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Economic Feasibility
This page illustrates the design codes on an economic level and if they are plausible.
In order to assess the feasibility of the proposed scheme, residual method is applied to a testing development scenario. In this section you’ll find the details of the scenario, the key figures as well as a discussion about the methodology we’ve used.
Scenario
Methodology
Key Figures
Details
Scenario
The scenario that has been considered for the purposes of this financial assessment is based on the outcomes of one of the groups in the workshop. The original masterplan, that concerned only the PAR area, has been then tweaked - namely by densifying the area - in order to make it financially viable. This master plan reflect the codes as they were developed in Brazil, and namely the ones concerning street hierarchy, block and plot size, building types and height specifications and provision of green spaces.
The final scheme that has been used to test the design code provides for 233 residential units (covering a surface of 4,636 m2), and 22 commercial units (covering a surface of 1,390 m2), located on the ground floor of a set of designated mixed-use buildings. The area will feature 1051 m2 of equipped green areas as well, alongside the canal and in the pocket parks in the block corners.
Five types of buildings, based on the standards developed by the Sindicato da Indústria da Construção in order to calculate the CUB (Basic Construction Cost) (SINDUSCON-MG 2015), have been considered for the development. This has the double advantage of providing a context-appropriated and diversified type of architecture, and of allowing a precise knowledge of the construction costs. PP stands for Prédio Padrão (which translates to building standards) with three heights A, N, and B. R-1 stands for residential use with two heights N and B.
The new development will house a population of 879, thus achieving a density of 557 inhabitants per hectare - increasing the current density (500 inhabitants per hectare) by 11.4%; besides, it will improve the commercial tissue of the neighbourhood, which is presently limited to some sparse commerce.
Click here to have more information about the development.
Methodology
In order to assess the feasibility of the proposed scheme, we applied the residual method to a testing scenario, thus finding the residual present value of the land after building cost and profit are subtracted.
Doing so in a Brazilian context has been rather challenging, due to the limited amount of knowledge about the local institutions and regulations that might be relevant (as sources and as constraints), and the even more limited quantity of reliable sources available.
However, a fair amount of official and reliable data has been collected, namely:
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The cost of construction and the type of buildings are taken from the most recent bi-monthly survey conducted by the Brazilian Builder’s Association (Sindicato da Indústria da Construção - SINDUSCON) for the State of Rio Grande do Sul (SINDUSCON-RS 2015).
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The market value of the residential units, the rental prices for offices and the value of the land are the result of the survey of 3 different real estates agencies’ websites (PenseImóveis n.d.; Fuhro Souto n.d.; Trovit n.d.), for the areas of Pelotas Centro and Pelotas Porto (for the built environment) and of the Pelotas and Laranjal area for the terrain values. The outcome of the survey was a sample of 100 flats, 9 houses, 13 shops and 93 terrains. The median value per m2 has been retained for the “N”-type of building, while price for the “A” and the “B”-type of building has been fixed within the standard deviation.
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The percentage of fees has been taken from the official guidelines of the Conselho de Arquitetura e Urbanismo do Brasil (CAU/BR 2013).
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The average number of occupants per room (1.7) has been based on the results of 2010 IBGE’s Census (IBGE 2010).
Nonetheless, the knowledge of the local context is still limited, and some assumptions had to be made.
In the first place, for certain variables, whose nature is less formal and generally confidential, finding official sources has proven unsuccessful. Then, informal and “grey” sources, such as private investors, consultancies and financial webzines, had to be consulted. This has been the case for the investment yield (Global Property Guide n.d.) and the expected profits percentage (My House My Life Brazil n.d.).
Secondly, localised data concerning a third set of variables, such as the cost of site works, the costs and rates of short-term financing or the average length of the contracts, were impossible to find.
For this third set of variables, UK-based data have been retained; tweaking them when necessary, to better suit the peculiar characteristics of the project. For example, the impact of site works has been increased by 5% to reflect the additional costs for the demolition and the remediation of the PAR area.
Lastly, the residual land value appraisal framework we applied has been thought for the UK, and integrates some UK-based practices - such as the division of commercial space in three zones - that might not hold in Brazil, and, vice-versa, might not include some relevant local practice.
Those three limitations reduce the effectiveness of the residual land value as a way to assess the economic viability of an overseas scheme. For those reasons, the residual land value has been integrated with a second value assessment, based on the less context-sensitive comparison method (sample of n=93), which is intended to act as a control group in a double-blind experiment.
Key Figures
As shown in the chart on the right, the project is viable, insofar as its final value covers the building costs, the fees of the involved professionals and the site works and the other expenses, still allowing a profit on 20% for the developer and the creation of a reserve of R$ 8,911,510 for the acquisition of the land.
Those data are consistent with the comparison method’s results, which show an average value of R$ 623 per m2 with a standard deviation of R$ 363, corresponding to a total value of the land that can fluctuate within a standard deviation from R$ 25,246,720 to R$ 6,645,760. The reserve of R$ 8,911,510 found by the residual land valuation is then adequate to the reality of real estate market in Pelotas: therefore, the scenario can be considered viable.
Click here to have more information about how the residual land value has been calculated.
