The economics of renovation projects with energyrelated investments

Transcription

1 ENVIRONMENT AND HEALTH ADMINISTRATION ENERGICENTRUM Stockholm Energicentrum at the City of Stockholm Environment and Health Administration The economics of renovation projects with energyrelated investments Final report 15 February 01 ÅF Infrastructure AB Karin Byman Sara Jernelius

2 (61) 15 Feb 01 Foreword. The City of Stockholm has high ambitions with regard to its endeavours to improve the efficiency of energy use and reduce carbon dioxide emissions in conjunction with the renovation of the existing property stock. However, it is not always obvious how to justify investment in such projects from a purely financial point of view, or to determine what demands it is appropriate to make with regard to energy efficiency performance. To learn from good examples, the City of Stockholm Environment and Health Administration s Energy Centre (Energicentrum) therefore commissioned a study of a handful of successful projects, in which extensive energy-saving measures were implemented as part of the renovation work. The projects chosen as examples are Brogården in Alingsås, Poseidon s renovation in Backa Röd, Gårdstensbostäder s Solhus in Gothenburg and Sustainable Järva, which is owned by Svenska Bostäder, in Stockholm. The aim has been to show how energy consumption can be halved, and to make clear how various conditions relating to the way in which these investments are costed and calculated can affect the profitability of the projects. One conclusion is that the cost of investing in measures designed to halve energy consumption can very rarely be recouped through savings made by lower energy costs alone. To make the projects profitable, a truly comprehensive approach is required, in which energy-saving initiatives are combined with measures to address the consequences of deferred maintenance and action to increase revenue from rents. Profitability can also be improved by actively endeavouring to reduce project costs. Investing in thorough and careful analyses at an early stage in the process provides a good basis for implementing cost-effective measures that can reduce production costs. The project manager was Jan-Ulric Sjögren (Licentiate in Engineering and Technology) at the City of Stockholm Environment and Health Administration s Energy Centre (Energicentrum). The assignment was performed by Karin Byman (Licentiate in Engineering and Technology) and Sara Jernelius (Master of Science in Engineering) of the Energy Management section at the technical consulting company, ÅF AB. The City of Stockholm Environment and Health Administration would like to thank all those who have made this study possible by contributing their experience and knowledge. Stockholm, 13 February 01 Gunnar Söderholm Director, Environment and Health Administration Gustaf Landahl Head of Department

3 3 (61) 15 Feb 01 Summary. ÅF has been commissioned to clarify the profitability criteria used for measures to improve energy efficiency in conjunction with the renovation of four housing developments in Sweden that are part of the so called Miljonprogrammet ( The Million Homes Programme ). This programme aimed to build a million new apartments and houses between 1965 and 1975 to provide housing at a reasonable price. The projects studied in detail in this assignment are Backa Röd in Gothenburg, Brogården in Alingsås, Gårdsten in Gothenburg and Sustainable Järva in Stockholm. Interviews with the property companies, combined with the authors own calculations, show that measures designed to halve energy consumption can very rarely be fully financed through savings in the form of lower energy costs. To make the projects profitable, a more comprehensive approach is required, in which energy-saving measures are combined with measures to address deferred maintenance and action to increase revenue from rents. Profitability can also be improved by actively trying to reduce the investment costs in the projects. Thorough analyses at an early stage provide a good basis for cost-effective measures. Increasing levels of competence among developers can also cut production costs. Minor differences in the input data for the profitability calculation, such as cost of capital and assumptions of future cost trends, can have a major impact on the results. It is therefore of utmost importance that requirements on return and risks are managed in line with the company s business concept and strategies, so that investment decisions are based on the relevant factors in line with the company s long-term business activities. Success factors for profitable improvements in energy efficiency: 1.. Minimise costs a. Select the most cost-effective measures based on the circumstances pertaining to each individual building. b. Work hard to cut the cost of contractors services. c. It is usually less expensive to reduce energy consumption in properties that use a great deal of energy. Maximise income a. Increase the proportion of space available for rent. b Take action to enhance the appeal of the area. Adopt an all-round approach a. Combine essential maintenance work with improvements in energy efficiency. b. Involve tenants in activities to improve energy-efficiency. c. Improve accessibility to enable older residents to continue to live at home. Long-term approach and risk awareness a. The owners determine the conditions and rules of play. b. Draw up calculations based on the company s business concept and strategies. c. Manage and analyse risks continuously.

