eres2010_130_Henneberry_MODELLING_THE_RELATI(15)

The paper describes the development and application of physical-financialmodelling techniques to the analysis of relations between development design –covering the broad characteristics of a scheme, such as land use mix, developmentdensity and built form – and financial viability. It is divided into two parts

Figure 7: Financial Structure of Redevelopment Options

Bottom-up Generic Modelling

The results of specific site level analyses may be adapted to support bottom-up generic modelling. Take the apartment block in the revised ‘Park’ design option for The Wicker Riverside, as an example. Here, the selling price for apartments, the construction and other costs (fees, finance and so on) for such accommodation form the starting-point for analysis. They are then elaborated, so that the relevant costs and values for an apartment building with eight one-bedroom units on each floor are identified. Construction costs increase with height, because of growing structural and service requirements. However, the increase is not gradual and even, but sporadic and marked; and is determined by a combination of physical performance thresholds and legal regulations. Two assumptions are made. The first is that the area of the site of the apartment block remains constant. The second is that – in the first instance – the sale price of apartments also remains constant, whatever the height.

The results are described in Figure 8a. The total value of the building increases at a constant rate, as each storey is added. However, there are major increases in construction costs at 6 and 14 storeys. In the case of the latter, this produces a unit construction cost that exceeds the unit value of the apartments, causing the total value and cost curves to diverge. The marginal cost (MC) curve in Figure 8b emphasises the impact of the stepped increases in construction costs and shows that average cost (AC) is higher than average revenue (AR) for buildings of 14 storeys or more (note that marginal and average revenue are the same, given constant prices). In these circumstances, the optimum height of the apartment block (that is, the development density) is five storeys, with a secondary ‘peak’ at 13 storeys. These are the points of the highest residual (the difference between development value and development cost, from which the developer’s profit and the land value are derived).