risk that buyer will either not be found or will only purchase at heavily discounted price
  14. Assume risk that sale price will not exceed development costs in order to provide a margin for profit

Value = (Gross income – outgoing)/Capitalisation rate (CR)

                CR = Annual net operating income/Current market value of investment

                      E.g. Building purchase price $600,000 and net operating income $60,000

                                        CR = $60,000 / $600,000 = 10%

Investment = Land + Building + Finance + Marketing + Management

                CR = 1 / Payback period

Profit = Net Development Revenue – (Land cost + Development Cost + Interest Cost)

Present Value of capital to be received in year n with an interest rate r; PV = V/(1+r)^n

Net Present Value: Value today of sum of benefits to be received over time; NPV = Sum ((B-C)/(1+r)^i

  • Benefits: Rental value, outgoings, capital growth (rate of return, yield)
  • Costs: Land, building, finance, marketing, management, fees

                Discount rate: The interest rate used in discounted cash flow analysis to determine the NPV

Real discount rate (d) = ((1+D)/(1+i) – 1; where Nominal discount rate (D) and inflation rate (i)

Convert initial investment into annual rate given discount rate (d) and lifetime (n);

    Capital recovery rate (CRR) = d/ 1-(1+d)^-n

PV = Constant annuity / CRR

                      E.g. Annual net operating income is $60,000 for next 10 years & discount rate is 8%

                                       Present worth of annual net operating income would be

                                             CRR = d/ 1-(1+d)^-n  =0.08/ 1-(1+0.08)^-10 = 0.149

PV = Constant annuity / CRR = $60,000 / 0.149 = $335,504

Internal Rate of Return: Find value of r where NPV = 0

 

Property Investment Process: Acquiring a completed property as a going concern for other then occupation by the acquirer

Example: Property Investment Process

Example: Property Investment Process

  1. Acquire tenanted property, with lease agreement in place, using equity and debt (borrowed) finance
  2. Receive rental income from tenants
  3. Pay revenue expenses such as rates and taxes etc
  4. Use net income to pay interest on borrowed finance
  5. Assume the uncertainty that net rentals will grow to exceed loan interest payments and eventually reach positive cash inflow
  6. Enjoy capital growth
  7. Assume the uncertainty that capital growth will cause the value of the property to eventually exceed the original capital invested
  8. Dispose of the property to eventually exceed the original capital invested
  9. Dispose of the property at any time after this occurs to realise profit
  10. Repeat the process bearing in mind that substantial costs are incurred in disposal and subsequent acquisition
  11. Devise strategies which are required to retain sitting tenants at least termination; this may involve substantial refurbishment costs to maintain market position

Property Investment analysis

  • Risk and return: Investor requirements, relative yields, uncertainty, capital gain
  • Capitalisation and discounted cash flows: Real dollars and yield, current dollars and yields, NPV (sum of the present values of expected cash flows), IRR (profitability of investments)

 

Occupier’s Accommodation Options: Lease, buy, build, sale and leaseback

 

Life Cycle Cost Analysis: Initial costs, recurring costs and benefits, replacement costs, disposal

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