4 4 (61) 15 Feb 01 Table of contents. PRESENTATION OF THE PROBLEM INTRODUCTION WHAT IS A PROFITABLE INVESTMENT?... 7 SVENSKA BOSTÄDER JÄRVA...13 BOSTADS AB POSEIDON - BACKA RÖD....3 ALINGSÅSHEM AB - BROGÅRDEN....3 GÅRDSTENSBOSTÄDER AB - GÅRDSTEN ANALYSIS AND CONCLUSIONS REFERENCES....60

5 5 (61) 15 Feb 01 Presentation of the problem. The City of Stockholm has high ambitions in terms of improving energy efficiency and reducing greenhouse gas emissions. There is particular potential for improving energy efficiency in conjunction with renovating existing properties. The city s authorities recently adopted an environmental programme according to which energy consumption is to be reduced to a level that does not exceed the standard for new buildings stipulated in the Swedish Board of Housing, Building and Planning s Building Regulations for major renovation projects. Energy consumption has been halved in connection with renovation work in several pilot projects in Sweden, including those in Brogården in Alingsås, Gårdsten and Backa Röd in Gothenburg and Sustainable Järva in Stockholm. This proves that the potential for achieving the proposed levels of improved energy efficiency using today s techniques does exist. Opinion is divided, however, about the economic viability of such projects. ÅF has been commissioned to shed light on the profitability criteria used for measures to enhance energy efficiency in conjunction with renovation work in the various pilot projects. The projects that were studied in detail as part of this assignment are Backa Röd, Brogården, Gårdsten and Sustainable Järva. The assignment has been conducted through studies of relevant literature, interviews and the consultants own analyses and calculations. The analysis is complex and requires more comprehensive and detailed supporting documentation than we have had access to. Within the framework of this study we cannot therefore provide exhaustive answers to all questions, but we hope that it will provide some insight into how the projects differ. The assignment was performed by Karin Byman (Licentiate in Engineering and Technology) and Sara Jernelius (Master of Science in Engineering) of the Energy Management section at ÅF. The City of Stockholm s Environmental Programme for states that energy consumption is to be reduced so that it does not exceed the standard for new buildings stipulated in the Swedish Board of Housing, Building and Planning s Building Regulations for major renovation projects.

6 6 (61) 15 Feb 01 Introduction. What are the parameters for determining what is profitable? This question becomes even more complicated if one also factors into the equation longterm environmental aspects, such as individuals responsibility for climate change and socio-economic aspects relating to people s living conditions and how to promote equality and reduce segregation. Politicians attempt to bridge the gap between what is profitable from a socio-economic and commercial perspective with various types of policy instruments taxes on the one hand, grants and subsidies on the other. Research and development can create further opportunities. The lack of a single, generally accepted method for how to measure the profitability of different investments tends to create confusion and lack of clarity. How do you compare payback period with a productive value procedure, a life cycle cost calculation or impact on return on investment? Irrespective of which method is chosen, each of the assumed conditions in the calculation has a significant impact on the results. Cost of capital, timeframes and assumptions of energy price trends all play a major part in determining whether or not an investment can be regarded as profitable. Another issue to consider is how energy efficiency enhancement measures are packaged. Should individual measures be valued separately or packaged in a way that makes it possible to calculate the effect of the entire project? In this assignment we have collated data on how projects in Gårdsten, Backa Röd, Brogården and Sustainable Järva were conducted and on what the results of these projects were. We report on and discuss how the calculations have been made and how the various principals/owners view the profitability of their respective projects. (NB: The documentation we have had at our disposal has not been comprehensive, which would also have been difficult to achieve within the framework of this project.) The diagram illustrates how different perspectives govern what is regarded as profitable and viable. There is a theoretical level that is never attained. In many instances, however, investments do not even achieve a commercially viable result. Obstacles to improving energy efficiency include a lack of competence and resources in the organisation and the fact that the issue is not prioritised by management. Theoretically feasible improvement in energy efficiency Research & development Socio-economic improvement of energy efficiency Commercially viable improvement of energy efficiency

7 RAPPORT 7 (61) What is a profitable investment? This chapter provides a theoretical background to how profitability is assessed in an investment.

8 8 (61) 15 Feb 01 Profitability in theory. Profitability is a term used to measure the economic efficiency of an operation. It is usually expressed as the relationship between the surpluses that arise and the value of the resources used. In property investments the term income return (or return on income, ROI) is often used to measure and judge profitability. This is defined as the ratio between net operating income and the market value of the property. Profitability can be calculated for both society as a whole and for individual companies. Commercial calculations only consider the company s own costs, revenues and invested capital. Capital provided by society is therefore not included in these calculations, nor are any societal benefits or losses. As a result, a socio-economic profitability calculation can lead to results that are totally different to those obtained in a commercial calculation. In a socio-economic profitability calculation, strict cost and revenue methods are rarely sufficient to assess all consequences for an operation. Instead, a cost-benefit analysis may be used, which takes account of negative external effects, such as environmental destruction, and the real benefits and costs to society. Example: Gårdsten A profitable investment? The Gårdsten area in Gothenburg is part of the Million Homes Programme, which over the years had become marred by more than,000 apartments that were technically run-down with a high proportion of vacancies and significant levels of social exclusion. In 1996 work started to transform the area into a fully functional district of the city. In a study conducted in 008, Hans Lind and Stellan Lundström analysed whether the renovations had been profitable, from both a commercial and socio-economic perspective. The commercial calculation focuses exclusively on the degree to which the equity, in the form of group contributions from the municipality, has yielded interest during the 10-year period examined. With a cost of capital amounting to per cent, the investment breaks even. With a more commercial rate of interest at 6 8%, however, the investment is clearly unprofitable (generating a financial loss of SEK million). The socio-economic calculation, on the other hand, takes account of factors such as reduced unemployment and crime, increased wellbeing among tenants and lower consumption of resources (resulting from the use of individual hot-water meters) in addition to the appreciation in value in the property company. The result of the socio-economic analysis shows that the positive benefits for society can be valued at approximately SEK 300 million over the period, thus offsetting the loss incurred by the investment in purely financial terms.

