Does the investor like the circular economy?

Gili TawanganPicture this! A beach on the Bahamas, a man with a spreadsheet on his lap and a phone to his ear. While the waiter puts down his cocktail the investor closes a deal directly with the supplier-provider about their next building project, as partners.

The new supplier-provider

This scenario has been expressed frequently, therefore thus enhancing the investor businesscase of circular buildings. Why should the supplier-provider in the circular economy – no longer called the contractor – be the best and only partner for every investor? When, for example, forty suppliers jointly deliver the total performance needed for that building, the investor’s holiday will be ruined. The government could not handle that very well either, as we have seen in the previous blog. The one who undertakes the work is not only changing into a supplier-provider of the solution, but can also be co-owner, or at least assume warranty responsibility. So investor and supplier-provider have a common interest. Together they provide a solid foundation, supporting structure, roof, façade and utility connections. A long-term investment that will yield real returns. The supplier-provider not only offers the construction, but also the building. The layout and fit-out of the apartments is a necessary evil for the investor that he would gladly hand over to individual tenants, their corporation or their suppliers. So everyone finally gets value for money. Then the circular economy is the obvious choice for every investor, isn’t it?

How different it is now. The investor romps with all kind of parties in order to achieve maximum efficiency and minimum risk. Who are these parties and what are their interests?

Property value

Apart from stocks and bonds, property is the third investment category for pension funds, insurers, banks and wealthy families. The price per square meter is determined by the location in combination with the function of the building (living, working, recreation etc.) The realization is in the hands of different parties, such as consultants, architects and contractors, who often work individually, submit their accounts separately and quickly move on to the next project. Major developers on behalf of the anonymous investors and housing associations implement the plans and color them more fully inside the lines. The investor will do everything to safeguard the value of its property and preferably let it increase. For the local government it is just as important to get return on equity out of this long-term investment, we talked about this extensively in our previous blog.

Value Management

For an investor the value of his property lies in the structure and exterior. He monitors the value of his buildings usually by appointing a building manager. This manager receives a fixed monthly fee to cover the costs of management and maintenance. So what will he do? This manager spends minimal time on actual management by always turning to the same people who always work with the same products and materials in all homes. For the user, this means a minimal choice of kitchens, bathrooms and installations. This restriction in choices will naturally not contribute to a positive value perception at all. More about that in a future blog.

Transactions are leading

Just like the building manager, consultants and contractors are paid for the transaction of services and work. Their goal is to make as much money as quickly as possible. After the final settlement everybody moves on to the next project. Estimate costs for transactions are often unavoidable and due to the recurrent nature on the high side. This is unfortunate because in the execution of each project a series of quotations for each product is requested, time and again. That’s because project work in the building industry is still the norm while a systematic approach in building and property would yield so much more. More about that in a previous blog. Then, consultants and contractors are also rewarded for the future value development to which they have contributed with their work.

Also for the real estate agent only transactions are of interest. He benefits from the highest possible price at the moment of transaction. At that moment he will receive a percentage or a fixed price per (re)sale or (re)rent. His focus lies on transaction profit so the rental or sale should preferably be arranged quickly. Because delay may lead to cancellation.

Finally, developers also earn their money with transactions, namely the sale transaction of their project to the investor. But that transaction takes place only when the developer has arranged all the contracts and he has hedged the risk of additional project costs. As a start he re-earns his own cost on the sale or rental to users and by saving on the pre-financing of consultants and contractors. Without a preliminary purchase contract, the developer would be wise to stick with a sketch design and a preliminary income statement.

Adding value

Meanwhile the circular economy is all about adding value for the long term, not to get a quick profit on separate transactions. So the question is how all tender parties can – in the long run – be rewarded for their value addition?

For an investor the value of the location and the value of the building determine if the long-term investment is profitable. Therefore it is logical that the investor is fully committed to a flexible base building with a good foundation, structure, façade and roof. To his great relief the responsibility for short-term investments in the fit-out with kitchen, bathroom facilities and installations goes to the user. In our next blog you will discover how this affects the sentiments of the user. Everyone keeps his own part in good condition, with purchase and installation discount for the fit-out, including maintenance and management, without much additional cost. So all parties share in the development of value.

Who is the ideal partner for the investor?

In addition to the local government and the user, the investor also has a strong interest in a good value development of the site and the building. Only the investor wants to spend no more than standard cost and minimal attention. Who, then, is the ideal partner for this investor? Is that the new supplier-provider? What is your view on this matter?

Take the next step and share your experiences

Do you want to take a next step? Come to the FREE* Masterclass. We will work with practical tools to instantly implement the actions of my ebook in your organizational, fiscal or financial projects and organization.

Join the conversation

Do you know how to build that new way and what you need? What exactly do you need as an investor to grow into an happy profitable and specialized investor of buildings in the circular economy? Share it in the comments below.

To your health and wellbeing,

Remko Zuidema

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