DAVIS LANGDON AFRICA REGION PROPERTY AND CONSTRUCTION HANDBOOK 2009
22nd EDITION © 2009
ISBN 978-0-620-43099-9
Published by Davis Langdon, formerly Davis Langdon Farrow Laing, as a service to the property and construction industry
Written and revised by Dr Gerhard Brümmer Research manager Corrie Pienaar Design and layout Glowing Asparagus Design
DAVIS LANGDON AFRICA ESTABLISHED 1922 www.davislangdon.com CONTENTS
Message from the managing director 2 Vision and values 4 BBBEE statement 5 Quality management 6 Research support 8 Sustainability 9 Quantity surveying / cost management 11 Engineering 12 Building services cost management 14 Project management 15 Legal support 17 Valuation services 18 Specification consultancy 19 Application of inclusive rate estimates 22 Approximate inclusive building cost rates 30 International costs 39 International office rental comparison 43 Building cost 45 Graphs (BER and JBCC CPAP) 52 January to January % change 53 January indices 54 Tender market indicator 55 Method for measuring rentable areas 56 Return on investment 63 Residual land value 69 Africa in figures 72 Area and population 73 Graph: population 2006 74 Gross domestic product 2006 75 Graph: gross domestic product 2006 76 Directory of offices 77 Worldwide & associated offices 89 MESSAGE FROM THE MANAGING DIRECTOR
In January last year Davis Langdon decided to implement an international brand programme whereby we revisited our branding globally with a view to moving towards rationalisation of our brand. For a considerable period historically we have not been much more than a quantity surveying firm. However, the range of our service offerings currently indicates that we have become a leading global construction consultancy. Our new brand identity reflects and recognises this different positioning.
I am therefore pleased to announce, that as of early 2009 we have globally launched a new and evolved visual identity, which will be introduced gradually over the coming months. This development was completely managed in-house with cost neutrality our guiding principle. Our core values, and our determination to offer clients the best possible service, remain unchanged. This reflects our confidence in the future, despite worldwide tough economic climates.
Davis Langdon has started with a strategic vision of building on our strengths and exploring opportunities. To this end we have established new offices in Port Elizabeth and Maputo and are on the road to formalizing our relationship with our partners in Nigeria and strengthening our existing presence in Botswana. Africa is the frontier where we want to develop and expand key businesses in order to service our clients in their endeavours. We have approached these existing offices with a spirit of partnership, with local partners retaining stakes in the businesses. We view this approach as being a sine qua non of success.
Our service lines have been expanded with property valuations, specification consulting, project management, facilities management consulting and public private partnerships as further offerings. The above, together with our strengths in quantity
2 DAVIS LANGDON MESSAGE FROM THE MANAGING DIRECTOR surveying and cost management, is being under- pinned by sectors specialisations. Our sectors have been identified as retail, public, education, commercial property, hotels, sports and culture, infrastructure, engineering, industrial and mining. Our investment in research will ensure the required outcomes in these sectors.
Davis Langdon has embarked on a programme of being the employer of choice in South Africa. We value our employees as being the cornerstone of our business and the greatest asset we have. Our employer of choice programme, amongst others, includes aggressive recruitment, talent retention, training and education, staff wellbeing, research and innovation.
Corporate social responsibility is an area close to our hearts and involves charitable giving, involvement with key social projects on a pro-bono basis, sustainability and health and safety. In addition we are in the process of obtaining ISO 14001 accreditation to enshrine our environment, health and safety policies and to enhance sustainable living for the benefit of all.
We have made further strides in our BBBEE commitment and have moved up from being a Level 5 contributor a year ago, to a Level 4 contributor in terms of the Department of Trade and Industry's codes of good practice. We view this milestone as an ongoing quest to achieve the highest possible rating in support of government's initiatives.
The entire Davis Langdon strategy is based on offering our clients optimal outcomes of their construction projects. We await the challenges ahead with anticipation.
INDRESEN PILLAY
MESSAGE FROM THE MANAGING DIRECTOR 3 VISION AND VALUES We seek to build the best and most valued relationships in the industry
PURPOSE Our core purpose is to make a measurable difference to the value, cost and time of our clients' projects
VALUES Our core values are integrity, innovation and collaboration. We create an environment that enables our people to take pride in acting with these values in the things we do
PASSION We are passionate about recruiting and developing the best people, working with the best teams and delivering successful solutions that respect the environment
GOAL To provide services that combine to produce the best project and cost management in our industry BBBEE STATEMENT
Davis Langdon is fully committed to embrace the principles of the Broad-based Black Economic Empowerment Bill No 53 of 2003. We have been independently evaluated and certified in terms of the act for the code of good practice issued under Section 9(1) gazetted on 9th February 2007 and the results are as follows:
Score: 65.7% Level: level 4 contributor Procurement recognition level: 100%
The above scores have been achieved by quantifying all the components of BBBEE, viz:
l ownership; l management control; l employment equity; l skills development; l preferential procurement; l enterprise development; l socio and economic development.
Notwithstanding the above achievements, Davis Langdon has set itself a continuing improvement target in all the above criteria in order to maintain and increase our leading role amongst professionals in the built environment.
BBBEE STATEMENT 5 QUALITY MANAGEMENT
Davis Langdon introduced a quality management system to their offices throughout South Africa in 2001. It is the national policy of the firm that their quality management procedures provide a system of 'best practice' that is utilised to control and maintain the high level of professional service provided to clients and additionally to promote continuous improvement of these services.
The system has been developed, established and documented to ensure that:
l processes needed for the quality management system, and their sequence and interaction, are identified and addressed; l these processes are effectively controlled; l the resources and information needed to support those processes are monitored, measured, analysed and continually improved; l the system is fully documented by means of a quality manual containing policies, objectives and system procedures supported by additional documentation incorporating operational work instructions, practice notes and standards; l all records necessary for demonstrating conformance to requirements and for analysis are held in safekeeping.
This quality management system is accredited to the international standard for quality management, EN ISO 9001:2000 and it is the view of the firm that achieving and maintaining this accreditation is an essential factor in guaranteeing the provision of professional services of a consistently high standard.
6 DAVIS LANGDON QUALITY MANAGEMENT A senior consultant to the firm oversees that section of the practice responsible for maintaining and continually improving the “best practice” procedures within the various Davis Langdon offices throughout the region. Regular surveillance and recertification audits are conducted by DEKRA Certification (Pty) Ltd, an international market leader in certification and testing services, the latest recertification audit being successfully concluded in mid 2007.
It is anticipated that the maintenance and constant improvement of the firm's quality management procedures will certainly ensure that Davis Langdon retains its position as a leader in the field of construction cost consultancy and will continue to provide their clients with an excellent service conforming to the latest international standards.
QUALITY MANAGEMENT 7 RESEARCH SUPPORT
There is in general a shortage of 'in-depth' research in the built environment. Davis Langdon therefore decided for the benefit of our clients and colleagues, to contribute to relevant research in a dedicated and rigorous way.
Research is firstly conducted to support our knowledge data base and existing activities to deliver the highest quality and relevant services. Secondly it serves the purpose to enhance our competitive edge in order to also deliver cost effective services. Thirdly, contract research is undertaken on assignment for clients in order to resolve industry specific problems.
Research activities nationally, regionally and internationally include amongst others, the following:
l cost research; l establishing and maintaining cost indices for various property categories; l cash flow analysis; l collaboration, support and advice to universities, professional bodies and research institutions; l whole life costing; l continuing educational workshops; l industry reports and brochures; l dedicated research collaboration with our international offices with specific reference to: n sport facilities; n special consultancy services; n sustainability; n specialised procurement methods; n airports; n building services; n hotels; n tax; n due diligence ; n tall, large and complex buildings.
8 DAVIS LANGDON RESEARCH SUPPORT SUSTAINABILITY
In the wake of global warming we are facing a planetary emergency. The contribution of construction and operation of buildings to the destruction of the earth compel us to change the methods of the past and to adopt environmentally sustainable development principles.