9 9 (61) 15 Feb 01 What is an investment? Investment: The use of capital that has consequences for cash flows in the long term. Due to the long-term nature of investments, they are often recognised as non-current assets in a company s balance sheet. The cost is allocated through depreciation and amortisation over the economic life of the investment, instead of impacting profit when the investment is made. This process is called capitalising the investment and it raises the carrying amount of the asset. The investment can also be recognised as an expense directly, within the framework of taxation regulations. From a calculation perspective, a venture with long-term consequences for cash flows is always an investment, irrespective of whether it is capitalised or expensed directly. From an accounting perspective, the venture is only an investment if it is capitalised. Properties have a long lifespan and therefore require regular maintenance. There are no clear regulations on whether a renovation should be classed as an investment and thereby be capitalised, or as maintenance and thereby be expensed directly. As a guide, however, the accounting must provide a true and fair picture of the actual situation liabilities and assets should be neither undervalued nor overvalued. If the carrying amount of the property exceeds an estimated market value, an impairment loss is recognised in the accounts. This means that surplus values are recognised as an expense in the company s income statement. Recommendations from the Council for Municipal Accounting (Rådet för kommunal redovisning) about tangible assets Additional expenditure for tangible non-current assets (also called property, plant and equipment) is to be added to the cost of acquisition by the amount by which the asset s performance and/or service potential improves compared to the performance level and/or service potential at the time of acquisition. All other additional expenditure is to be recognised as expense in the period when it is incurred. Examples of measures that can be regarded as entailing an increase in the asset s performance and/or service potential such that the expenditure is to be added to the cost of acquisition: modification of the asset that lengthens the estimated useful life or that raises the asset s capacity and/or service potential, changes that entail a significant improvement in the quality of products or services produced, or changes that entail a significant reduction in production costs. Expenditure for repairs and maintenance of a tangible non-current asset (an item of property, plant or equipment) designed to retain or restore the characteristics of the asset is to be recognised as expense in the period during which it is incurred.

10 10 (61) 15 Feb 01 Assessing the profitability of an investment. Assessing the profitability of an investment often involves considerable uncertainty, since it can be difficult to estimate future payment flows and the economic lifespan. Capital budgeting is used to facilitate and support decision-making. B, the basic investment, consists of the cash outflows that arise in conjunction with the investment being made. The basis of capital budgeting is to investigate whether using resources to a certain degree, in the form of a basic investment, is justifiable with regard to the net cash flow that the investment generates. In the calculation it is important to: R, residual value, arises if the investment still has a value after the end of its economic life (or the calculation period). consider the size of the cash inflows and cash outflows, consider when these cash flows occur, make cash inflows and outflows comparable, i.e. recalculate them to the same date. Cash inflows and outflows that are due to take place in the future are worth less than if they were to take place today. This is due to the fact that cash in hand can be used to generate a return through alternative investments. Cost of capital (CC) is used to make the payment flows comparable by taking account of various factors such as: the interest rate at which company can borrow capital, the return on the company s alternative investment opportunities, the risk associated with the investment. n, net cash flow, is the change in cash inflows that the investment gives rise to. u, economic useful life, states the period during which it is economically meaningful to use the investment.

11 11 (61) 15 Feb 01 Calculation methods. The payback method is a form of capital budgeting that calculates the investment s payback period, i.e. the time taken for the net cash flow to exceed the basic investment. In its simplest form, the payback method takes no account of interest or depreciation in value, etc. Rules for decisions: An investment is profitable if the payback period is less than a predetermined maximum payback period. An investment with the shortest payback period is the most profitable one. Advantages: Simple to use, few factors to consider. Disadvantages: Misleading, because it does not take account of consequences after the payback period, or when cash inflows and outflows occur. This method is therefore most appropriate for short-term investments. Yield-based methods mean that all future consequences for cash flows during a specified calculation period are recalculated and added up for the time when the investment was made in order to give a net present value (NPV). In this way, the basic investment can be compared to the future net cash flows that arise from the investment. The net present value depends on the company s alternative capital growth, i.e. the cost of capital. NPV = n NPV factor + R NPV factor B Rules for decisions: An investment is profitable if it has a positive net present value. The investment with the greatest positive net present value is the most profitable alternative. Advantages: Takes account of virtually all of an investment s quantifiable consequences. Disadvantages: In terms of calculation, it is more difficult to apply than other methods and can produce misleading results for companies that have problems with financing.

