REAL OPTIONS PLANNING IN REAL ESTATE DEVELOPMENT

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REAL OPTIONS PLANNING IN REAL ESTATE DEVELOPMENT
24/06/10 ERES 2010 Dietmar Wiegand, Univ.Prof.
Dipl.-Ing. Architect AKH SRL Head of Divivsion
Real Estate Development and Management Vienna
University of Technology (TU Wien) wiegand_at_tuwien.
ac.at
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new OPEC building in Vienna
One user/tenant! Adaptability to changing user
requirements? Future uses?
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Agenda

1. Real Options a new way of thinking
2. Cases simulating and designing Real Options
   using Discrete Event Simulations (DEVS)
3. MoreSpace Initiative reducing carbon emission
   using real options in operation

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(1) Real Options a new way of thinking

• Real options, the right but not the obligation to
  conduct an action, still plays a minor role in
  the practice of real estate development and
  investment. Taking into account the numerous
  options to behave, that exist during the
  lifecycle of real estate especially for real
  estate and portfolio managers means
• - accept the existence of uncertainties, -
  design and prepare possible future behaviours-
  appraise option prices- design and prepare
  monitoring systems

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accept uncertainties design options to behave
(real options)
state-of-the-art risk gt IRR 6, 10, 14
1)
A
B
t1
evade
steering wheel

2)
A
B
stop
break
3)
A
B
stop relax eat
break intell. driver
4)
A
B
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analysis, valuation, change of option to behave

• Example 1 Appraisal of risks without regarding
  options to behave
• Wrong risk assessment
• wrong investment decisions
• Example 2-4
• Appraisal of risks incl. regarding options to
  behave
• Importance of the vehicle and the possible
  options to behave (embedded real options)
• Importance of the driver and his possible and
  real behaviour in case of events (embedded real
  options)

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analysis, valuation, change of option to behave

• Measures
• Design real options / optimize system behaviour
• buy a car with steering wheel and break
• Planning and execution of regular checks and
  maintenance of car
• Planning and execution of regular checks and
  training of driver
• Improved risk assessment
• Investment decisions based on improved
  understanding aof system behaviour
• Situation in Real Estate?
• DCF, VoFi etc. are static assessments, they dont
  know any system behaviour over time in case of
  events!

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(2) Simulating and designing Real Options using
DEVS

• Hostel for elderly people in Zürich
• People move in healthy 2-4 rooms
• No moves, whatever happens
• Shrinking apartments according to needs
• Floor plan ?
• Spatial Management ?
• Business Model ?
• Statistic data, duaration of stay etc. !
• 1) 2) 3) have to be based on a consideration of
  events
• Probability known,
• moment of entry unknown

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FM Option to behave / flexibility of rooms
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FM Option to behave / flexibility of
installations
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Development of room mix

• Development of room mix over 40 years

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Development of room mix with a certain FM
behaviour

• Management min. 2 room apartments for new
  tenants

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Discrete event simulations (DEVS)

• Types of dynamic simulations e.g. discrete event
  simulation (DEVS)

Zimmeranzahl
Zeit
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Targets of DEVS application

• Targets of DEVS

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How to work with DEVS

• How to work with discrete event simulations

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Results

• buildings and its management represent
• a dynamic system with
• a behaviour
• we are able to design and develop
• We have to design and consider the fitness of
  buildings and management behaviour
• events
• Probability known or assumed,
• moment of entry unknown

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Area and Hospitality Development

• Hotel Investment at a certain location
• Type of hotel
• Number and mix of rooms
• Hospitality concept / business model
• Development in steps
• Alternating use of parts

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DFD application Area and Hospitality Deveopment
DFD Simulation
Use / occupancy
Letting / booking status
Market of tenants guests
Building LC
Marketing / Branding
Profitability Analysis

• Rules
• Behavior of Mgmt.
• Behavior of Building
• Behavior of Market

Special Calculations
Excel
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Complexity of search space
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Real Options and DEVS

• Discrete event simulations
• Transparancy in Real Estate Development for
  different partners / stakeholders
• Enhanced principal agent relationships
• Improved building design for the lifecycle
• Improved Facility Management concepts
• Improved economical and ecological efficiency
• DES will become a standard method within 5 10
  years in Facilities and Hospitality Developments
• DES need data (RFID)

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Case School building
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Results
Floor plan / spatial management Classrooms and
specialized rooms Number and size according to
rules Average use of classrooms 25 7am 7pm
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Results
Floor plan / spatial management Classrooms and
minimized number of specialized rooms 40 savings
qm / space for other use
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MoreSpace intense use saves CO2 Emission
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MoreSpace structure of initiative
externalfunding
Municipality
MoreSpace Innovation Groups
Team Web 2.0
NN
Universities
League of Towns and Municipalities
MoreSpace Transfer Points
Town
Enterprises
IEE funding
presentfunding
Town
Interest Groups
Chambers
Municipility
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MoreSpace schedule
EUwide
Initiative MoreSpace

• Gathering of information exchange
• Best practice
• - e.g. area/space management of buildings for
  educational purposes

Round tablemeeting

• 
  Portfolio operations of buildings
• Analysis evaluation
• use/ occupancy of buildungs for educational
  purposes
• C02 per teaching unit
• - problems with intensified use/occupancy

Dissertation / RD/ Master Thesis
Partner search/ early appliers
Round tablemeetings

• MoreSpace Congress (less energy - less money)
• Official start of the initiative

• Projects/ fundraising etc

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Join MoreSpace Univ.Prof. Dipl.-Ing Dietmar
Wiegandwiegand_at_tuwien.ac.at