Davis Langdon, in recognizing our social responsibilities, formed an international sustainability group who is active in research and development of sustainable solutions for developments. The expertise of our international partners is extensive and of great value to us as sustainable practices elsewhere have advanced and progressed by large measures in recent years. For example, in the UK the BREEAM rating system, in Australia the Green Star rating system and in the USA the LEEDS system have been developed. Through their relevant Green Building Councils (GBC) they advocate sustainable principles and methods for property owners and contractors to adhere and aspire to in order to achieve their desired green ratings.
It needs to be mentioned that the Green Building Council South Africa (GBCSA) was established in 2007. Davis Langdon is proud to be associated with the GBCSA and was in fact instrumental to their creation by being a founder member. Also, Davis Langdon assisted the GBCSA on their technical working groups to recently launch the Green Star SA Office rating tool. We intend to support them in their endeavours to develop other rating tools. We also promote sustainable living in buildings. Most Davis Langdon offices abroad have either been accredited or applied to be accredited in terms of ISO14001 in this regard. The Africa Region decided to follow their set examples without any further delay.
SUSTAINABILITY 9 Davis Langdon recently hosted many seminars and published numerous scientific articles on sustainability. Staff from all geographic regions in South Africa completed the Green Star SA accredited professional course and are ready to assist clients and colleagues to also achieve their social responsibilities in addition to their financial or other objectives.
The international sustainability group has developed various sustainability service lines and many are currently being developed. Davis Langdon Africa is fortunate to be ahead of the pack in this regard, as some of these are readily available from our international partners, to be adapted for South Africa and the region.
10 DAVIS LANGDON SUSTAINABILITY QUANTITY SURVEYING / COST MANAGEMENT
Davis Langdon provides comprehensive cost estimating and cost planning services, including viability analysis, to enable budgets to be established and approved. Cost control and monitoring procedures during detail design stage are dynamically implemented and maintained in order to keep budgets relevant. Preparation of procurement documentation to allow competitive tenders to be called for or contracts to be negotiated. This may include pre-qualification documents and formulation of tender and contract conditions to suit particular circumstances. Tender adjudication and assistance with contractor or sub-contractor selection. Being a large practice, we have a comprehensive construction data bank which facilitates contract negotiation. Effective cost planning, cost control and monitoring throughout the duration of a project, including regular issue of cost reports and cash flow projections supported by our excellent IT-infrastructure. Continuous valuation of work for progress payments and determining final values throughout the construction period, including the settlement of the final account. This is achieved in a manner to ensure that the client pays for relevant values as and when expenses are incurred. Our duty of care role to financial institutions on commercial projects is normally regarded as an inclusive service. Value engineering of the designs and concepts to ensure that optimum value for money is achieved. Our services include international procurement of any materials, fittings, equipment and furniture. Principal agency services, when appropriate, ensure a value adding management service complementing our cost control functions.
QUANTITY SURVEYING / COST MANAGEMENT 11 ENGINEERING
Engineering operates as a specialist division within the greater Davis Langdon group and has developed specialist skills and applications that enhance the risk and value management techniques required by the mining, minerals, metallurgical and petro-chemical industries. This includes the constitution of dedicated independent teams specialising in and responsible for the estimating, procurement and cost management activities relative to the above stated industries. Engineering is responsible for many diverse projects within the above mentioned industries with principle benefits to our clients being independence, accountability and evidence of corporate governance.
With offices located in Johannesburg and Klerksdorp, Engineering operates throughout Africa using infrastructure support from other local Davis Langdon offices located in all major centres in South Africa and Botswana. We employ professional qualified quantity surveyors, cost managers, cost engineers, construction programmers, accredited lead assessors and building surveyors.
In the mining, minerals, metallurgical and petro- chemical industries, where projects are generally of a high monetary value, it is most beneficial to involve us at an early stage in the project cycle. This allows for strong financial discipline to be imposed on the project to ensure accurate and structured estimating, timeous and cost effective procurement, accurate and up to date maintenance of costs to completion including the cost management of design changes, and the timeous close-out of contracts. The implementation of these principles of financial management will deliver maximum shareholder value and it is in this area that Engineering strives to significantly influence project outcomes to benefit all stakeholders.
12 DAVIS LANGDON ENGINEERING Davis Langdon Engineering provides a depth of experience, expertise and independence, which will contribute to and complement the client's team. This is critical particularly in the early phases of a project when the opportunity to add value, recognise and define cost, are established. Simultaneously the formalisation of project principles is equally critical, through the project, cost management continuing through to the post-contract period and final closeout.
ENGINEERING 13 BUILDING SERVICES COST MANAGEMENT
Davis Langdon Building Services specialist division, a separate unit within Davis Langdon, draws upon their unique and extensive knowledge, experience and expertise to provide financial management and contract administration of mechanical and electrical engineering services including the following:
l electrical installation; l HVAC installations; l fire protection systems; l fire detection and evacuation systems; l access control; l CCTV; l lifts, escalators, travelators; l communication systems; l building management systems; l security systems; l data systems.
Davis Langdon Building Services provides a comprehensive service including cost advice and quantity surveying services encompassing the following:
l cost planning; l contract procurement; l tender and contract documentation; l cost control; l risk management; l value management; l life cycle and whole life costing.
14 DAVIS LANGDON BUILDING SERVICES COST MANAGEMENT PROJECT MANAGEMENT
Davis Langdon Project Management provides that vital independent and professional service to plan, lead, organise and control the management of projects and programmes, from inception to reality.
Recognised as one of the world's leading providers of management and consultancy services, we employ highly skilled project managers from a broad range of professional disciplines - offering experience across a wide range of sectors.
This equips Davis Langdon Project Management with the in-house skills and market expertise to recognise potential and define objectives from the outset, whilst also ensuring the delivery of value and appropriate management of risk throughout the project cycle.
Our strength lies in an ability to provide a dedicated service on a local, national and international basis. Through our whole business approach to managing projects, we draw on the inherent commercial strength of the practice whilst also delivering a creative and people-based service.
Our services can be tailored to suit the needs of the project and client and include:
l project management; l client's representative; l principal agent; l value and risk management; l programming and planning; l project monitoring; l project consultancy; l development management.
PROJECT MANAGEMENT 15 Davis Langdon Project Management will invariably work with teams that are carefully pre-qualified and selected for their expertise, personnel, enthusiasm and drive to deliver the required results.
Our project managers work together with our clients to manage the appointments of the necessary consultants, including advising on the various methods of selection, the negotiation and agreement of their services and fees. In addition, we will provide a single contact point for the client when dealing with other third parties, contractors and suppliers.
We are committed to building and managing teams with a common culture of delivering excellence and strive to engender healthy and vibrant working relationships throughout the life cycle of the project.
The growth of the service in recent years has been built upon strong alliances with long standing clients and our ability to deliver wherever and whenever required, on time and within budget on a consistent basis.
16 DAVIS LANGDON PROJECT MANAGEMENT LEGAL SUPPORT
Invariably the construction process results in a number of disputes, ignored they have a tendency to escalate and often result in arbitration or litigation. In recognizing this fact Davis Langdon have established over the years a specialist service line to assist their clients in the dispute arena. We are equipped to provide a range of services targeted at being practical, pragmatic and cost efficient. Our services embrace, but are not limited to the following:
l assessment of contractors' claims; l advice on dispute procedures; l provision of adjudication, mediation and arbitration services; l expert witness reports and appearance; l establishment of quantum relating to claims; l delay analysis; l assistance to legal teams.
Davis Langdon is in the unique position of being able to draw on both national and global networks of knowledge and expertise. Our legal support services group has the ability to source leading experts in all fields of construction for the benefit of legal teams and their clients. Our aim is to provide expert advice to reduce risk and to deploy our experience and skills to the benefit of our clients and legal colleagues in a cost effective and efficient manner.
LEGAL SUPPORT 17 VALUATION SERVICES
Davis Langdon's valuation subsidiaries, Davis Langdon Valuation & Building Consultants and Abalaing Valuers specialise in all types of property valuations, including replacement cost analyses for insurance purposes, insurance assessments, estate appraisals, building inspections and pre-blasting surveys.
Our professional team has successfully completed an extensive number of valuations, building inspections and surveys to date for various financial institutions, governmental bodies, 'blue-chip' companies and private individuals.