12 1 (61) 15 Feb 01 Calculation methods, continued. A life cycle cost analysis (LCC) is fundamentally a form of yield-based method that compares future energy and maintenance costs for alternative investments to improve energy efficiency. If the investments give rise to other cash flow changes, and they differ between the alternatives, these should also be considered in the calculation. As its name suggests, the calculation period spans the entire economic life cycle of the investment. LCCtot = B + LCCenergy + LCCmaintenance LCCenergy = annual energy cost present value factor LCCmaintenance = annual maintenance cost present value factor Rules for decisions: The investment with the lowest total life cycle cost is the most profitable one. Advantages: Takes account of cost savings throughout the entire lifespan of the investment. Disadvantages: The method requires several investment alternatives in order to be relevant. The total life cycle cost in a free-standing investment alternative tells us nothing on its own about the profitability.

13 RAPPORT 13 (61) Svenska Bostäder Järva This chapter reports on how the property company Svenska Bostäder assessed profitability in Järva, a Million Homes Programme area. The chapter focuses on the renovation projects that were part of the so called Sustainable Järva initiative.

14 14 (61) 15 Feb 01 The Svenska Bostäder property company. Svenska Bostäder is one of the City of Stockholm s three municipally owned housing companies. The company was founded in 1944 and currently owns more than 700 properties with a total of 8,419 apartments. As a result of a stable rental market and substantial property sales, Svenska Bostäder has a robust balance sheet with a large proportion of equity. In 010 the company had no interest-bearing liabilities and the visible equity ratio was 87.9%. Equity in 010 totalled SEK 1,813 million. The municipality normally has a requirement of 3% for income return and 1.5 % for return on equity. This corresponds to an annual result of SEK 600 million. In response to the 008 financial crisis, the City of Stockholm introduced stimulus measures to boost employment in the construction industry ( Stimulus for Stockholm ). For Svenska Bostäder, this meant that required returns were permitted to be negative in order to facilitate new builds and major maintenance work in existing property. In the past year, the company reported a loss of SEK 150 million as the result of large-scale renovations. Svenska Bostäder s properties include all types of buildings. In Järva they mainly comprise buildings constructed in the 1950s, 1960s and 1970s, slab blocks, tower blocks and balconyaccess blocks. Financial ratios (010) In Stockholm vacancy rates for rented residential property are effectively zero. Svenska Bostäder has a vacancy rate of 4 5% for commercial premises. Gross rental income: Net operating income: Income return (ROI): Equity ratio: Svenska Bostäder has set a target to reduce average energy consumption for its properties as a whole from 175 kwh/m to 15 kwh/m by 00. This means that certain properties will be totally renovated, while no action will be taken in others. The construction of new properties will also help to reduce average energy consumption. Owner directives SEK,643 million SEK 431 million.9% 87.9% contribute to construction of 15,000 new homes. make it possible for tenants to buy their properties and convert their apartments to housing cooperative apartments. actively contribute to investments in the outer areas of the city and continue work on the Järvalyftet ( Järva Lift ) and Söderortsvisionen ( Stockholm South Vision ) projects to develop and improve living conditions. carry out the requisite maintenance work in the company s properties dating from the 1940s and 1950s and increase the renovation and maintenance work in properties that are part of the Million Homes Programme. continually maintain the properties owned and managed by the Stadsholmen property company. continue to further develop quality and service and increase tenants choices. continue efforts to reduce administrative and indirect production costs. continue to transfer parking operations to Stockholms Stads Parkerings AB. facilitate the construction of student accommodation. aim to provide additional inexpensive apartments for young people in the southern part of the city of Stockholm.

15 15 (61) 15 Feb 01 Policies for valuation and accounting. Each individual property is valued annually through an analysis of cash flow based on the trend for net operating income and an assessment of the market s return requirements. Actual operating and maintenance costs are adapted to normal levels to reflect assessed market conditions. Svenska Bostäder has surplus values in its properties. The carrying amount was about SEK 13 billion for 010, while the market value was nearly three times higher (see diagram). The parts of the investment that are covered by increased cash flows (higher revenue and/or lower operating costs) are the only parts that are capitalised in the balance sheet. Remaining amounts are recognised as expense directly in year 1 (NB: This is possible thanks to the company s strong equity ratio and the owner s active strategy in the Stimulus for Stockholm project.) Investments in the properties have a depreciation period of 50 years, which corresponds to depreciation of % per year. On the balance sheet, each property represents a carrying amount. Surplus and deficit values in individual properties may not be offset against each other. There is a problem in the fact that housing companies may not make provisions to maintenance funds. This means that renovation and deferred maintenance cannot be financed using provisions from earnings from operations; instead, funds for this must be taken from the sale of properties, which depletes the property portfolio. In contrast to many other housing companies, Svenska Bostäder is in a position which enables the company to sell off properties for this purpose. Higher market values for the properties are only really affected by differences in cash flows. The return requirement is determined by the market and is more difficult to influence. If rents are increased, there is a risk of the return requirement also being increased; this may result in greater difficulty in renting out properties. Renovation work that improves the appeal of the area does not therefore necessarily lead to a lower risk assessment. This is largely due to the fact that, from the outset, vacancy rates are very low throughout all of Stockholm. The lack of apartments means that even apartments in poor condition can be rented out. Svenska Bostäder Source: Svenska Bostäder s annual report for 010

