Opti­miz­ing costs and ben­e­fits in real estate con­struc­tion and oper­a­tion

Opti­miz­ing con­struc­tion and oper­at­ing costs has always been an impor­tant mat­ter for all play­ers in the real estate mar­ket. How­ev­er, there are increas­ing signs that the top­ic will become even more sig­nif­i­cant in the future.

Prop­er­ty own­ers have ben­e­fit­ed from steady price increas­es in recent years. As a result, the opti­miza­tion of costs has been some­what neglect­ed in many cas­es. The rea­son for this is that the excess demand for real estate in pre­vi­ous years has gen­er­at­ed lit­tle price pres­sure. Now, how­ev­er, inter­est rates have risen in gen­er­al, and with them mort­gage rates. In addi­tion, glob­al uncer­tain­ty has increased sharply due to the war in Ukraine, the pan­dem­ic, sup­ply chain prob­lems, infla­tion, etc. The real estate mar­ket will not remain unaf­fect­ed by these changes in the medi­um term. Although record prices are still being paid for prop­er­ties in good loca­tions, some investors are already exer­cis­ing a cer­tain degree of cau­tion as cur­rent prices don’t always match their real estate strat­e­gy or return expec­ta­tions.

We know what hap­pens in the indus­try when prices can no longer be increased due to com­pe­ti­tion or even fall: Opti­miza­tion must be made inter­nal­ly. Com­pa­nies that come under pres­sure often man­age to devel­op more effi­cient pro­duc­tion process­es and gen­er­al­ly oper­ate in a more inno­v­a­tive and agile man­ner to achieve attrac­tive mar­gins despite the pres­sure on prices. Com­pa­nies oper­at­ing in the real estate mar­ket also need to become more effi­cient again — and even more so in these trou­bled times.

Hous­ing: Price-opti­mized or good val­ue for mon­ey?

Opti­miz­ing costs has been par­tic­u­lar­ly impor­tant for non-prof­it orga­ni­za­tions such as coop­er­a­tives or foun­da­tions that offer low-cost hous­ing, often based on cost rents. Here, the idea is that rents should cov­er costs while only a lim­it­ed return on invest­ment, or none at all, is tar­get­ed. This means that con­struc­tion and oper­at­ing costs are direct­ly includ­ed in the rent cal­cu­la­tion and have a cor­re­spond­ing­ly high sig­nif­i­cance. In the case of low-cost hous­ing, costs are delib­er­ate­ly kept low. These insti­tu­tions aim to meet the basic needs of their ten­ants — and this includes keep­ing rents as low as pos­si­ble. Nev­er­the­less, a cer­tain lev­el of com­fort, to which ten­ants are accus­tomed nowa­days, is rarely dis­re­gard­ed.

With the goal of inter­nal den­si­fi­ca­tion, many cities are increas­ing­ly grant­i­ng use bonus­es in the case of rezon­ings, com­bined with the require­ment that a cer­tain pro­por­tion of the apart­ments be offered at afford­able prices. Such oblig­a­tions affect all investors, includ­ing those who are seek­ing returns and have not yet addressed the issue of afford­able hous­ing. There is a broad spec­trum between afford­able and lux­u­ry hous­ing. Due to the above-men­tioned increas­ing cost pres­sure, a cat­e­go­ry of apart­ments ori­ent­ed towards excel­lent val­ue for mon­ey is like­ly to increase in impor­tance. Investors who bring such cost- and use-opti­mized hous­ing onto the mar­ket want to offer their ten­ants real added val­ue while keep­ing costs and thus rents under con­trol. For exam­ple, a laun­dry tow­er in the apart­ment is a rel­a­tive­ly inex­pen­sive pur­chase yet is high­ly appre­ci­at­ed by most ten­ants. How­ev­er, ten­ants’ needs also change over time. While fire­places were con­sid­ered essen­tial in con­do­mini­ums in the 1980s, this need has large­ly dis­ap­peared nowa­days. The assess­ment of the val­ue added depends heav­i­ly on the ten­ant seg­ment and their will­ing­ness to pay.

