An introduction to Real Estate Development

1. An introduction to Real Estate Development RYTJO 2018 MiroRistimäki 20.9.2018

2. About me MiroRistimäki D.Sc. (Tech), M.Sc.(Tech.), LEED AP Development Manager at Skanska Oy – BIM team leader and Digital Services Expertise: - Digital Concept Creation - Digital Leadership and Strategy - Life Cycle Design - Real Estate Development (public sector, retail, assisted living) - Creating Business Models & Concepts - Urban Development - Contractual agreements in real estate development

3. What is real estate development? The process of transforming a plot of land from one state to another. The main motive is usually financial profit Creating cashflow and a stable investment

4. What is real estate development? A puzzle to be built… What are the pieces of the puzzle? Zoning compliance Plot/land or existing building to be developed Yield for investment Stakeholder management Design principles (Architecture and Engineering) Sustainability targets Legal agreements Rent level for tenants Marketing material Coordination of the development Contractors, equipment and material

5. Stakeholders within the real estate development process

6. Different stakeholders interests during the life cycle Local authorities Develop urban structure to be socially, economically and ecologically sustainable Developer Negotiate and create projects which are economically profitable Consultants Support design and development practices to create profit for shareholders Designers Design buildings and infrastructure to create profit for shareholders Contractor Execute and manage construction to create profit for shareholders Investor Identify and invest in objects that create cash-flow and value increase during the investment period FM provider Provide FM services to create profit for shareholders Tenants Find facilities to support their activities as good as possible with a reasonable price

7. Different stakeholders interests during the life cycle Years 1 3 5 7 10 15 25 40... Land acquisition Planning Design Construction Use phase 1 Use phase 2 Use phase 3 Local authorities Developer Local authorities Developer Consultants Designers Developer Consultants Contractor Investor A FM provider A Tenants A, B Investor B FM provider B Tenants C, D Investor C FM provider C Tenants E, F No single stakeholder have the interest to manage and optimize the life cycle!

8. Three main components of real estate development* Yield = the risk level the investor is willing to accept for the investment – simultaneously the yield it will gain (e.g. 3% - 10+%) Rent = the price per month the tenant is prepared to pay for the premises (e.g. 22 EUR/m2) Tot. Investment = Investment that is needed to build/rennovate the building for the tenants purpose (incl. land cost, construction cost and development profit) *not academic validity. Based on experience and pragmatic observations

9. Three main components of real estate development* Rent level (NOI) / Yield = Investment NOI = 18 EUR/m2/month (capital rent) + 4,22 EUR/m2/month (FM costs) x 1500m2 x 12 months x 91,75% (vacancyrate) = 400 000 EUR per annum Yield = 5% (according to marketsituation) Investment = 5333,33 EUR/m2 * 1500 m2 = 8 000 000 EUR *not academic validity. Based on experience and pragmatic observations

10. Three main components of real estate development* Rent level (NOI) / Yield = Investment 400 000 EUR / 5% = 8 000 000 EUR Ifrentgoesdownby 50 000 EUR: 350 000 EUR / 5% = 7 000 000 EUR Ifyieldgoesdownby 0,5% 400 000 EUR / 4,5% = 8 888 888 EUR *not academic validity. Based on experience and pragmatic observations

11. Three main components of real estate development* Rent level (NOI) / Yield = Investment 400 000 EUR / 5% = 8 000 000 EUR Ifrentgoesupby 50 000 EUR: 450 000 EUR / 5% = 9 000 000 EUR Ifyieldgoesupby 0,5% 400 000 EUR / 5,5% = 7 272 727 EUR *not academic validity. Based on experience and pragmatic observations

12. Three main components of real estate development* Investorwants to maximizeyield pressure on construction/investmentcosts Tenantswant to minimizerent  pressure on construction/investmentcosts Contractorwants to maximizeinvestment to makemoreprofit  A challengingequation to negotiatearound… *not academic validity. Based on experience and pragmatic observations

13. Questions so far… • Whoheremightbeinterested in realestatedevelopment in the future? • Whothinksthatsustainabilitywillattainmoreattention? • Doyouseethatdigitalizationwillchange/disrupt the industry? • How? Ideas? Examples? *not academic validity. Based on experience and pragmatic observations

14. What is… Life Cycle Leadership in Real Estate Development A defined time span taken into consideration. For buildings usually 40+ years A continuous process of various actions through which responsibility is enhanced. The process of transforming a plot of land from one state to another. The main motive is usually financial profit. Sustainable responsibility

15. Apply Life Cycle Thinking

16. Construction costs are often the tip of the iceberg compared to operational costs Construction costs = 1 Cost to operate, maintain, replace etc . = 20+ Life Cycle Energy UseSource: World Business Council of Sustainable Development (2007) Small design changes can have a significant impact on operational costs!

17. Comprehensive optimization Conventional vs. Life Cycle Execution Conventional Execution => Sub-optimization Repair and maintenance Responsibility disruption Responsibility disruption Construction Design Life Cycle Execution => Optimization Repair and maintenance Design Construction

18. Real Estate Development from a Product Development –point of view Life cycle potential in real estate development is not fully applied! Life cycle thinking in product development is implemented in other industries, for example; Car production – selling arguments • Lower fuel consumption => life cycle costs • Lower emissions => life cycle emissions • X years maintenance guarantee Other products • Cruisers • Motors • etc

19. Apply Life Cycle Thinking as Early as Possible By taking into account the user phase in early design, natural resources and cost of change can be minimized. • For example: • Building orientation and architectural modellings • Selecting durable materials • Appropriate energy solutions • Opportunities of renewable energy The benefits of early integrationLähde: World Business Council of Sustainable Development (2007)

20. Integrated Design Process A design process were all stakeholders during the life cycle is involved Source: Whole Building Design Guide http://www.wbdg.org/

21. Integrated Design Process Players and practices in the building market Source: World Business Council of Sustainable Development (2007)

22. Life Cycle Analysis – Life Cycle Costing (LCC) LCC is defined as “a technique which enables comparative cost assessments to be made over a specified period of time; taking into account all relevant economic factors both in terms of initial costs and future operational costs” (building and construction asset standard ISO15686-5)

23. Life Cycle Analysis – Life Cycle Costing (LCC) Design Costs Construction Costs (Investment / Capex) Design & Construction Cost WHOLE LIFE CYCLE COST Operation & Maintenance Costs Periodic Replacement Costs Operation Costs (cleaning, utilities, admin.) Occupancy Costs (staff, catering, security, post etc.) Maintenance / repair Costs Periodic Replacement Costs Understanding, managing and optimizing Life Cycle Costs (LCC)

24. Life Cycle Analysis – Life Cycle Costing (LCC) Process description Life Cycle “perspective” Design solution (system, material choice etc.) Life Cycle (defined time frame)

25. Building Information Modelling (BIM) Communicating and Collaborating Design with BIM Services Source: http://www.bluentcad.com/architectural/bim.html

26. Contractual models – Life cycle responsibility • The last decades various procurement models have developed where different stakeholders extend their responsibilities during the life cycle; • Private Public Partnerships (PPP) • Partnering models • Alliance models • Design & Build

28. Thank you! Questions?