16 16 (61) 15 Feb 01 The Järva area in the Million Homes Programme. Järvalyftet ( The Järva Lift ) is a long-term collaborative project involving players in the public and private sectors in Stockholm. The aim of the project is to develop the districts of Akalla, Hjulsta, Husby, Kista, Rinkeby and Tensta, which currently have reputations as problem areas, into attractive residential areas. A method for adding prefabricated insulation to the façades will be tes- The residential areas in and around Järvafältet are fundamentally very good areas. They have Metro stations and are close both to green spaces and to major urban centres such as Kista. The areas have, however, had a bad reputation for a long time as the result of socioeconomic factors and segregation. Objectives for energy efficiency improvement in Sustainable Järva The Järva Lift was initiated primarily because the area is run-down and the buildings have reached the end of their technical life. There is a major need for maintenance that must be met. Demolishing the buildings has not been deemed an option; instead the objective here is a thorough renovation of the existing properties. Svenska Bostäder has gone from patching things up to adopting a comprehensive perspective, in which measures in properties and in the area as a whole are implemented simultaneously. This approach paves the way for opportunities to make major improvements in energy efficiency. The Järva Lift includes the Sustainable Järva sub-project, which focuses on environmental, climate and energy issues. Much of the activity in the project relates to extensive renovation measures to improve the energy efficiency of seven properties with a total of 350 apartments. The buildings selected for these comprehensive renovation programmes correspond to the three most common types of building in the Million Homes Programme: balcony-access blocks, highrise apartment blocks and slab blocks. ted and evaluated as part of the project. The plan is to use this new method to install supplementary insulation in each type of building and to compare the result with reference buildings which will be insulated with additional insulation in the traditional way on site. Objective A: Average consumption of purchased energy for heating, hot water and electricity for shared facilities in the seven buildings shall not exceed 88 kwh/m heated area p.a. after the renovations. Objective B: A 10% reduction in consumption of household electricity in the seven renovated buildings. Objective C: A 30% reduction in construction site energy consumption compared with energy consumption on a traditional building site in 009. Objective D: Draw up a method for calculating emissions of greenhouse gases. Objective E: Preserve cultural history values in conjunction with implementing the climate objectives. Objective F: Test and compare prefabricated and in situ techniques for additional insulation of façades. Objective G: Implement positive experiences in Svenska Bostäder s new projects.

17 17 (61) 15 Feb 01 Sustainable Järva. Energy efficiency improvements. Nystad 7 Sibeliusgången, Kv. Nystad 7, is the third building to be renovated in the Sustainable Järva project. The 1-storey high-rise apartment block is situated in central Akalla, a suburb of northern Stockholm. The building contains 99 apartments and the heated area totals 8,440 m. The renovation started in April 011 and work is estimated to be complete in June 01. Measures to improve energy efficiency Additional insulation, attic, 300 mm. Additional insulation, façade, 80 mm. Additional insulation, basement, 80 mm. The first building to be renovated as part of the Sustainable Järva project was a pilot project, which in addition to achieving far-reaching energy efficiency improvements also resulted in exclusively designed apartments. In subsequent renovation activities, the measures have been adapted to cut costs, but the focus remains on halving energy consumption. For example, Nystad 7 has been fitted with additional insulation, draughtproofed and equipped with exhaust and supply air ventilation with heat recovery. Airtightness of the building shell, 0.4 l/s at 50 Pa. Switching to energy-efficient windows, U-value 0.9. Switching to energy-efficient doors, U-value.0. Installation of exhaust and supply air ventilation with heat recovery, efficiency 65%. Installation of low-flow mixer taps. The building s average energy consumption before renovation was 164 kwh/m heated area p.a. The energy efficiency improvement measures are estimated to reduce energy consumption to 78 kwh/m heated area p.a., an efficiency improvement of some 5%. The building has a high proportion of apartment area in relation to the surrounding area, which means that average energy consumption per heated area was relatively low both before and after the renovation. Heat recovery from wastewater. Replacement and fine-tuning of heating systems. LED lighting in bathrooms and stairwells. Nystad 7 at a glance Built: Renovated: Size: Type of building: Previous energy consumption: apartments, 8,440 m heated area High-rise apartment block 164 kwh/m Svenska Bostäder has also previously had a major focus on improving energy efficiency, primarily by fine-tuning and improving existing systems. This has made it possible to reduce energy consumption in many buildings by between 0% and 30%. In some cases the energy savings have led to lower levels of perceived comfort in the apartments. In certain apartments in the Million Homes Programme, temperatures were raised again after tenants complained. To reduce energy consumption further, major measures must be taken to improve building shells and invest in new installations.