We offer a countrywide service and are equipped to exceed client expectations on all levels, including quality, turnaround time and pricing structure. We comply with the codes of conduct of the South African Council for the Property Valuers Profession and South African Institute of Valuers.
18 DAVIS LANGDON VALUATION SERVICES SPECIFICATION CONSULTANCY
As the world's leading specification consultancy firm, Davis Langdon Schumann Smith is well established in South Africa.
An experienced team, based in Johannesburg, facilitates local delivery of specifications, in particular 'Africa Spec™', which provides a means of accurate communication between client, designer and those carrying out the construction.
Our service has been prepared for use by employers, architects and engineers.
We compile project specific specifications to reflect:
l the design; l the form of contract; l the procurement process; l programme requirements; l national standards and regulatory standards.
Whilst tailoring the specifications to suit the needs of:
l design teams; l developers; l retailers; l government bodies; l universities; l private practices; l manufacturers; l other parties involved in the design/construction process.
We underwrite our specifications by the guarantees of knowledge, research, experience and professionalism. Through them we aim to add value, ensure quality and reduce the risk on projects.
SPECIFICATION CONSULTANCY 19 A comprehensive specification reduces the contractual risk of all parties, avoids post contract disputes and ensures that everyone is aware of what is being bought before committing to a contract.
Specifications must reflect both the designer's responsibility as set out in his appointment, and the responsibilities of the contractor under the terms of the contract. Our specifications are tailored to suit the needs of the parties involved in the design/ construction process.
As specification consultants, our role is to:
l support the design team; l prepare appropriate documentation; l assist in the procurement process.
We operate as a pro-active member of the design team, attending design review meetings and producing appropriate project specifications that will:
l maintain the architect's/designer's intent; l set accurate technical criteria; l set achievable performance criteria; l allow specialist contractors to provide a design response; l reflect the contractual requirements; l form the basis for checking compliance.
As further services to the construction professionals:
With our joint venture partners we have brought to South Africa a specification software package which has been tried and tested overseas for almost thirty years.
National Building Specification (NBS) is a joint venture between RIBA Enterprises, Klassidex and Davis Langdon Schumann Smith.
20 DAVIS LANGDON SPECIFICATION CONSULTANCY NBS Building SA is a library of pre-written specification clauses with guidance for each clause appearing alongside for speedy referral. The content is delivered on tried and tested software, and specifications are edited on screen.
The NBS Building SA technical team have written the content with the most up to date technical information available and this content, together with its associated guidance clauses will be expanded and updated regularly.
As another development of our service line:
We have recently introduced the concept of 'Design Team Management' to South Africa. Close collaboration with design teams has led to the evolution of our design team management service, the purpose of which is to facilitate the design process by managing issues that impinge on it. This service is based on our contractual, technical and organisational knowledge, deployed to support the working methods of design firms and to protect their interests.
Managing design teams allows us to add value because we understand the design process. We also understand the interface between design and construction, and add knowledge of advanced construction techniques, new procurement routes and industrial technology to the design team.
SPECIFICATION CONSULTANCY 21 APPLICATION OF INCLUSIVE RATE ESTIMATES
22 This section highlights the inherent difficulties and pitfalls that may be experienced when inclusive or single rates are used to establish the estimated cost of a particular building.
Construction cost estimation is complex. Comprehensive exercises based on detailed and accurate information are required to achieve reliable levels of comfort. For various reasons however, decisions are often based on inclusive rate estimates, i.e. rate per m² of construction area or rate per unit in number.
The most widely used method of quick approximate estimating to obtain an indication of the construction cost of a building is by the rate/m²-on-plan method. It is often also referred to as 'order of magnitude'-type methods of cost estimation. It certainly is both quick and convenient but it can be very misleading if used indiscriminately without care being taken in the calculation of the construction area (m²) and the selection of the rate.
Comparisons of the costs of various buildings are often made by comparing the individual rates/m² without due consideration being given to a number of factors that can affect the rate/m² to a substantial degree.
Very often the cost of a building is expressed in R/m² and the unit cost is ignored, if calculated at all. This rate/m² is then used as the sole yardstick of what the building costs. For example, a security guard's shelter measuring 2m x 2m consisting of brick walls with windows, one door and a simple roof construction may cost R6 000/m². This rate when compared with the rate for a 200m² house containing plumbing, carpets, etc. at R4 700/m² would seem to be very expensive. Yet in fact the unit cost of the shelter is R24 000 compared with R940 000 for the house.
APPLICATION OF INCLUSIVE RATE ESTIMATES 23 The following are a few of the important criteria to be taken into account when rates/m² are considered:
1. SPECIFICATION
Two buildings having identical shape and accommodation can have vastly different R/m² rates should the one building have finishes of a differing standard from the other. For example, expensive carpets in lieu of vinyl floor tiles can increase the rate by R100/m².
24 DAVIS LANGDON APPLICATION OF INCLUSIVE RATE ESTIMATES 2. WALL TO FLOOR RATIO - PLAN SHAPE
The most economical shape of a building is a square. This shape requires the minimum wall length to enclose a given floor area, e.g.
Case A 40m
40m
Area 1 600m² Wall length 160m Wall height 3m Wall area 480m² Wall floor ratio 480/1 600 Cost of external facade in terms of R/m² of floor area to each R/m² of facade area 30.0%
Case B 100m 16m
Area 1 600m² Wall length 232m Wall height 3m Wall area 696m² Wall floor ratio 696/1 600 Cost of external facade in terms of R/m² of floor area to each R/m² of facade area 43.5%
APPLICATION OF INCLUSIVE RATE ESTIMATES 25 The rate/m² on plan of a facade costing R600/m² on elevation in each case is:
Case A R600 x 30.0% = R180/m² Case B R600 x 43.5% = R261/m²
The reader with a good knowledge of mathematics will correctly fault the above argument by promoting a circle as being the geometric shape that requires the minimum wall length to enclose a given floor area. In very few cases however, this is the most economical plan shape of a building, as for various reasons the cost of constructing a circular as opposed to a straight external envelope is generally greater than the saving in quantity of the envelope. As the length of the perimeter of a circle is 11.4% less than that of a square enclosing the same area, the unit cost of the circular envelope should not exceed the unit cost of the straight envelope by more than 12.8% for the circle to be the most economical plan shape.
3. FLOOR TO CEILING HEIGHTS
Two buildings of identical plan shape and area but of different floor to ceiling heights will have different rates/m² due to the additional cost of walling, finishes, etc. in the building with the higher floor to ceiling height.
4. PLUMBING, MECHANICAL AND ELECTRICAL INSTALLATIONS
The concentration of plumbing installations has a marked effect on the rate/m² of the building. The cost of a toilet block per m² is much greater than that of a house containing one bathroom because the high cost of the bathroom area is spread over the less expensive areas of the remainder of the house.
26 DAVIS LANGDON APPLICATION OF INCLUSIVE RATE ESTIMATES Similarly in office blocks, factories, etc. the rate/m² will depend greatly on whether air-conditioning, security systems, sprinklers, smoke detection systems, specialised electrical installations, acoustic treatment or other specialised installations are incorporated into the design.
5. CONSTRUCTION AREAS
The rate/m² for a building having large balconies or access corridors that have been included in the construction area cannot be compared with the rate/m² for a building not having similar areas of low cost.
6. INTERNAL SUBDIVISIONS
The rate/m² for open plan offices should not be compared directly with the rate/m² for offices having internal partitions without the relevant adjustments being made. The inclusion of partitions can increase the overall rate/m² by up to R230/m² of office area.
7. PARKING
Should the building in question contain certain areas for parking within the building area, the average rate/m² will be less than for a building having the identical accommodation but with parking outside the building structure, e.g.
