Finance Sustainable Buildings
Adaptable Buildings can accommodate more than one use during their lifetime through retrofit rather than demolition. The model operates through a new investment partnership: a long-term investor invests in the façade and structure that can accommodate multiple functions, while a short-term investor obtains the right to adapt it for a specific use. Thus, office-to-residential conversions are relatively common in some real estate contexts where planning regulation facilitates it. An example is the permitted development rights in the UK.
This model incentivises a long-life, loose-fit design to ensure the opportunity cost of adaptation (or conversion) does not exceed demolition and reconstruction. The façade and structure of the building can account for over half the construction costs, so designing it for adaptability is an insurance policy against market risk for these high-cost elements.
This model is particularly suitable for non-residential buildings as they could tolerate more flexibility, particularly in office buildings. Due to the global COVID-19 crisis and rising prices, real estate trends have significantly changed. Thus, the adoption of this instrument could, to a large extent, solve problems of early demolitions or vacant places.
Designing circular multifunctional buildings will lead to lower costs in converting the spaces while ultimately creating less waste. Also, this method foresees the possibility of a downsizing. Since this perspective requires for more loose-fit during the building’s construction phase, it is more applicable in non-residential buildings. As the structure gradually begins to depreciate, the building adapts the space for micro logistics use. The modifications will only affect the building’s services and fittings. This would involve only minor work, such as removing the partition walls to create a single open space on each floor; or adding a more useful lift that allows larger items to enter and exit the building.
Despite the benefits that non-residential adaptable buildings could bring, when it comes to residential buildings, some potential issues is expected, such as overcrowding or speculation. Therefore, proper policy/economic measures that avoid these side effects should be in place, such as proper densification strategies, maximum number of dwelling units, caps to rental prices, minimum number of social and affordable units etc., ensuring the environmental and social positive effects of adaptable buildings.
This innovative business model is related to addressing circularity schemes in the built environment sector. Aiming at applying this kind of instruments, a strong raw materials secondary market must be established.
We did not find any real business case. Instead, we present the testbed developed by ARUP.
AARHUS ADAPTABLE BUILDINGS TESTBED, DENMARK
The testbed chosen for the Adaptable Building model is a five-floor, 15-unit residential block in Aarhus (Denmark) located within a larger masterplan. The baseline development has elements designed for adaptability, a particular challenge given the low floor-to-floor heights, low structural loading and constrained riser capacity typical of housing as a building typology.
A reasonable assumption for an investor is that demand for housing will remain steady, ensuring income from the 15 residential units over a 50-year operational period. If demand is expected to fall, the investment may not be viable.
The discounted cash flow has been developed assuming the steady demand assumption was wrong and, due to economic and demographic changes, residents start moving out. The resulting vacancies warrant a change of use, one that would require an extensive engagement programme with any remaining residents.
A horizon scanning exercise for this location could have anticipated this change in demand, arising from the following site-specific emerging trends:
The following scenario has been developed representative of a medium-term downturn. Under the linear model, it is assumed that the building is demolished when it reaches 60% vacancy (40% occupancy) in the face of falling residential demand. The investor (or construction client) evicts the remaining residents, demolishes the building and redevelops it into logistics use.
In the circular model, the possibility of a downturn is acknowledged during brief development, and passive provision for this is provided in the design from the beginning. As the downturn takes effect and the vacancy increases, the building adapts the space to micrologistics use – a decentralised distribution centre located close to customers.
This adaptation happens progressively, floor-by-floor, as occupancy gets consolidated and whole floors become unoccupied.
This adaptation process retains the foundations, structure and envelope of the building, while requiring changes to the building services and fit out. For example, the partition walls may be removed to create a single open space on each floor, with racking added to store parcels. An upgrade to the lift may be needed to allow larger or heavier items to move in and out of the building. As the cost of conversion is unknown, it is not considered directly for the circular base case but rather tested in the sensitivity analysis.
For the purposes of modelling, the cash flows of the long-term investor and short-term investor have been combined into a single cash flow model. Therefore, cash flows exchanged between them, such as the rent paid by the short-term investor to the long-term investor for use of the adaptable shell and core, is not accounted for.
The starting assumption where residential income is maintained over the 50-year operational period gives an Internal Return Rate of 3.7%. The linear model where the building would be demolished and rebuilt into a logistics centre gives an IRR of 0.3%. The circular model where each floor is progressively converted into micrologistics use gives an IRR of 3.6% (circular base case).
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