18 18 (61) 15 Feb 01 Sustainable Järva. Energy efficiency improvements. Trondheim 4 Trondheimsgatan 30, Kv. Trondheim 4 occupies a central location in the Stockholm suburb of Husby. One of the neighbourhood s four balconyaccess blocks is the fifth building earmarked for renovation in the Sustainable Järva project. In addition to modernisation improvements and energy-efficiency measures, the building will also be complemented with an additional storey containing eight new apartments. Energy consumption in Trondheim 4 was 14 kwh/m heated area p.a. before the renovation. As part of the renovation project, energy-efficiency measures are expected to reduce energy consumption by 56% to 94 kwh/m heated area p.a. The property will have a more efficient heat recovery process for ventilation than Nystad 7, but inferior draughtproofing and insulation of the building shell. Measures to improve energy efficiency Additional insulation, attic, 00 mm. Additional insulation, façade, 50 mm. Additional insulation, basement. Airtightness of the building shell, 1 l/s at 50 Pa. Switching to energy-efficient windows, U-value 1.0. Switching to energy-efficient doors, U-value 1.6. Installation of exhaust and supply air ventilation with heat recovery, efficiency 90%. Insulation of water pipes in connection with replumbing Installation of low-flow mixer taps. Change of substation and heating system. Fine-tuning of heating system. Trondheim 4 at a glance The Trondheim neighbourhood after renovation. (Source: Svenska Bostäder) Built: Renovated: Size before: Size after: Type of building: Previous energy consumption: apartments,,06 m heated area 3 apartments, 3,01 m heated area Balcony-access block 14 kwh/m

19 19 (61) 15 Feb 01 Sustainable Järva. Financial preconditions. The profitability assessment for the Sustainable Järva project is based on a net present value (NPV) analysis of the property s future cash flows. The calculation period is 10 years and the cost of capital is set at 5%, regardless of the location of the property. For Year 11 a residual value is calculated based on the market value of the property. The required return on the residual value is determined by previous transactions, i.e. the market. An individual estimate is made of the profitability of each property and the property must be able to bear the cost of its own investment. Svenska Bostäder does not specify investment separately as energy improvements and other measures, as this would be too complicated and timeconsuming. Although deferred maintenance (which is not classed as an investment) should not properly be included in profitability calculations, in practice it is very difficult to differentiate between maintenance and investment. Svenska Bostäder is a company that adopts a long-term perspective and, in the first instance, makes investments in order to improve net operating income (NOI) and thus increase operating profit. Today the company has a very strong balance sheet but a weak portfolio of properties that give low rates of return. By investing available resources in refurbishment and modernisations, rents can be raised and running and maintenance costs can be reduced, thus strengthening the income statement in the long term. The company believes that it will be in a very strong financial position by 05, with high levels of NOI and minimal maintenance needs. The market value of properties in Järva is relatively low. For this reason, property improvements constitute a large proportion of the original value, in many cases up to 50%. Thanks to the company s robust financial position with a very strong balance sheet, improvements are mainly financed from equity. Svenska Bostäder s annual budget includes SEK 1,400 million for conversions and renovations and SEK million for maintenance. The major investment in maintenance that is now taking place will continue until 00. The Sustainable Järva project has been granted state subsidies to finance further initiatives to improve the properties in terms of sustainability. The subsidies total SEK 55 million and are intended to cover 30% of the extra costs involved in this project. Definition of profitability Commercial and socio-economic ( Stimulus for Stockholm ) Model for profitability analysis Yield valuation Required return Cost of capital, 5%, incl. inflation Financing Equity, state subsidies Impact of investment on company s finances Reduced equity/assets ratio. Lower profits during the years concerned. Long-term improvements in earnings as a result of lower operating and maintenance costs and higher rental income.

20 0 (61) 15 Feb 01 Sustainable Järva. Anticipated outcome. Nystad 7. The cost of improvements to Nystad 7 is estimated to total SEK 11 million, which works out at approx. SEK 1,000/m (Gross floor area/gfa). According to a preliminary cost estimate, SEK 1. million of the total cost (approx. SEK 1,300/m) is attributable to the energy-efficiency measures required to achieve the energyefficiency goals of the Sustainable Järva project, namely measures that reduce energy use to less than 110 kwh/m. Calculations suggest that energy use, which previously amounted to 164 kwh/m heated area p.a., will be reduced to 78 kwh/m heated area p.a. following the implementation of the measures. This represents an energy efficiency improvement of approx. 5%. The target level for Sustainable Järva is to reduce energy use to an average of 88 kwh/m heated area p.a. In its annual report for 010 Svenska Bostäder writes that annual energy costs for its properties as a whole average SEK 165/m. Improving energy efficiency by 5% would save SEK 86/m, provided that energy costs change in proportion to energy consumption. In conjunction with the renovation work, the rent for the apartments in the block can be increased. Prior to the renovation the average rent for a 3-room apartment with kitchen and bathroom was SEK 85/m p.a. The new rent will be SEK 1,00/m p.a., an increase of approx. 4%. These bar charts show the results in terms of energy-efficiency and economy of the improvements made as part of the Sustainable Järva project. The red columns show energy consumption before and after the renovations in Nystad 7, together with the average target level for Sustainable Järva as a whole. The green columns show rent levels before and after, together with an estimate of the general ability to pay in the area. The lilac-coloured column shows the estimated financial saving for reduced energy cost.

