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) [email protected]

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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) [email protected]. new OPEC building in Vienna. - PowerPoint PPT Presentation

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Page 1: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

REAL OPTIONS PLANNING IN REAL ESTATE DEVELOPMENT

24/06/10ERES 2010

Dietmar Wiegand, Univ.Prof. Dipl.-Ing. Architect AKH SRLHead of Divivsion Real Estate Development and Management Vienna University of Technology (TU Wien)[email protected]

Page 2: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 2Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

new OPEC building in Vienna

One user/tenant!Adaptability to changing user requirements? Future uses?

Page 3: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

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

Page 4: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 4Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

(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

Page 5: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 5Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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

t1

steering wheel

break

break + intell. driver

1)

2)

3)

4)

Page 6: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 6Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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)

Page 7: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 7Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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 behaviourSituation in Real Estate? DCF, VoFi etc. are static assessments, they don´t

know any system behaviour over time in case of events!

Page 8: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 8Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

(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 needs1) 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

Page 9: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 9Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

FM: Option to behave / flexibility of rooms

Page 10: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 10Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

FM: Option to behave / flexibility of installations

Page 11: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 11Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

Development of room mix

Development of room mix over 40 years

Page 12: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 12Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

Development of room mix with a certain FM behaviour

Management: min. 2 room apartments for new tenants

Page 13: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 13Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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)Z

imm

eran

zahl

Zeit

Page 14: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 14Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

Targets of DEVS

System-InputS

yste

m

Funktionsnachweis Leistungsgrenzen

bek

ann

tu

nb

ekan

nt

Systemalternativenallg. Aussagen über

Systemtypen

bekannt unbekannt

Targets of DEVS application

Page 15: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 15Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

How to work with discrete event simulations

SimulationsmodellReales System

Formale Ergebnisse

Folgerung für das reale System

Modellierung Abstraktion

Übertragung Interpretation

Experimente

How to work with DEVS

Page 16: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 16Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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

Page 17: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 17Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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

Page 18: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 18Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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

Page 19: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 19Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

Complexity of search space

Z

1

23

34

456

7

AZ

X

Page 20: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 20Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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)

Page 21: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 21Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

Case: School building

Page 22: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 22Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

Results

Floor plan / spatial management: Classrooms and specialized roomsNumber and size according to rules Average use of classrooms: 25 % 7am – 7pm

Page 23: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 23Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

Results

Floor plan / spatial management: Classrooms and minimized number of specialized rooms

40% savings qm / space for other use

Page 24: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 24Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

• P

ub

lic

infr

astr

uct

ure

O

blig

atio

n (n

atio

nal e

duca

tion)

• B

uil

din

g p

roje

ct:

loca

tion,

are

a pr

ogra

mm

e (m

2 gr

oss

floor

are

a/

oper

atio

n)

• C

on

stru

ctio

n /

pro

du

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• O

per

atio

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• S

ale/

dem

oli

tio

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Public buildings - portfoliomanagement

MoreSpacemore efficient use of tax income;objective e.g. national education with less public investment / less C02 etc.

MoreSpace – intense use saves CO2 Emission

Page 25: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 25Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

League of Towns and

Municipalities

MoreSpace TransferPoints

MoreSpace Innovation

Groups

Town

Municipility

TeamWeb 2.0

Chambers

Interest Groups

Enterprises

Municipality

TownIEE

funding

externalfunding

presentfunding

UniversitiesNN

MoreSpace – structure of initiative

Page 26: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 26Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

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…

Dis

ser

tati

on

/ R

&D

/ M

aste

r T

hes

is

Portfolio & operations of buildings• Analysis & evaluation

- use/ occupancy of buildungs for educational purposes- C02 per teaching unit- problems with intensified use/occupancy

Par

tner

sea

rch

/ ea

rly

ap

pli

ers

Round tablemeetings

Round tablemeeting

MoreSpace – schedule

Page 27: REAL OPTIONS PLANNING  IN REAL ESTATE DEVELOPMENT

Seite 27Univ.Prof. Dipl.-Ing. Arch. Dietmar Wiegand – 20.04.23

Join MoreSpaceUniv.Prof. Dipl.-Ing Dietmar Wiegand

[email protected]