Aspects of cost opti­miza­tion

In the fol­low­ing sec­tion, five aspects will be high­light­ed that are impor­tant for those focus­ing on the cat­e­gories of afford­able or good-val­ue hous­ing:

1. Space effi­cien­cy and floor plan qual­i­ty
2. Deal­ing with exist­ing prop­er­ties in need of refur­bish­ment
3. Sus­tain­abil­i­ty pays off
4. Con­sid­er­ing the entire life cycle of a prop­er­ty
5. Sys­tem con­struc­tion

1. Space effi­cien­cy and floor plan qual­i­ty

Many ten­ants are plac­ing increas­ing impor­tance on floor plan qual­i­ty. This is often weight­ed even high­er than the total space of an apart­ment. The fol­low­ing aspects can play a role:

• Com­pact floor plans: Avoid­ing traf­fic areas while allow­ing for fur­ni­ture to be placed eas­i­ly.
• Mul­ti­ple uses of rooms: A liv­ing room, for exam­ple, can be con­vert­ed into a bed­room, office or fit­ness room in just a few easy steps.
• Com­mon areas: Areas that are not per­ma­nent­ly used are shared with oth­er ten­ants (par­ty room, roof ter­race, stu­dio, office).
• A home office does not nec­es­sar­i­ly have to be in one’s own apart­ment. A co-work­ing space in the house, set­tle­ment, or neigh­bor­hood can serve this pur­pose just as well or even bet­ter. In this way, it’s pos­si­ble to for­go the addi­tion­al room for a home office and keep costs low.
• Build­ing ser­vices: Build­ing ser­vices (e.g. pipe rout­ing or shafts for con­trolled ven­ti­la­tion) deserve spe­cial atten­tion as they often con­flict with space effi­cien­cy. Although eas­i­ly acces­si­ble build­ing ser­vices sim­pli­fy main­te­nance, they require more space, which in turn reduces the leasable area. Here, it is impor­tant to weigh the advan­tages and dis­ad­van­tages of pos­si­ble solu­tions.

Exam­ples 1: Lymhof

Wüest Part­ner accom­pa­nied the devel­op­ment of the Lymhof. The apart­ments, which are rent­ed out at attrac­tive prices, are char­ac­ter­ized by a high use val­ue while requir­ing lit­tle space.

Exam­ples 2: Per­for­ma­tive House

In the mid­dle of the room there is a wall that can be rotat­ed. Depend­ing on the rota­tion, dif­fer­ent room divi­sions are cre­at­ed. Anoth­er spe­cial­ty are the stor­age spaces in the floors.

More infor­ma­tion about the per­for­ma­tive house (exter­nal link)

2. Deal­ing with exist­ing prop­er­ties in need of refur­bish­ment

Viele Investor:innen wen­den über ihr ganzes Port­fo­lio hin­weg ein­heitliche Sanierungsstrate­gien an. Es ist jedoch in den meis­ten Fällen sin­nvoller, für jedes Objekt eine eigene Strate­gie zu entwer­fen. Investor:innen, die über Erfahrun­gen mit unter­schiedlichen Strate­gien und über das entsprechende Know-how ver­fü­gen, von der Pin­sel­ren­o­va­tion über umfassende Sanierun­gen bis zum Ersatzneubau, sind hier im VoMany investors apply uni­form refur­bish­ment strate­gies across their entire port­fo­lio. How­ev­er, in most cas­es, it makes more sense to devel­op a sep­a­rate strat­e­gy for each prop­er­ty. Investors who have expe­ri­ence with dif­fer­ent strate­gies and the cor­re­spond­ing know-how, from brush ren­o­va­tions to com­pre­hen­sive refur­bish­ments to replace­ment con­struc­tion, have an advan­tage here.