APPLICATION OF INCLUSIVE RATE ESTIMATES 27 Case A
Building having parking within the building area
OFFICES Plan area 600m2/floor Construction area 3 000m2 OFFICES
OFFICES
OFFICES
PARKING (600m2) Basement
Cost of building Offices 2 400m² @ R7 000 = R 16 800 000 Parking 600m² @ R3 000 = R 1 800 000 Total R 18 600 000 Average rate/m² R 6 200
Case B
Building having parking outside the building structure and on grade
OFFICES Plan area 600m2/floor Construction area 2 400m2 OFFICES
OFFICES
2 OFFICES PARKING (600m )
Cost of building Offices 2 400m² @ R7 000 = R 16 800 000 Parking 600m² @ R 300 = R 180 000 Total R 16 980 000 Average rate/m² R 7 075
28 DAVIS LANGDON APPLICATION OF INCLUSIVE RATE ESTIMATES Under Case B the area of parking is not included as part of the 'construction area' for purposes of calculating the rate/m².
Similarly the rate/m² for supermarket/ hypermarket shopping centres should be qualified as to whether the cost of on-site parking and ancillary site development has been included, which cost could be in the region of R400/m² of construction area.
There are numerous further points of consideration that should be taken into account in addition to those given above. Amongst these are siteworks (peculiar to each specific contract), number of storeys, floor loadings, column spans, concentration of joinery and other fittings, overall height of building, open atrium upper volumes, etc.
In conclusion, rates/m² must be used with circumspection and the degree of accuracy of the answers provided must be considered to be in direct proportion to the amount of research and study undertaken to establish the rate for the building in question.
APPLICATION OF INCLUSIVE RATE ESTIMATES 29 APPROXIMATE INCLUSIVE BUILDING COST RATES
30 INTRODUCTION
The following, unless otherwise stated, is a list of approximate inclusive building cost rates per m² of construction area for various building types in the Gauteng region. Rates are based on 1 July 2009 and therefore represent the average expected building cost rates for 2009. It is stressed that these rates are purely of an indicative nature and should be used with circumspection, as they are dependent upon a number of assumptions. See 'Application of inclusive rate estimates' herein.
The area of the building expressed before in m² is equivalent to the 'construction area' where appropriate, as defined in the 'Method for Measuring Floor Areas in Buildings' First Edition (effective from 1st August 2005), published by the South African Property Owners Association (SAPOA).
REGIONAL VARIATIONS
Construction costs normally vary between the different provinces of South Africa. Costs in the Western Cape and KwaZulu-Natal, specifically upper class residential, for example, are generally significantly higher than Gauteng due to the demand for this accommodation. Rates have therefore been based on data received from the Gauteng province, where possible. However, specific costs for any region can be given upon request from any Davis Langdon office in that region.
BUILDING TYPE
Rates include the cost of appropriate building services, e.g. air-conditioning, electrical, etc. but exclude costs of site infrastructure development, parking, any future escalation, loss of interest, professional fees and VAT.
APPROXIMATE INCLUSIVE BUILDING COST RATES 31 Offices Rate per m² (excl VAT)
Low rise office park development with standard specification RR 44 800 800 --RR 5 7005 700
Low rise prestigious office park development RR 66 200 200 --RR 9 2009 200
High rise tower block with standard specification RR 77 000 000 --RR 9 2009 200
High rise prestigious tower block RR 99 000 000 --RR1111 000 000
Note: The aforementioned rates include appropriate tenant allowances incorporating carpets, wallpaper, louvre drapes, partitions, lighting, air-conditioning and electrical reticulation.
Parking
Parking on grade including integral landscaping and ground preparation RR 300300 --RR 400400
Structured parking above ground RR 22 500 500 --RR 3 2003 200
Parking in semi-basement RR 22 500 500 --RR 3 4003 400
Parking in basement RR 22 600 600 --RR 3 8003 800
Retail
Suburban strip shopping/ value centre RR 44 500 500 --RR 6 8006 800
Regional shopping centre comprising supermarket chain store, national chains, line shops and enclosed malls RR 66 800 800 --RR 8 0008 000
Note: The above rates include the cost of tenant requirements and specifications of national chain stores.
32 DAVIS LANGDON APPROXIMATE INCLUSIVE BUILDING COST RATES Industrial Rate per m² (excl VAT)
Industrial warehouse including small office area and change facilities within structure (architect/ engineer-designed): - steel frame, corrugated steel cladding and roof sheeting R 22 300 300 --RR 3 5003 500 - steel frame, brickwork to ceiling height, corrugated steel cladding above and roof sheeting R 22 700 700 --RR 3 9003 900 - administration offices, ablution and change room block R 44 600 600 --RR 5 4005 400 - cold storage facilities R 88 000 000 --RR10 10000 000
Residential Rate per no (excl VAT)
Site services to low cost housing stand (250-350m²) R 2020 000 000 --R R3030 000 000 Rate per m² (excl VAT)
RDP housing R 11 000 000 --R R1 2001 200
Low cost housing R 11 800 800 --R R2 9002 900
Simple low rise apartment block R 44 200 200 --R R5 9005 900
Duplex townhouse - economic R 44 200 200 --R R6 0006 000
Prestige apartment block R 66 500 500 --R R1010 000 000
Private dwelling houses: - economic R 2 900 R 2 900 - standard R 4 100 R 4 100 - middle class R 4 700 R 4 700 - luxury R 6 900 R 6 900 - exclusive R 9 500 R 9 500 - exceptional ('super luxury') R 1616 000 000 --R R3232 000 000
Outbuildings R 11 800 800 --R R3 0003 000
APPROXIMATE INCLUSIVE BUILDING COST RATES 33 Rate per no (excl VAT)
Carport (shaded) - single R 2 600 R 2 600 - double R 5 000 R 5 000
Carport (covered)- single R 3 800 R 3 800 - double R 7 000 R 7 000
Swimming pool - not exceeding 50 kl R 55 000 R 55 000 - exceeding 50 kl and not exceeding 100 kl R 5555 000 000 --RR9090 000 000
Tennis court - standard R 120 000 R 120 000 - floodlit R140 000 R 140 000
Clinics
Clinic - 150-bed, 5-theatre (excluding doctors’ accommodation) RR 530530 000 000--RR800800 000/bed 000/bed
Hotels
Limited service RR 380 380 000 000--RR550550 000/key 000/key
Resort style R 1 300 000 - R 1 500 000/key
Luxury RR11 500500 000 --RR22 100 100 000/key Note: The rates stated above for a luxury hotel is based on a hotel having a ratio of approximately 35m² of back-of house and public areas such as conference rooms, entrance foyers, lounges and restaurants per room. This ratio can vary considerably with different types of hotels, e.g. limited service and resort hotels, CBD business hotels or casino complexes.
34 DAVIS LANGDON APPROXIMATE INCLUSIVE BUILDING COST RATES Studios Rate per m² (excl VAT)
Studios - dancing, art exhibitions, etc R 8 0008 000 -- RR 1111 000 000
Conference Centres
Conference centre to international standards R 1515 000 000 -- RR 1919 000 000
Retirement Centres
Dwelling houses - middle class R 4 300 R 4 300 - luxury R 6 100 R 6 100 Apartment block - middle class R 4 500 R 4 500 - luxury R 6 400 R 6 400 Community centre - middle class R 5 900 R 5 900 - luxury R 8 500 R 8 500 Note: The above rates exclude frail care facilities
Schools
Primary school R 4 0004 000 -- RR 5 1005 100 Secondary school R 4 3004 300 -- RR 5 6005 600
Stadiums Rate per no (excl VAT)
Stadium to PSL standards including partial roofing and seating to main stand and VIP areas, public seating on concrete stands and facilities, change rooms, field preparation, irrigation, drainage, access control, PA system and floodlighting R 20R 00020 000- - R 3030 000000/seat/seat
APPROXIMATE INCLUSIVE BUILDING COST RATES 35 Rate per no (excl VAT)
Stadium to FIFA standards including roofed public seating, private suites, bar facilities, change rooms, press and VIP areas, field preparation, irrigation, drainage, access control, PA system, video displays, floodlighting and CCTV R 45 000 - R 60 000 /seat
Stadium pitch to FIFA standards including field preparation, sub-soil drainage, grassing, irrigation and 24-month maintenance R12 000 000 - R15 000 000
Prisons
New generation prison R 160 000 - R 190 000/inmate
BUILDING SERVICES
The following rates are for building services (mechanical and electrical) applicable to typical building types in the categories indicated. Rates are dependent on various factors related to the design of the building and the requirements of the system.
