Funders

What Does Whole Life Cost Mean to You?

What is Whole Life Costs from the perspective of Development Funders?

Speculative Developers and their short term funders are historically focused on achieving a low capital cost to improve profits when the asset is sold on.

But that is now changing as long term funders, their valuers and insurers realise that the value of the asset depends on the performance of building and its suitability to accommodate change in the future.

Other valuation methods being trialled now, such as cashflow highlight, the inadequacies of our present system for achieving the right investment value using predicted rent and yield.

No longer is it possible to ignore the effect of the design or construction on the tenant as they are becoming conscious of the huge additional costs their businesses incur from a poorly designed building compared to a building designed by using performance requirements and using whole life costs in system selection.

Whole Life Costs is about understanding the balance between Capital Costs and Costs in Use (also called Revenue Costs and Life Cycle Costs) to deliver the performance or service level required for that asset.

Why is it about performance?

Recent and widely reported research into office accommodation has identified the relationship between capital cost, the cost in use and the cost to the business of assets as:-

Capital Cost

Cost in Use

Business Costs

200

Source.: "The long term costs of owning and using buildings" - published by The Royal Academy of Engineering (November 1998).

What this means is that to operate and maintain the building will cost 5x the capital costs over the life of the building.

However, the cost to the business occupying, including salaries and staff productivity, the asset is 200x the capital cost.

But these relationships work in reverse as well.

So if the Developer just focuses on lowest capital cost, ignores performance and produces a poor building the effect, per £1m capital cost, of reducing the Capital Cost by 10% may be:-

Capital Cost

Cost in Use

Cost to Business

200

-£100k

+£500k

+£20m

over the life of the building compared to a well designed and performance specified building.

This was identified by the UK Government in the early 1990’s and all Government procurement has to consider the Whole Life Costs and not be just capital focused. Is this perhaps the first example of the Government, a notoriously poor Client usually, leading the private sector?

However, the private sector is increasingly recognising this relationship and Occupiers, Funders and Insurers are beginning to accept a lowest capital cost focus leads inevitably to higher costs of servicing, maintenance and repairs particularly when the opportunity cost is included when the asset is out of use or functioning at lower than optimum performance.

Just as you would not buy a car without some knowledge of the costs of running that car and the expected life of that car so the most important tenants are putting greater emphasis on costs in use when selecting new premises. Developers need to remember that these tenants are also the best covenants attracting the highest valuation levels.

To add to the pressure on Developers the long term funders are beginning to be concerned about the future value of the assets.

For example the old 25 year fully repairing and insuring (FRI) leases are changing with shorter leases now being more common. This has benefits to both the tenants and the owner. The tenant has the option to move to premises more suitable to its current business and it allows the owner to revalue the rent or refurbish the building.

However, long term funders are now looking at what is likely to happen to their buildings at 10 years into its life as an indicator of prospective rent level, quality of tenant and hence valuation.

A building that has been designed using performance requirements across all the asset levels from Facility (Building) through System (Heating and Cooling System) to Component (Air Handling Unit) and even Sub-Component (Fans or Pumps) will have a much better chance of letting and attracting the better quality tenant throughout its life.

Look around London today buildings that attracted good tenants and rents in the 1980’s and early 90’s are now only attracting secondary or tertiary covenants in multiple occupancies leading to lower rents and valuations.

The long term funders are seeing their 25-35 year investments substantially underperforming in mid life which is driving the need for better designed and performing buildings for the whole of its life.

What can Funders do?

Just as they already understand that entrances, common parts and facades are important to the value of the asset and they now need to accept there is a balance to strike between capital and revenue spend.

Funders also now need to appreciate the value and competitive advantage derived from spending the right amount on ‘hidden’ aspects of the building as the cost of running the building will become evermore important in the future.

Start by using the Whole Life Cost Forum Comparator Tool to assess your building at Facility level.

Ensure the Developer employs Consultants who have knowledge of and use Whole Life Costs, and design using required performance.

Require them to use the Whole Life Cost Forum Comparator Tool when deciding which element, system etc., to specify since they can only use the WLCF Tool once the required performance is established.

Ensure the Main Contractor has knowledge of using Whole Life Costs and understand what required performance for assets means to them, their supply chain and more importantly for their Client. Ask what they are doing to develop Whole Life Costs in their supply chain. Require them to use the Whole Life Cost Forum Comparator Tool when deciding which components to install since the WLCF Tool requires the performance of the asset to be defined.
Employ letting agents that have knowledge and even use Whole Life Costs in their own supply chain. They must also understand the importance of designing and constructing using required performance for assets.
It is the whole supply chain that will deliver you the prime tenant and maximise the value of the asset so they all need to be the ‘best in class’ and that means using Whole Life Costs and required performance as very important factors in decision making.

For further information see the sections on:-

What is Whole Life Costs from the Perspective of Speculative Developers?

What is Whole Life Costs from the Perspective of Consultants?

What is Whole Life Costs from the Perspective of Contractors?

What is Whole Life Costs from the Perspective of Suppliers?

If you need help and assistance with any aspects of Whole Life Costs, the WLCF Comparator Tool or specific projects a good place to start is the membership of the Whole Life Cost Forum who have worked for 3 years to develop the WLCF processes and methods. If any one has the knowledge and can use design and build to required performance they can.