• Loca­tion: The qual­i­ty of the loca­tion and, relat­ed to this, the local demand and will­ing­ness to pay should play an impor­tant role in deter­min­ing the scope of the invest­ment. Cen­tral to this is the amount that can be passed on to ten­ants. Typ­i­cal­ly, more invest­ment can be made in expen­sive neigh­bor­hoods because the high­er costs can be passed on to ten­ants and the demands on the stan­dard of the apart­ments are high­er. In price-sen­si­tive loca­tions, the mar­ket price may inflate due to exces­sive invest­ment, mean­ing own­ers have to bear a large part of the costs them­selves. In many invest­ment plans, too lit­tle con­sid­er­a­tion is giv­en to the qual­i­ty of the loca­tion, and fixed refur­bish­ment costs are cal­cu­lat­ed per square meter or apart­ment. How­ev­er, it makes sense to dif­fer­en­ti­ate accord­ing to loca­tion and to ren­o­vate only what is nec­es­sary in price-sen­si­tive areas.
• Depth of inter­ven­tion: Floor plan adjust­ments in exist­ing prop­er­ties are rel­a­tive­ly expen­sive and often not worth­while. Thus, the costs are usu­al­ly only mar­gin­al­ly low­er than those for new con­struc­tion — and in some cas­es, even sig­nif­i­cant­ly high­er. Anoth­er dis­ad­van­tage of prop­er­ties that under­go exten­sive ren­o­va­tion as well as floor plan adjust­ments is that they are often not per­ceived as com­plete­ly “new”  (and in many cas­es, they are not) despite the high cost. How­ev­er, there is one major excep­tion to note here: Build­ing and zon­ing reg­u­la­tions may mean that a new build­ing would have a sig­nif­i­cant­ly low­er uti­liza­tion rate than the orig­i­nal build­ing; this is espe­cial­ly true for high-rise build­ings.

3. Sus­tain­abil­i­ty pays off

• Envi­ron­ment: Switzer­land wants to become cli­mate neu­tral by 2050. Real estate must make a deci­sive con­tri­bu­tion to achiev­ing this goal — after all, the Swiss build­ing stock is cur­rent­ly respon­si­ble for around a quar­ter of the coun­try’s CO2 emis­sions.
• Own­ers: It is obvi­ous that invest­ments in the sus­tain­abil­i­ty of build­ings incur costs — and high­er costs in them­selves lead to a low­er mar­ket val­ue. For own­ers, how­ev­er, invest­ments in the sus­tain­abil­i­ty of their prop­er­ties can pay off finan­cial­ly at var­i­ous lev­els. For exam­ple, a prop­er­ty’s attrac­tive­ness is increased by sus­tain­able con­struc­tion, which can be reflect­ed in dis­count­ed prices and high­er net rental income. In addi­tion, there are usu­al­ly low­er util­i­ty costs for ten­ants and low­er main­te­nance costs for own­ers. Last but not least, the build­ings are more durable and it is pos­si­ble to apply for sub­si­dies. The study “The effect of sus­tain­abil­i­ty on real estate val­ues”, which Wüest Part­ner recent­ly con­duct­ed on behalf of the Fed­er­al Office for the Envi­ron­ment (FOEN), shows that in many cas­es it is actu­al­ly pos­si­ble to increase the mar­ket val­ue of a sus­tain­ably oper­at­ed prop­er­ty despite high­er costs. In prin­ci­ple, eco­log­i­cal con­struc­tion meth­ods have long since ceased to be in con­flict with eco­nom­ic prof­itabil­i­ty. On the con­trary: the fact that invest­ments in sus­tain­abil­i­ty pay off in the long term applies to most build­ing com­po­nents.
• Ten­ants: CO2-free heat­ed apart­ment build­ings can be oper­at­ed at sig­nif­i­cant­ly low­er costs. Inci­den­tal costs, for exam­ple, fall so sharply when switch­ing from oil or gas heat­ing to a heat pump that the gross rent often increas­es only slight­ly – even after the invest­ment costs have been passed on to the ten­ants. In some cas­es, hous­ing costs can even fall, as the study “Ener­gy refur­bish­ments: 3 win­ners” con­duct­ed by Wüest Part­ner in 2020 showed.