In particular the design, and therefore the cost of air- conditioning can vary appreciably depending on the orientation, shading, extent and type of glazing, external wall and roof construction, etc.
36 DAVIS LANGDON APPROXIMATE INCLUSIVE BUILDING COST RATES Electrical installation Rate per m² (excl VAT)
Office buildings - standard installation RR280 280- -RR400 400
Office buildings - sophisticated installation RR 400400 -- RR 500500
Residential RR300 300- -RR420 420
Shopping centres RR450 450- -RR500 500
Hotels RR600 600- -RR750 750
Electronic installation (offices)
Access control RR75 75 -- RR 150150 Fire detection RR65 65 -- RR 120120
CCTV RR130 130- -RR170 170
Data installation RR450 450- -RR650 650
Fire protection installation (offices)
Sprinkler system including hydrants and hose reels (excluding void sprinklers) RR130 130- -RR200 200
Air-conditioning installation
Ventilation to parking/ service areas RR150 150 -- RR 300300
Office buildings - console Units RR400 400- -RR480 480
Office buildings - console/ split units RR500 500- -RR650 650
Office buildings - package units RR650 650- -RR900 900
Office buildings - central plant RR900 900- -RR1 2001 200
APPROXIMATE INCLUSIVE BUILDING COST RATES 37 Rate per m² (excl VAT)
Residential - split units RR600 600- -RR950 950
Shopping centres - split units RR550 550- -RR680 680
Shopping centres - package units RR600 600- -RR1 2001 200
Hotels - public areas RR900 900- -RR1 5001 500
Hospitals - split units to wards R 1 2001 200- -RR1 4001 400
Rate per no (excl VAT)
Hotels - console units RR1111 000 000--RR1616 000 000/key/key
Hotels - split units RR2323 000 000--RR3232 000 000/key/key
Hotels - central plant RR4040 000 000--RR6060 000 000/key/key
Hospitals - operating theatres RR200200 000 000--R700R700 000/theatre 000/theatre
Note: See note on page 34 with regard to hotels.
38 DAVIS LANGDON APPROXIMATE INCLUSIVE BUILDING COST RATES INTERNATIONAL COSTS
39 INTERNATIONAL BUILDING COSTS
The following table (Africa) (see page 41) presents, in summarised form, the approximate estimated costs per square metre for two different types of office buildings, namely:
1. Three-storey commercial offices, air-conditioned, with no basement and including allowance for tenants' installation.
2. High rise prestige offices, air-conditioned, with no basement and including allowance for tenants' installation.
The indicated approximate costs include mechanical and electrical installations but exclude professional fees.
These costs are indicative only and should be considered in the context of acceptable building standards in each particular country.
These standards, both at a technical level and pertaining to quality, do vary from country to country, therefore the building costs must be seen as being for the normal standards prevailing in each particular region. This being the case, these costs must be used with circumspection.
The cost data under the international building cost rate comparison heading was made available by Davis Langdon Australasia and their assistance in this regard is acknowledged with thanks.
40 DAVIS LANGDON INTERNATIONAL BUILDING COSTS Note: The conversion to US Dollars is based on approximate exchange rates as at December 2008 (i.e. R10.00/USD). Rates represent the average expected construction cost rates for 2009 and exclude VAT, but include general sales tax (GST) where applicable.
INTERNATIONAL BUILDING COSTS 41 Note: Large fluctuations in exchange rates can create short-term anomalies. Prices exclude land, professional fees, tenant fitout, equipment and VAT. * Incl FF&E
42 DAVIS LANGDON INTERNATIONAL BUILDING COSTS INTERNATIONAL PRESTIGIOUS OFFICE RENTAL COMPARISON: USD/m2 p.a.
INTERNATIONAL RENTAL COSTS 43 Note: Rates are applicable as at 1 January 2009 and exclude VAT, but include GST where applicable.
Above are gross rentals and include operating costs and municipal costs, but exclude VAT and electricity/water consumption.
44 DAVIS LANGDON INTERNATIONAL BUILDING COSTS BUILDING COST
45 1. BUILDING COST
The meaning of building cost depends on the application thereof in context. A building contractor, for example, may refer to building cost as the cost of labour, material, plant, fuel and supervision. In contrast, a developer may refer to building cost as either the tender price from the contractor or to the ultimate cost of the project, which could include professional fees, plan approval fees, escalation, loss of interest, etc.
For the purposes of this document building cost shall be deemed to mean the tender price (or negotiated price) submitted by the building contractor.
2. ESCALATION RATE
There seems to be two popular methods of calculating and expressing percentage annual increases, namely the average rate and the year-on- year rate. The average rate is of no real use in calculating escalation and is of general interest only. The year-on-year rate should be used in escalation calculations, taking cognisance of actual project programmes.
The average rate compares the indices for each month (or quarter) of the year with those of the corresponding months (or quarters) of the preceding year and calculates the average of these, which is then quoted as the average annual increase for that particular year.
The year-on-year rate compares the January (or December) index with the index for the corresponding month of the previous year and reflects the increase over that year.
46 DAVIS LANGDON BUILDING COST There could be a significant difference in the two rates in question, for example in 2002 the year-on-year rate of building cost inflation in South Africa was 12.3% but the average annual rate (comparing monthly indices) was 15.7%.
3. CALCULATION OF ESTIMATED ESCALATION OF CONSTRUCTION CONTRACTS
Pre-contract
Construction cost, for various reasons, change on an on-going basis. Provision should therefore be made for the changes in tender prices during the period from the date of the estimate to the expected tender date. When the said increase is added to the estimated current building cost, the total will equal the anticipated tender amount.
It is calculated by multiplying the estimated current building cost by the average estimated monthly percentage increase and by the number of months from the date of the estimate to the tender date.
Contract price adjustment
Provision is made for the escalation in building cost during the contract period. The Joint Building Contracts Committee - Series 2000 Contract Price Adjustment Provisions (JBCC CPAP) formula provides for 85% of the contract amount to be subject to escalation adjustment - the remaining 15% to stay fixed. Furthermore, a factor must be introduced to take account of the cash flow of payments during the construction period - usually 0.6 is acceptable if a short method of calculation is employed.
BUILDING COST 47 The total escalation during the contract period is therefore calculated by multiplying the anticipated tender amount by 0.85 and 0.6 and then by the estimated monthly percentage increase indicated by the relevant indices incorporated in the JBCC CPAP formula and by the contract period expressed in months.
4. TENDER PRICE ESCALATION
The annual year-on-year increases in building costs (i.e. tender prices) based on the indices published by the Bureau for Economic Research, University of Stellenbosch (BER) (January to January of each year) and for JBCC CPAP formula (work group 181 'commercial/industrial buildings') published by Statistics South Africa (P0151), are as follows:
48 DAVIS LANGDON BUILDING COST Note: The average annual increases indicated by the BER in their publications are the average of the quarterly increases for that year and may not correspond to the above year-on-year increases. The difference between the tender price escalation and the escalation according to the indices incorporated in the JBCC CPAP formula for any one period, may be attributed to the market factor, which incorporates the contractor's mark-up, productivity, availability of materials, etc. * Forecast based on information provided by Medium-Term Forecasting Associates Building Economists, Stellenbosch.
BUILDING COST 49 5. TENDER CLIMATE
The column marked 'TMI' (tender market indicator), gives an indication of the tender climate. The building cost index, as published by the BER and which is based on tender prices, has been deflated by the index for JBCC CPAP work group 181, which is based on the cost of labour and material. The result is the movement of tender prices excluding the influence of market costs of labour and material, giving an indication of competitiveness of tendering. It represents a comparison or rate of change of BER and JBCC CPAP indices.
When the TMI (see graph on page 55) shows a downward gradient, this indicates a favourable tender market, i.e. the next point is numerically less than the previous, which results from the calculation of BER ÷ JBCC CPAP and indicates that the increase in BER (tender index) is less than the increase in the JBCC CPAP index; therefore a favourable tender market from the viewpoint of the employer exists.
