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STEPHEN FLANAGAN KNIGHT FRANK MIDDLE EAST

Development Valuations in the Light of Covid-19

In the current global situation and present market conditions, there are some significant key points to consider when advising on the value of a proposed or partly completed development.

CONSTRUCTION LEAD-IN PERIOD AND TIMING For ready sites where construction has not yet started, it is prudent to allow for an extended lead-in time prior to commencement of construction on site. This could be an additional three or even six months, depending on the project nature and location. In many cases, contractors will not be willing or able to commence work on site and comply with the rules on social distancing in the workplace.

Supply chains for materials are likely to be subject to some disruption, which could mean that an extended construction period is required, with the nature of the scheme having a significant bearing on this and the construction materials being utilised.

DEVELOPER’S PROFIT In times of heightened risk, an investor or developer will typically seek a greater reward to reflect that proposed risk, but accordingly there is an argument to add a risk premium over and above the level of the development return that would have applied immediately prior to the global COVID-19 outbreak arising.

DEVELOPMENT FINANCE It is acutely important to establish the actual cost of borrowing on the project if it has

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already commenced, as this may provide a good indication of the cost of borrowing levels in the market, as well as speaking to a selection of lenders to gauge current appetite. Despite the historically low interest rates currently in place, lenders, if they have any current appetite for new development finance at all, are likely to be seeking an additional risk premium for new lending to developers.

Normal finance rates are probably only available only to blue chip / strong covenant borrowers, with balance sheet lending rather than project-based finance. Therefore, a smaller developer could have great difficulty raising finance at anything approaching reasonable rates and lower LTV and higher rates may therefore render some developments impossible to fund at all.

PARTIALLY COMPLETED DEVELOPMENTS Valuations of partially completed developments need very careful review in the current market conditions. Scenario examples include: • Ongoingdevelopments: This is where the lender is requesting an update to assess progress of the scheme and to gauge whether the gross development value (GDV) remains in the same ball park as at the outset of the project. In these cases (subject to any specific client instructions) a valuer would normally assume that the construction contract / developer, remain in place and that the project will broadly

Supply chains for materials are likely to be subject to some disruption, which could mean that an extended construction period is required, with the nature of the scheme having a significant bearing on this and the construction materials being utilised”

continue as originally proposed, although we may of course factor in any cost over-runs, extended construction periods, as well as any changes to the GDV and sales timings.

In the UAE, the practice of off-plan sales and revenues from pre-sales being held in an escrow account to fund construction, will warrant careful consideration going forward from a valuation perspective. Where a residential development is partially complete, consideration must be given to the timing of outstanding sales collections due from buyers. The probability of strong collections is now likely to be impacted and thus it is important to engage closely with the developer to understand how many requests have been received for cancellation or payment deferment. Other key questions to consider in this process are: • Howadvanced is the construction progress and what % of due collections have been received to date? • Howwell funded is the escrow account and what is the price point of the units under development? • What is the current value ofunits in the development versus the contracted value, as well as ascertaining what the likelihood of buyers defaulting is?

In addition, the marketing period for any unsold units in the development, together with the sales price point and any revenue growth assumptions needs careful review. These will need to be carefully examined on a project-by-project basis in close discussion with the developer.

For a commercial project developed for lease, similar careful assumptions need to be made on pre-letting percentages’s, marketing / leasing up periods for vacant space, and rental levels / payment incentives being offered for the same.

SENSITIVITY ANALYSIS It is more important than ever to highlight to clients within the property risks section of the valuation report, the key property risks in the current market. The inclusion of a sensitivity analysis in all cases is considered best practice and will no doubt be requested by all informed lenders going forward.

Stephen Flanagan, Partner and Head of Valuation & Advisory at Knight Frank Middle East.

SANDRA BOU MADI TAQEEF

Retrofitting Old Buildings Key to Meeting the Region’s Sustainability Goals

The GCC region’s commitment to smart infrastructure development is changing the planning and construction landscape. With data collection and analytics integration as a key driver in delivering greener, cleaner building stock, there is great potential in technologies that minimise operating costs, maximize efficiencies, and promote targeted user comfort. The challenge then is in adopting these same principles for our existing building stock and how we repurpose buildings with the kind of smart, efficient cooling technologies that not only contribute to a more sustainable environment but also increase long-term investment prospects for building owners, too.