21 1 (61) 15 Feb 01 Sustainable Järva. Anticipated outcome. Trondheim 4. The cost of improvements to the building in Trondheim 4 is estimated to total SEK 44 million, which works out at approx. SEK 14,600/m (including the construction of new apartments). When the project was initiated, it was estimated that SEK 10.5 million of the total project investment would be used for measures to achieve the energy efficiency targets set within the framework of the Sustainable Järva project. A preliminary review of the investment suggests, however, that this additional cost will total approx. SEK 5. million, which corresponds to approx. SEK 1,700/m. Calculations suggest that energy use, which previously amounted to 14 kwh/m heated area p.a., will be reduced to 94 kwh/m heated area p.a. following the implementation of the measures. This represents an energy efficiency improvement of approx. 56%. As the project has not yet been completed, no measurements are currently available to confirm the final energy use. As in the case of Nystad 7, running costs for energy use are assumed to total SEK 165/m p.a. Improving energy efficiency by 56% would save approx. SEK 9/m p.a. Prior to the renovation, the norm for rent for a 3-room apartment with kitchen and bathroom in Trondheim 4 was SEK 809/m p.a. in 01. Thanks to the new improved standard of the property, rents can be increased by 17% to SEK 945/m p.a. These bar charts show the results in terms of energy-efficiency and economy of the improvements made as part of the Sustainable Järva project. The red columns show energy consumption before and after the renovations in Trondheim 4, together with the average target level for Sustainable Järva as a whole. The green columns show rent levels before and after, together with an estimate of the general ability to pay in the area. The lilac-coloured column shows the estimated saving for reduced energy costs.

22 (61) 15 Feb 01 Sustainable Järva. Do the measures make financial sense? Svenska Bostäder claims that it is very rare that investment in extensive renovations can be recouped in the form of reduced energy costs and increases in rent. Part of the investment must be expensed as maintenance. The point that Svenska Bostäder is making here can clearly be seen by drawing up a simple investment appraisal with the estimated costs and anticipated return from the investment in the form of rent increases and savings in energy costs. Based on a cost of capital of 5% and a calculation period of 0 years, the present value of the net operating income for Nystad 7 is SEK 3,50/m. That can be compared with the overall project cost of SEK 1,000/m. Capital budgeting: Nystad 7 Using a straightforward payback calculation, without taking the cost of capital into account, the payback period for the improvements made to Trondheim 4 would be close to 43 years. Seen solely in terms of the additional costs for energy efficiency improvements as part of the Sustainable Järva project and the savings in energy costs, the payback period would be approximately 15 years, provided that energy price trends keep pace with the rate of inflation. Assuming that the preliminary cost estimate for Nystad 7 is correct, it may be concluded that it is, first and foremost, the investment required to renovate and improve the property that is not profitable. While the cost of the measures to improve energy efficiency cannot be recouped within the timeframe and at the required rate of return that Svenska Bostäder has laid down, these measures do nevertheless contribute to making the calculation more profitable than if these measures had not been implemented. Profitability in the projects is determined to a great degree by energy price trends. It may be assumed that energy prices will continue to rise by more than inflation, but Svenska Bostäder does not take this into account in its calculations. Cost of capital 5.00% Rise in energy prices 0.00% (over rate of inflation) Calculation period 0 years Energy improvements Sustainable Järva SEK 1,300/m Refurbishment SEK 10,700/m Total project cost SEK 1,000/m Rent increase SEK 195/m p.a. Energy saving SEK 86/m p.a. Anticipated return from investment SEK 81/m p.a. Measures to raise standards SEK,430/m Measures to reduce running costs SEK 1,07/m Investment to raise value SEK 3,50/m

23 RAPPORT 3 (61) Bostads AB Poseidon - Backa Röd. This chapter gives an account of how Poseidon assessed the profitability of the Million Homes Programme area Backa Röd, with the focus on the Katjas Gata conversion project.

