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)

Seite 2 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – new OPEC building in Vienna One user/tenant! Adaptability to changing user requirements? Future uses?

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

Seite 4 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – (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

Seite 5 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – accept uncertainties – design options to behave (real options) A B state-of-the-art: risk > IRR 6%, 10%, 14% A B stop A B stop + relax + eat A B evade t1t1 steering wheel break break + intell. driver 1) 2) 3) 4)

Seite 6 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 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)

Seite 7 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 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 don´t know any system behaviour over time in case of events!

Seite 8 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – (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 1)Floor plan ? 2)Spatial Management ? 3)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

Seite 9 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – FM: Option to behave / flexibility of rooms

Seite 10 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – FM: Option to behave / flexibility of installations

Seite 11 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Development of room mix Development of room mix over 40 years

Seite 12 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Development of room mix with a certain FM behaviour Management: min. 2 room apartments for new tenants

Seite 13 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Types of dynamic simulations e.g. discrete event simulation (DEVS) Y t Y t Y t Y t diskrete ereignisorientierte Simulation stetige Simulation mit diskreten Zeitintervallen stetige Simulation kombinierte Simulation Discrete event simulations (DEVS) Zimmeranzahl Zeit

Seite 14 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Targets of DEVS Targets of DEVS application

Seite 15 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – How to work with discrete event simulations How to work with DEVS

Seite 16 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 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

Seite 17 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 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

Seite 18 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – DFD Simulation Building LC Letting / booking status Use / occupancy Profitability Analysis Market of tenants + guests Marketing / Branding DFD application: Area and Hospitality Deveopment Excel Special Calculations Rules Behavior of Mgmt. Behavior of Building Behavior of Market

Seite 19 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Complexity of search space Z AZ X

Seite 20 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 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)

Seite 21 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Case: School building

Seite 22 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Results Floor plan / spatial management: Classrooms and specialized rooms Number and size according to rules Average use of classrooms: 25 % 7am – 7pm

Seite 23 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Results Floor plan / spatial management: Classrooms and minimized number of specialized rooms 40% savings qm / space for other use

Seite 24 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Public infrastructure Obligation (national education) Building project: location, area programme (m 2 gross floor area/ operation) Construction /production Operation Sale/ demolition Public buildings - portfoliomanagement MoreSpace more efficient use of tax income; objective e.g. national education with less public investment / less C0 2 etc. MoreSpace – intense use saves CO2 Emission

Seite 25 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – League of Towns and Municipalities MoreSpace Transfer Points MoreSpace Innovation Groups Town Municipility Team Web 2.0 Chambers Interest Groups Enterprises Municipality Town IEE funding external funding present funding Universities NN MoreSpace – structure of initiative

Seite 26 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Initiative MoreSpace Gathering of information & exchange Best practice - e.g. area/space management of buildings for educational purposes EUwide MoreSpace Congress (less energy - less money) Official start of the initiative Projects/ fundraising etc… Dissertation / R&D/ Master Thesis Portfolio & operations of buildings Analysis & evaluation - use/ occupancy of buildungs for educational purposes - C0 2 per teaching unit - problems with intensified use/occupancy Partner search/ early appliers Round table meetings Round table meeting MoreSpace – schedule

Seite 27 Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – Join MoreSpace Univ.Prof. Dipl.-Ing Dietmar Wiegand