Sustainability remains a vital focus across GCC countries and is evident in each of their national agendas. Strategies to achieve efficiency target puts retrofitting existing high energy-consuming buildings with new sustainable measures front and centre of sustainability plans. For example, in line with the UAE Vision 2021, Dubai has initiated to retrofit 30,000 buildings by 2030 in a bid to reduce the nation’s energy demands by 30%. Similar initiatives exist in Oman, Kuwait, and the KSA, and so the drive to be more sustainable is region wide. We know that deep retrofits are the key to addressing the challenges of climate change.

More than 50% of the energy consumption of a building can be attributed to air conditioning systems, which is why retrofitting using optimum energy conservation measures is important in achieving changes that are cost-efficient and offer a more sustainable use of power. A study by international consulting firm Booz & Company showed that in the GCC, air conditioning accounts for around 70% of the annual peak electrical consumption, and with cooling demand set to triple by 2030.

For building owners to develop a strategic retrofitting plan, they need a creative, multidisciplinary approach that looks at technology, automation, and data analytics. The first step is to conduct level 1,2 and 3 energy audits. This is done to highlight the energy conservation measures, capital expenditures (CAPEX), potential energy savings capabilities, and payback and lifecycle costing. A walk-through audit identifies areas with high energy usage or what we call EUI “Energy Use Intensity”, dividing energy

Making existing commercial properties greener isn’t a burden, but a real business opportunity. The benefits of retrofitting are significant – enabling developers to sustainably improve their real estate investment while limiting their building and development impact, reducing costs, and improving customer satisfaction and comfort”

consumption of the whole year by the airconditioned area to compare it with similar buildings. This gives a good indication as to how much energy can be saved, and more detailed measurements and energy simulation is then used to model energy conservation measures and the most suitable retrofit plan for the building. Energy conservation measures are categorised as no-cost and low-cost and while shallow retrofitting measures can lead to savings of up to 15%, deep retrofittingofHVAC systems is where the real opportunities lie, significantly cutting electrical consumption by up to 50%.

Technology proposals will be tailored to building type and usage, however, VRF is particularly effective for the repurposing and retrofitting of the old buildings we see in this region. Indeed, Variable Refrigerant Flow (VRFs) has been identified as a strategic technology delivering peak energy savings and driving the region’s cooling industry to reduce carbon footprints. Most cooling systems in old buildings can easily be retrofitted or replaced by smart VRF systems (with minimum disruption to occupancy) thanks to its high adaptability. These systems also demonstrate long-term proficiency in operating expenses (OPEX) and maintenance costs which, coupled with the adaptable cooling, put VRF at the technology of choice for the next generation of smart and green buildings. Additionally, when used with integrated smart technology (such as learning thermostats), further optimization is realised increasing efficiency outcomes by a further 10-12%.

Making existing commercial properties greener isn’t a burden, but a real business opportunity for owners and developers to reduce business costs as well as meeting their corporate responsibility. The benefits of retrofitting are significant – enabling developers to sustainably improve their real estate investment while limiting their building and development impact, reducing costs, and improving customer satisfaction and comfort. Perhaps most importantly, a strong forward-looking retrofit strategy is a significant and ultimately necessary step to stay ahead of the sustainability game.

HKA

The Complexities of MEP Design

MIDDLE EAST Bill Haggart, director of Engineering at HKA, explains why the devil is in the detail when it comes to designing MEP systems and interfaces that prevent disputes from arising

The design and installation of MEP systems, that intertwined network of ducts, pipes, wires, generators, controllers and emitters that bring our buildings to life, is an extremely complex and complicated part of any construction project.

Figure 1 shows the most common MEP systems that might be installed in a building – amounting to over fifty different MEP systems that need to be designed and coordinated with one another, as well as with other trades and disciplines.

Few of these systems can be regardedas stand-alonesystems; many of them interface with others and all of them must be considered holistically for space planning requirements. The complex web of the interfaces that exist between each of the MEP disciplines makes for a very complicated picture!

The cost of MEP systems in a building project can range between 25% and 40% of the total construction cost depending on the nature and function of the building. Failure to identify, define and manage the many interfaces between MEP systems during design and through to installation can often give rise to costly disputes in construction projects.

Some MEP interface problems are more common than others: • Alignmentofaboveground and below ground drainage; • Powersupplies for mechanical equipment; • Locationandprovisionof primary service connections to shell spaces; • Methods ofterminationof primary service connections to shell spaces; • Provisionofcontainment (cable trays and trunking) for other systems; • Utilities connectionpoints; • Interfaces betweensitewide distribution systems and individual building systems (district cooling for example); and • Contractordesignedelements.

