How building adaptability creates economical value for the property investor?

How building adaptability creates economical value for the property investor?

Physical adaptability of buildings has a major role in creating competitiveness for property investors as well as creating a sustainable built environment. Current real estate investment analysis methods do not value investments into long-term adaptability because the discounting effect gives less weight to cash flows further in the future. This study attempts to apply a newly developed investment theory for justifying the investor value of long-term adaptability. The theory, which combines of real options valuation, investment analysis and building component lifecycle design, proposes that physical asset characteristics can create valuable real options (i.e. building adaptability) for the real estate investor. This paper applies the theory into a real life investment case, AINOA shopping center development, and evaluates the value of real options for the investor, LähiTapiola.

Picture: Decreasing economical lifecycle (average lease lengths) increases the need of building adaptability during the technical lifecycle of a building (Vimpari and Junnila, Building Research & Information, 2015)

Results

The results try to explain in economical terms why investors should invest into long-term adaptability. The study founds that the value of real options ranges from 0,0 % to 221,4 % compared to the initial investment cost of the building component. The extra investment costs for creating these real options ranges from 0,0 % to 5,0 %. The real option values exceed the costs in most of the cases. As can be seen from the results, it is important to recognize valuable options from the ones that do not provide value in the long-term.

Effects

Actually, the results would suggest that the property owner should take an active role of choosing the expected lifecycle from the business perspective, rather than basing it on the technical quality of the product. Then the value that exceeds this expected business lifecycle would be optional and the property owner would seek for design solutions that maximize this optional value. Thus, the property owner would have to take a stand on the actual business lifecycle of product (with technical implication) rather than take them as a given from the developer, which is the case at the moment. This would result into better alignment of the economical and technical lifecycles.

Future Opportunities

More research and discussion regarding the practical usability of the results is needed, as the topic is quite complex. The value of the options depends on what kind of lifecycles is inputted into the framework. Defining these lifecycles is somewhat confusing because both economical and technical lifecycles have to be considered. The findings of this study encourages that more focus should be put on the economical lifecycle as it will eventually constrain the use of the technical lifecycle. This approach can help in targeting limited resources in a more sustainable way in building projects.

RYM Program

Energizing Urban Ecosystems (EUE)

Participants

LähiTapiola Real Estate Asset Management Ltd.

Aalto University

Contact Person

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