Conversely, if the graph has an upward gradient, the increase in BER is greater than the increase in JBCC CPAP indices indicating an unfavourable tender market from the viewpoint of the employer and it would be prudent to recommend negotiation as opposed to tendering.
This tendency is also apparent on the cost indices graph (see page 54). When the two lines (JBCC CPAP and BER) converge, i.e. JBCC CPAP is 'dropping' and BER is 'rising', then rather negotiate. When the two lines diverge, i.e. JBCC CPAP is 'rising' and BER is 'dropping', then rather proceed to tender.
Base dates: To allow for comparison of indices, a factor has been introduced resulting in an equal base to both BER and JBCC CPAP indices (i.e. January 2000 = 100).
50 DAVIS LANGDON BUILDING COST 6. UNIQUE LARGE SCALE PROJECTS
Building cost estimation seems to become more complex when unique circumstances prevail. For example, and in anticipation of the Soccer World Cup 2010, many new construction works and associated infrastructure projects are currently under construction. Projects of such magnitude can only be constructed by major contractors possessing the required expertise and resources. It is apparently experienced throughout that the unit costs of these projects are significantly higher than originally anticipated. Selected contractors at this level have little competition, and based on a favourable supply and demand market for them, priced accordingly, resulting in clients' cost overruns, causing severe pressure on budgets.
7. VALUE ADDED TAX
As the majority of developers are registered vendors in the property industry, any value added tax (VAT) paid by them on commercial property development is fully recoverable. Therefore to reflect the net development cost, VAT has not been allowed for in the above rates. Should the gross cost (i.e. after VAT inclusion) be required, then VAT at the ruling rate (currently 14%) should be added to all the above rates.
Cognisance should be taken however, of the effect of VAT on cash flow over a time period. This will vary according to the payment period of the individual vendor but in all cases will add to the capital cost of the project to the extent of interest on the VAT outstanding for the VAT cycle of the particular vendor.
BUILDING COST 51 GRAPHS BER AND JBCC CPAP
52 JANUARY TO JANUARY %Change
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3 E G
A 2 T N E
C 1 R E P 0 00 01 02 03 04 05 06 07 08 09 10 11
YEAR
BER JBCC CPAP
GRAPHS: BER AND JBCC CPAP 53 JANUARY INDICES
360
340
320
300
280
260
240
220
200
180
160
140
120
100 00 01 02 03 04 05 06 07 08 09 10 11 12 YEAR
BER JBCC CPAP
54 DAVIS LANGDON GRAPHS: BER AND JBCC CPAP TENDER MARKET INDICATOR BER deflated by JBCC CPAP
1.45
1.40
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
0.95 00 01 02 03 04 05 06 07 08 09 10 11 YEAR
Note: This graph gives an indication of the tender climate. It is the result of the relationship between BER and JBCC CPAP. Refer section 5, page 50.
GRAPHS: BER AND JBCC CPAP 55 METHOD FOR MEASURING RENTABLE AREAS
56 INTRODUCTION
In the past many landlords and developers have derived methods for calculating the rentable areas in buildings. The current, most commonly used is the method recommended by SAPOA entitled 'Method for Measuring Floor Areas in Buildings' First Edition (effective from 1 August 2005). It replaces the document 'The Sapoa Method for Measuring Floor Areas in Commercial and Industrial Buildings' (updated August 1991). It should be noted, however, that the latest edition is approved for use from the 1st of August 2005 and that it should not be applied retrospectively.
Notwithstanding or detracting from the above publication, and by kind permission of SAPOA, we have abbreviated and simplified for easier understanding the definitions contained in that document, together with our comments on the use of rentable areas as follows:
The document separately provides methods for measuring floor areas of:
l offices of all types; l retail developments, including malls, stand alone, strip and value centres/warehouses; l industrial developments, including factories, warehouses, mini-units and trading warehouses, multi-storey and the like; l residential buildings, including houses, flats/ apartments, townhouses, cluster houses, etc.
For 'offices of all types’ referred to above, the following definitions and explanations are applicable:
METHOD FOR MEASURING RENTABLE AREAS 57 1. THE BASIS
The basis used in calculating the rentable area, is the measurement of useable area together with common area and supplementary area, which is determined at each level of offices. Unless otherwise indicated, the unit of measurement is given in square metres (m²).
2. AREA DEFINITIONS
2.1 Construction area
The entire covered built area; this is the sum of the areas measured at each floor level over any external walls to the external finished surface.
Only the lowest levels of atria are to be included, and all openings on other levels to form atria, are to be excluded.
2.2 Rentable area
The total area of the building enclosed by the dominant face, adjusted by deducting major vertical penetrations. No deduction shall be made for columns.
Its intended use is in determining the revenue producing area of a building, which comprises rentable area, supplementary area and parking. It is also used by those analysing the economic potential of a building.
Rentable area shall have a minimum floor-to ceiling height of 1.5m.
Rentable area comprises useable area plus common area.
Rentable area excludes supplementary area, which may produce additional revenue.
58 DAVIS LANGDON METHOD FOR MEASURING RENTABLE AREAS 2.3 Useable area
Area capable of exclusive occupation by the tenant. The total area of the building enclosed by the dominant face, adjusted by deducting all common area and major vertical penetrations. No deduction shall be made for columns.
Its intended use is to be the essential part of rentable area and the basis for the apportionment of common area.
2.4 Common area
Common area is an area to which the tenant has access and/or use, and is part of rentable area. Primary common area of the building is apportioned to tenancies pro-rata to the useable area of that tenancy. Secondary common area is apportioned only to tenancies that it services.
Common area has two components:
l Primary common area comprises all rentable area on a given floor, that is not useable area, together with remote common area, which comprises areas such as entrance foyers, plant and service rooms, or any other portion of rentable area not located on the given floor.
l Secondary common area comprises areas beyond primary common area giving access to multiple tenancies. Accordingly, this area may vary over the life of a multiple tenancy building.
METHOD FOR MEASURING RENTABLE AREAS 59 2.5 Supplementary area
Any additional revenue-producing component that falls outside of the definition of rentable area. Supplementary area need not be weatherproof, and includes - for example - storerooms, balconies, terraces, patios, access/service passages and signage/ advertising areas and parking areas demarcated for the use of the tenant.
Parking bays shall be given in number.
3. GENERAL DEFINITIONS
3.1 Atrium
A weatherproof interior space, accessible and capable of use by the tenant at the lowest level. Voids in floors above atrium space shall not be included in rentable area.
3.2 Entrance foyer
A portion of remote common area including associated adjacent rooms and lobby.
Lift lobby and entrance foyers that occur together with parking floors (not adjacent to office areas) shall be remote common area.
3.3 Major vertical penetrations
Stairs and landings, lift shafts, flues, pipe shafts, vertical ducts, and the like, and their enclosing walls; exceeding 0.5m² in area shall be deducted from rentable area.
60 DAVIS LANGDON METHOD FOR MEASURING RENTABLE AREAS 3.4 Remote service areas and plantrooms
Remote refuse rooms, electrical sub-stations, transformer rooms, central air-conditioning plantrooms and lift motor rooms shall be included in primary common area.
3.5 Storage areas
Dedicated storage areas within useable area, shall be included as useable area.
Dedicated storage areas are separately listed as supplementary areas.
4. RETAIL, INDUSTRIAL, RESIDENTIAL AND OTHER DEVELOPMENTS
Similar provisions have been made for measuring floor areas of retail, industrial and residential buildings referred to above. For detailed information it is suggested that the relevant sections of the said document be carefully studied.
Above method is designed to accommodate the measurement, as far as practical, of most building types, however, certain building types such as hotels, leisure and sport centres, petrol stations, hospitals, law courts, retirement villages and others may only be able to utilise the underlying principles adopted within this method.
METHOD FOR MEASURING RENTABLE AREAS 61 GENERALLY
Developers and financiers are constantly attempting to either reduce building costs or increase rental levels to achieve higher returns. When these parameters are exhausted, it becomes incumbent on the architects and designers to design more efficiently. One must therefore understand the complete 'SAPOA Method for Measuring Floor Areas in Buildings', First Edition and implement the various facets of the definitions to achieve higher efficiencies between the various areas.