With many MEP interface issues, the cost of rectification of the physical deficiencies can pale into insignificance when compared to the cost associated with the delayinrectifyingtheissue. An exampleI encounteredonarecent project concerned a dispute over the design responsibility of the site electrical infrastructure and obtaining the appropriate approvals from the supply authority.

The dispute resulted in a delay tothepower-ondateforthesite, which in turn impacted the testing and commissioning of the MEP systems and introduced the need for additional standby generators while waiting for power to be connected. Allofwhichdelayedthe project handover and invoked delay damages against the contractor.

HOW DESIGN AND CONSTRUCTION INTERFACES HAVE CHANGED WhenI startedmycareeritwas usual for the MEP subcontractors tobediscipline-specificin that there would be a separate subcontractor for mechanical and plumbing installations and another subcontractor for the electrical installation.

Over time, design and build procurement gained popularity and FIGURE 1: INTERFACES AND RELATIONSHIPS BETWEEN MEP SYSTEMS the MEP subcontractors became biggermulti-disciplineorganisations Cooling Emergency Lighting that would be responsible for the Staircase Pressurisation Heating Lighting Lighting Controls completeMEPinstallation. Atthe same time, MEP consultants started to fragment into specialisms. For example, systems that would have been designed by Refrigeration Steam & Condensate Smoke Ventilation Sprinklers Mechanical Mechanical Ventilation Control Systems Natural Ventilation Pneumatic Systems Earthing & Bonding Clock Systems Data & IT Street Lighting Small Power Containment MV Power LV Power an electrical engineer such as securityandITsystems arenow Fuel oil storage Gas Distribution BMS Utilities Utilities Lightning Protection Electrical FIre Alarm Telephone Systems commonly designed by specialists. Exhaust gas flue Air Conditioning Generation Plant Radio & TV

Currenttrends inthe Compressed Air UPS Public Address construction industry, Hot Water Cold Water Energy Metering Intruder Alarm and particularly in large Potable Water Rainwater LIfts & Escalators CCTV projects, is to have separate Water Treatment Plumbing Drainage Gas Extinguishing Access Control contractors responsible Hose Reels Wet & Dry Risers Systems for parts of the installation External Hydrants Fire Water under separate contracts.

On infrastructure projects the MEP installation can be compatibility of each system’s more than 700 projects that for MEP systems either lack the done by different contractors communication protocols. we have analysed (Figure 2). “glue” of the basic information that in each building with a separate Itshouldcomeas nosurprise defines who does what or, if it is contractor responsible for the then that a fragmented design HOW TO MITIGATE THE defined, it is not done accurately. site-wideutilities installation. process, coupled with multiple RISK OF DISPUTES ARISING Defining the interfaces at

The development of smart installationcontracts andeverFROM INTERFACE ISSUES? the design stage through the building technologies that operate changing technologies, creates Inmanyofthedisputes I haveseen, simple use of a responsibility on integrated common platforms numerous interfaces that must be poorly written scopes of work that matrixandobtainingbuy-in and networks further creates accurately defined and described fail to adequately define interface from construction and design another set of interfaces that is in the contract scope of work to responsibilities are frequently managers early in the process perhaps more difficult to define. avoid subsequent disputes arising. referenced as a primary source of would eliminate a huge amount of

The bridge between software, Interfacemanagement dispute. Project specifications that potential for subsequent disputes. system hardware and operational and poorly defined contract run to many hundreds of pages The increasing use of outputs includes not only requirements feature in the and are generated from software collaborative design processes physical interfaces but also the top five causes of disputes in packages using typical specifications suchas BIMandtheadoptionof advanced modelling and simulation FIGURE 2: HKA CRUX SUMMARY OF TOP PRIMARY AND SECONDARY CAUSES OF DISPUTES IN THE BUILT ENVIRONMENT ( PRIMARY SECONDARY) software in MEP design are fantastic developments in the automation of MEP design. These tools and 50 100 150 200 250 300 processes allow systems to be Change in scope designed extremely quickly and to very high levels of accuracy.

Contract requirements That said, failure to know and were poorly drafted understand the interfaces in MEP

Contract management system design cannot be rectified and/or administration failure by the use of sophisticated software alone. Indeed,itcouldbeargued

Design information was issued late thatover-relianceonthesetools may be a root cause of some of

Level of skill and/or experience the issues that are encountered!

Poor management of sub-contractor/supplier The old adage that “the devil is in the detail” is hugely relevant in MEP and/or their interfaces systems design. Without properly

Design was incomplete defined interfaces, even the best designs will provide opportunities for costly disputes to develop.