4. Con­sid­er­ing the entire life cycle of a prop­er­ty

When con­sid­er­ing the entire life cycle of a prop­er­ty, con­struc­tion accounts for only about one-third of the total cost. This means that two-thirds are spent dur­ing the oper­a­tional phase. Accord­ing­ly, the con­se­quences can be far-reach­ing if sav­ings are made in the wrong place dur­ing the con­struc­tion of a prop­er­ty. For exam­ple, a heat pump may be more expen­sive to buy than an oil-fired heat­ing sys­tem, but it is so much less expen­sive to oper­ate that the deci­sion to opt for a heat pump is also finan­cial­ly worth­while in the long term — not to men­tion the pos­i­tive con­se­quences for the envi­ron­ment.

Nat­u­ral­ly, the great­est scope for action in a build­ing project is at the plan­ning stage. The fur­ther a project pro­gress­es, the small­er it becomes (see fig­ure). Along­side the room for maneu­ver, the abil­i­ty to influ­ence future costs also decreas­es. Care­ful strate­gic plan­ning, there­fore, also pays off finan­cial­ly. More­over, adjust­ments made in the course of a con­struc­tion project often result in high addi­tion­al costs. Equal­ly impor­tant is care­ful qual­i­ty and cost con­trol through­out the plan­ning and con­struc­tion phase to ensure that dead­lines are met and build­ing costs do not get out of hand.

5. Sys­tem Con­struc­tion

Mod­u­lar con­struc­tion is a method in which the build­ing is assem­bled from pre­fab­ri­cat­ed com­po­nents or mod­ules. The com­po­nents are pro­duced in a fac­to­ry, trans­port­ed to the con­struc­tion site, and assem­bled accord­ing to the mod­u­lar prin­ci­ple. Sys­tem build­ing has many advan­tages:

• Short­er con­struc­tion time
• Low­er costs
• Many years of expe­ri­ence
• Inde­pen­dence from weath­er con­di­tions dur­ing the pre­fab­ri­ca­tion phase
• High pre­ci­sion of the often mass-pro­duced com­po­nents
• Bet­ter plan­ning and reduc­tion of unfore­seen events
• Indi­vid­ual archi­tec­ture is also pos­si­ble

A build­ing pro­duced by sys­tem con­struc­tion tends to be cheap­er to man­u­fac­ture than a con­ven­tion­al­ly built prop­er­ty. The biggest advan­tage, how­ev­er, is the time saved by the short­er con­struc­tion peri­od: faster com­ple­tion means ear­li­er rental income.

In Switzer­land, the sys­tem con­struc­tion method is cur­rent­ly used most­ly for tem­po­rary and com­mer­cial build­ings and is rarely used for res­i­den­tial prop­er­ties. Oth­er coun­tries, such as Ger­many or the Nether­lands, are already some­what fur­ther ahead in this respect. There is a good chance that the use of sys­tem build­ing meth­ods or the com­bi­na­tion of these with con­ven­tion­al build­ing meth­ods could also become more pop­u­lar in this coun­try. At present, their rep­u­ta­tion is still some­what tar­nished, as they are often asso­ci­at­ed with pre­fab­ri­cat­ed build­ings from the 1970s. How­ev­er, this image could change if it becomes increas­ing­ly vis­i­ble that sys­tem build­ing also allows for mod­ern and indi­vid­ual archi­tec­ture.

Con­clu­sion

In the cur­rent peri­od of high infla­tion and con­struc­tion costs as well as increased inter­est rates, opti­miza­tion regard­ing the costs and ben­e­fits of hous­ing is becom­ing ever-more impor­tant. The five aspects pre­sent­ed here rep­re­sent options that own­ers can act upon. Final­ly, remem­ber this: Build­ings are there for the peo­ple who occu­py them. And it is pre­cise­ly for these tar­get groups that they should be opti­mized in terms of costs and ben­e­fits.

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