The initial return is more sensitive to an increase in rental income (which can be affected by increasing the rental area) than the corresponding percentage reduction in construction costs.
Once again, the above has been produced as a quick guideline only, and should not be used in preference to the SAPOA publication, which is far more comprehensive and detailed. We are thankful to SAPOA for their permission to use extracts from this publication.
62 DAVIS LANGDON METHOD FOR MEASURING RENTABLE AREAS RETURN ON INVESTMENT
63 1. CRITERIA TO BE EMPLOYED
There are two distinct criteria generally used for evaluating the financial viability of a property investment, namely:
l The initial return; and l The cash flow analysis.
2. THE INITIAL RETURN
The initial return is based on the net income during the first year of operation of the development. The return is expressed as a percentage per annum of the anticipated capital investment. Escalation in construction cost and cost of capital are both taken into account in an effort to incorporate the 'time value of money'.
The major advantage of employing the initial return method is that expenses and income do not have to be escalated too far into the future and these are therefore relatively accurate and relatively easily understood in today's money terms. The fact that the first year of operation may have a higher vacancy factor than subsequent years should be ignored when the initial return is calculated in order to reflect long term potential more accurately.
The initial return should be qualified as follows:
l All expenses and income have been escalated to the construction completion date. l Interim income received prior to the construction completion date has been deducted from the capital investment after adjusting for operating expenses and cost of capital.
64 DAVIS LANGDON RETURN ON INVESTMENT l The returns are expressed as percentages of the escalated capital investment and do not take into account loans, loan repayments or interest charges on loans. l The calculated returns are for the first complete year of operation only and do not cater for the following:
n the project may not reach full maturity during the first year of operation; n vacancies; n recoupment of capital during the income- bearing period of the investment or realisation value of the investment at the end of the investment period; n income tax.
3. CASH FLOW ANALYSIS OVER A PREDETERMINED PERIOD
In the cash flow method the income and expenditure cash flow over the economic lifespan of the investment is taken into account. Usually an internal rate of return (IRR) and/or a net present value (NPV) is employed to evaluate the financial viability.
The NPV (discounted cash flow) method works as follows: determine the sum of all cash flows (both in- and outflows and initial investment) and discount to present values at the project's cost of capital. With a positive NPV the project can be accepted and it should be rejected if the NPV is negative.
The IRR is the rate of interest that equates the present value of the expected future net income with the present value of the cost of the investment. The NPV would therefore be exactly zero if the IRR is used as the discount rate. The IRR of an investment is generally used by institutional investors, as it is a comparative indication of the profitability of alternative investment options.
RETURN ON INVESTMENT 65 A weakness of the IRR calculation is the fact that an implicit assumption is made that cash flows are reinvested at the project's own IRR. The modified internal rate of return (MIRR) overcomes this problem by assuming that cash flows are reinvested at the cost of capital rate (or any other given rate), and may be calculated in addition. As the cost of capital rate is normally determined at a lower rate than the IRR, it can be assumed that the MIRR-calculation will always render a lower result.
The assumptions on which the cash flow return is based should be listed. These should inter alia include the assumed investment period (e.g. 20 years after the construction completion date), that income has been taken into account at the beginning of each month and expenditure at the end of each month, the terminal value, escalation in rental and operating expenses over the investment period, etc.
It is suggested that, where applicable, a comprehensive financial viability analysis should incorporate both the initial return and the cash flow method of evaluation. It is of significance to notice by informal observation, by the experienced analyst, that there is a close relationship between the initial return and the IRR - to be applied with care, however!
66 DAVIS LANGDON RETURN ON INVESTMENT EXAMPLE
Total capital expenditure (investment) R100 000 000 Rental in first year (net income) R 10 500 000 Initial return in first year 10.50% Escalation in net rental income 9.00% p.a.
Net cash flow
Year 0 -100 000 000 Year 1 10 500 000 Year 2 11 445 000 Year 3 12 475 050 Year 4 13 597 805 Year 5 14 821 607 Year 6 16 155 552 Year 7 17 609 551 Year 8 19 194 411 Year 9 20 921 908 Year 10 22 804 879 Year 11 24 857 319 Year 12 27 094 477 Year 13 29 532 980 Year 14 32 190 948 Year 15 35 088 134 Year 16 38 246 066 Year 17 41 688 212 Year 18 45 440 151 Year 19 49 529 764 Year 20 53 987 443 (+ terminal value) 560 441 075 614 428 518
The IRR with 9.00% annual escalation in rental is 19.50%.
RETURN ON INVESTMENT 67 The terminal value is subjective and in this example has been assumed as the capitalised value of the anticipated rental in year 21 (i.e. R53 987 443 + 9.00% = R58 846 313) capitalised at the initial yield, i.e. 10.50%.
Should the terminal value be assumed to be nil (this is unlikely as the land parcel will always have a value), the IRR drops to 16.92%.
A rule of thumb for the calculation of the approximate IRR for an investment is that it is equal to the sum of the initial return plus the escalation rate (assumed to be constant over the investment period), provided that the terminal value is calculated as in the given example, i.e. the capitalised value of the anticipated rental in the year after disposal assuming a capitalisation rate equal to the initial return.
Thus, in the given example, the initial return is 10.50%, the escalation rate is 9.00% and the approximate IRR is the sum of the two, i.e. 19.50%.
68 DAVIS LANGDON RETURN ON INVESTMENT RESIDUAL LAND VALUE
69 INTRODUCTION
The calculation of the residual land value for a predetermined rate of return, i.e. what a developer can afford to pay for a parcel of land given a specified return for a particular development, is as follows:
Return = net annual income total capital outlay (TCO)
= net annual income y + x
(where y = TCO excluding land value and its corresponding loss of interest and x = land value and its corresponding loss of interest)
Therefore = net annual income x - y return
Now x = land value + loss of interest = future value of land
Therefore to obtain present land value, i.e. land value excluding its corresponding loss of interest, merely discount x at the interest rate and period used in the previous calculations of TCO.
70 DAVIS LANGDON RESIDUAL LAND VALUE EXAMPLE
What price should be paid for land to obtain a return of 10.00% p.a. with a net annual income of R6 000 000 and the following capital outlay?
Estimated escalated building cost R 38 150 000 Professional fees R 5 725 000 Legal and plan approval fees R 45 000 Interim rates on ground during construction period R 265 000 Loss of interest and/or bond interest at 10.5% p.a. compounded monthly over a 15 month construction period R 3 180 000 Total capital outlay excluding land cost (y) R 47 365 000
x = net annual income - y return
= R 6 000 000 - R47 365 000 0.10
= R12 635 000
Therefore land value is R12 635 000 discounted at 10.5% p.a. over 15 months = R 11 087 204 (say) R 11 000 000
The above residual value is very sensitive to changes of the required rate of return, otherwise known as the capitalisation rate (CAP rate), and careful consideration should be given to this rate taking into account the risk profile of the proposed development.