24 4 (61) 15 Feb 01 The Bostads AB Poseidon property company. Together we create green homes in which people want to live." During 011, Gothenburg s municipal housing companies will reduce their energy use by 5%. All new production will be designed with well-insulated building shells and energy efficient installations, with a target of energy use that does not exceed 60 kwh/m p.a. Owner directives and objectives of the Municipal Assembly The operations of the housing companies should contribute to the development of Gothenburg. Residents should, via the housing companies, be given far-reaching influence over their homes and their immediate surroundings. Residents should be encouraged to contribute to their own wellbeing by developing a deeper sense of involvement in and greater responsibility for their homes. The environment in Gothenburg should be improved by increasing the proportion of travel by public transport and bicycle in relation to motorised traffic. Many people require homes. Therefore, 1,500 new homes should be built in 010. Poseidon s operations are based on the general objectives of the City of Gothenburg. These have then been broken down into owner directives and more detailed objectives for the City s housing companies (via the Framtiden Group). They include the overarching Green Homes vision that guides the companies energy and environment work. Young people need a good knowledge base. Therefore, the proportion of pupils with the grade pass should increase. Elderly Gothenburg residents need human interaction. Therefore, the opportunities for the elderly to spend time outside their homes and participate in social activities should be improved. Poseidon s financial requirement is to achieve an operating profit of SEK 50 million p.a., after annual maintenance costs of SEK 300 million. The maintenance budget also includes energy and environment meafinancial ratios (010) sures. Many people with mental health disorders currently have no work or home. Therefore, the number of adequate homes and opportunities for meaningful employment should be increased. Gothenburg residents want a clean, safe city. Therefore, there should be less litter, etc. in Gothenburg. To convert knowledge into action, knowledge about gender issues among managers of municipal administrations/companies and among other managers and key individuals should be increased. Electrical efficiency should increase. Consumption of fossil fuels should decrease. Bostads AB Poseidon is one of Gothenburg s biggest housing companies. Its property holdings comprise 36 residential properties with approximately 4,000 apartments. The total residential floor-space amounts to 1.5 million m. Bostads AB Poseidon is wholly owned by its parent company AB Framtiden which, in turn, is wholly owned by the City of Gothenburg. The vacancy rate is low, approximately 0.1%. Gross rental income: Net operating income: Income return (ROI): Equity ratio: SEK 1,555 million SEK 583 million 5.7% 36.4%

25 5 (61) 15 Feb 01 Policies for valuation and accounting. Poseidon s property holdings are valued internally twice a year. Each property is given a yield value that is designed to indicate a market value in the event of sale. To quality-assure the valuation, a representative selection of properties in the holdings is valued externally. The valuation model is based on each property s expected cash flow over 10 years and an estimated residual value in year 11. The cash flow includes rent, normalised operating and maintenance costs and property tax. When estimating future net operating income, assumptions are made about inflation, rent, loss of rent, operating and maintenance costs and property tax. The assumptions vary, depending on the age and location of each property. The location is also reflected in the yield requirements and cost of capital. The yield requirement (i.e. the required return on investment) for housing varies between 3.5% and 7.5%, depending on the location of the property. The requirement is determined on the basis of previous property transactions in each area. Poseidon has a policy of only including value-adding measures in the balance sheet. Value-adding measures are measures that produce a positive change in net operating income, i.e. measures to raise standards or enhance energy efficiency. The remainder is considered to be maintenance and is expensed in year one. The properties book value in 010 was SEK 10,00 million and the estimated market value was SEK 19,500 million. In 010 the company had equity of SEK 3,899 million and an equity ratio of 36.4% in 010. Poseidon s property holdings have been classified internally according to a geographical market division into A, B and C locations. These locations reflect demand and attractiveness. A locations are considered to be most attractive and are usually central. C locations consist mainly of large-scale developments in suburban neighbourhoods. A location B location C location Area Inner city Inner suburbs Outer suburbs Yield value (SEK million) Area (m ) 9,35 9, , , ,000

26 6 (61) 15 Feb 01 Backa Röd. Katjas Gata. Backa Röd is Gothenburg s biggest area from the Million Homes Programme and comprises a total of 1,564 apartments. Backa Röd consists of highrise buildings, low-rise buildings and small tower blocks. Backa is a relatively central suburb of Gothenburg. However, the area has long had a poor reputation and is associated with social problems and crime. The buildings are prefabricated concrete buildings dating from the Million Homes Programme. The supporting walls consist of concrete elements, while the internal walls of the apartments are light and thin. The area has three different types of building: 3-storey slab blocks, small tower blocks with around 0 apartments, and large high-rise apartment blocks of 8 9 storeys. The refurbishment of Backa began in 001 but at that time only minor energy measures were carried out (for example, the installation of lowflow plumbing fittings, replacement of curtain walls and replacement of some windows). The renovations from the earlier period can be seen as standard renovation work with which measures to enhance energy efficiency are now being compared. In this area, as in the rest of the company s portfolio of properties, simple measures to enhance energy efficiency (for example, the fine-tuning of existing systems and a crackdown on energy-wasters) have already been implemented in many buildings. The company s current consumption of district heating is approximately 150 kwh/m p.a. To make further progress, more extensive measures are required in the building shell, as well as investments in new energy system solutions. The city authorities discussed the option of demolishing the buil- dings and building new ones, but this was considered to be unfeasible in practice due to the severe shortage of housing in Gothenburg. Before and after the refurbishment of the Million Homes Programme building on the road Katjas gata in Backa Röd.