RESIDUAL LAND VALUE 71 AFRICA IN FIGURES
72 AREA AND POPULATION s e 6 c e - 0 n g 0 0 n y e a 0 t 2 l o i a i 0 ) ) a p l s ² ² e 2 l % v o i e n r l e m p g h m e a r a t m k a k 9 d f 6 p . d u r 6 6 w 4 r 0 o 0 p p n n 0 e 0 - o V e 0 0 I o o v a r 0 n 0 5 0 p 2 L ( P 2 A a g 2 P ( H % 1
Angola 1 247 16.0 2.8 13 3.7
Botswana 582 1.8 0 3 *
DRC 2 345 59.0 2.8 26 3.2
Ghana 239 23.0 2.1 99 2.2
Kenya 580 35.0 2.3 62 6.7
Lesotho 30 1.8 0 59 *
Malawi 118 13.0 2.2 140 14.1
Mozambique 802 20.0 2.0 26 16.1
Namibia 824 2.0 1.3 2 19.6
Nigeria 924 145.0 2.5 159 3.9
South Africa 1 221 47.0 1.2 39 15.6
Swaziland 17 1.1 1.2 65 *
Tanzania 945 39.0 2.6 45 7.0
Uganda 241 30.0 3.4 152 6.4
Zambia 753 12.0 1.7 16 15.6
Zimbabwe 391 13.0 0.6 34 20.1
Source: World Development Report 2008 * Figures not available
AFRICA IN FIGURES 73 POPULATION 2006
150
140
130
120
110
100
90
80
70
60
50
40
30
20 N O I
L 10 L I M
0 I E E A A A A A A A A A A C O D I I I I Y W L C U D R N N H N W I R B B N A O I N T Q A A D N A B E R I A L M E G O L A H M A F Z G W I B A A I K S N A G G A S B Z N Z
M E M N A T U N A A M L A H I O T Z T W Z B S O U O M S
74 DAVIS LANGDON AFRICA IN FIGURES GROSS DOMESTIC PRODUCT (AT CONSTANT 2006 PRICES)
Average Per capita USDm USDm annual GNI USD growth rate 1990 2006 2006 2000-2006
Angola 10 260 44 033 11.1 1 980
Botswana 3 766 * * 5 900
DRC 9 348 8 543 4.7 130
Ghana 5 886 12 906 5.3 520
Kenya 8 533 21 186 3.8 580
Lesotho 622 * * 1 030
Malawi 1 803 2 232 4.1 170
Mozambique 2 512 7 608 8.2 340
Namibia 2 340 6 372 4.7 3 230
Nigeria 28 472 114 686 5.9 640
South Africa 111 997 254 992 4.1 5 390
Swaziland * * * 2 430
Tanzania 4 220 12 784 6.5 350
Uganda 4 304 9 322 5.6 300
Zambia 3 288 10 907 4.9 630
Zimbabwe 8 784 5 010 -5.6 340
Source: World Development Report 2008 * Figures not available
AFRICA IN FIGURES 75 GROSS DOMESTIC PRODUCT 2006
USD million Per capita GNI USD
260 000 6396
240 000 5863
220 000 5330
200 000 4797
180 000 4264
160 000 3731
140 000
3198 120 000
2665 100 000
2132 80 000
1599 60 000
1066 40 000
20 000 533
0 I 0 E E A A A A A A A A A A C O D I I I I Y W L C U D R N N H N W I R B B N A O I N T Q A A D A N B E R I A L M E G O L A H M A F Z G W I B A A I K S N A G G A S B Z N Z
M E M N A T U N A A M L A H I O T Z T W Z B S O U O M S
76 DAVIS LANGDON AFRICA IN FIGURES DIRECTORY OF OFFICES
77 AFRICA REGION
CORPORATE Business address: 3rd Floor, MPF House 32 Princess of Wales Terrace Sunnyside Office Park Parktown, Johannesburg South Africa Tel: +27 (0) 11 544 1800 Fax: +27 (0) 11 642 2289 E-mail: [email protected] Managing director: Indresen Pillay Non-executive director: Hatla Ntene Group financial manager: Laurie Drake Financial manager: Duncan Bowie Research manager: Corrie Pienaar INTERNATIONAL Business address: 3rd Floor, MPF House 32 Princess of Wales Terrace Sunnyside Office Park Parktown, Johannesburg South Africa Tel: +27 (0) 11 484 2330 Fax: +27 (0) 11 484 2361 E-mail: [email protected] Directors: Indresen Pillay Rob Black QUANTITY SURVEYING / COST MANAGEMENT
Bloemfontein
Business address: 4 Langeberg Ave, Bainsvlei Bloemfontein, South Africa Tel: +27 (0) 51 451 1548 Fax: +27 (0) 51 451 1832 E-mail: [email protected] Director: Johan Kemp Office manager: Louis Butler
78 DAVIS LANGDON DIRECTORY OF OFFICES Cape Town
Business address: 45 Buitengragt Street Cape Town, South Africa Tel: +27 (0) 21 423 7840 Fax: +27 (0) 21 423 7841 E-mail: [email protected] Directors: Nigel Sessions Martin Meinesz Associates: Billy Abelman Tim Smith
Durban
Business address: 17 The Boulevard Westway Office Park Westville, Durban South Africa Tel: +27 (0) 31 275 4200 Fax: +27 (0) 31 265 0038 E-mail: [email protected] Directors: Andries Schoeman Roy Turner Local directors: Dean Narainsamy Rakesh Patel
George
Business address: 97 Mitchell Street George South Africa Tel: +27 (0) 44 873 5070 Fax: +27 (0) 44 873 3931 E-mail: [email protected] Director: Dean Chandler Associate: Emil Altona
DIRECTORY OF OFFICES 79 Johannesburg
Business address: 3rd Floor, MPF House 32 Princess of Wales Terrace Sunnyside Office Park Parktown, Johannesburg South Africa Tel: +27 (0) 11 544 1800 Fax: +27 (0) 11 642 2289 E-mail: [email protected] Directors: Indresen Pillay Kevin Pickup Alastair Reid Pusetso Makote Auret van Lille Craig Stuart Associates: Thomas Fuller Sean Forbes
Klerksdorp
Business address: 2nd Floor, 22 Boom Street Klerksdorp South Africa Tel: +27 (0) 18 464 1641 Fax: +27 (0) 18 464 1644 E-mail: [email protected] Director: Bertus van Eeden Associate: Stephanus de Vos
Pietermaritzburg
Business address: 300 Jabu Ndlovu Street Pietermaritzburg South Africa Tel: +27 (0) 33 345 8371 Fax: +27 (0) 33 394 9201 E-mail: [email protected] Director: Roy Turner Associate: Noel Stevens
80 DAVIS LANGDON DIRECTORY OF OFFICES Port Elizabeth
Business address: 25A Frank Street Newton Park, Port Elizabeth South Africa Tel: +27 (0) 41 365 6221 Fax: +27 (0) 41 365 6246 E-mail: [email protected] Director: Dean Chandler Office manager: Craig Mackenzie
Port Shepstone
Business address: Suite 7, Portston Centre Aiken Street Port Shepstone South Africa Tel: +27 (0) 39 682 4114 Fax: +27 (0) 39 682 3584 E-mail: [email protected] Director: Roy Turner Office manager: Geoff Wallace
Pretoria
Business address: 1st Floor, Lakeview II 138 Middel Street New Muckleneuk, Pretoria South Africa Tel: +27 (0) 12 460 5100 Fax: +27 (0) 12 460 5677 E-mail: [email protected] Directors: Pieter Rossouw Don Reid Gerhard Brümmer Andries Cilliers Tobie van Wyk Johan Kemp Local director: Karl Röhrs
DIRECTORY OF OFFICES 81 Richards Bay
Business address: Zululand Chamber of Business Foundation Office Park South Central Arterial Alton, Richards Bay South Africa Tel: +27 (0) 35 797 3039 Fax: +27 (0) 35 797 3977 E-mail: [email protected] Director: Roy Turner Office manager: Jeffrey Khumalo
Stellenbosch
Business address: Time Square, 9 Electron Street Technopark, Stellenbosch South Africa Tel: +27 (0) 21 880 8300 Fax: +27 (0) 21 880 2984 E-mail: [email protected] Directors: Sam Kelbrick Ian Sutherland Francois du Toit
BOTSWANA
Davis Langdon Botswana
Business address: Plot 20620, Unit 9 Samedupe Road Broadhurst Industrial Gaborone Botswana Tel: +267 390 0711 Fax: +267 395 7550 E-mail: [email protected] Directors: Fred Selolwane Rob Black
82 DAVIS LANGDON DIRECTORY OF OFFICES MOZAMBIQUE
Davis Langdon Mozambique
Business address: Rua D. Estêvão de Ataide No.38/48 Sommerschield 1 Maputo Mozambique Tel: +258 21 490 696/7 Fax: +258 21 490 699 E-mail: [email protected] Director: Indresen Pillay Local director: Charle Viljoen
ENGINEERING
Johannesburg
Business address: 2nd Floor, MPF House 32 Princess of Wales Terrace Sunnyside Office Park Parktown, Johannesburg South Africa Tel: +27 (0) 11 484 2330 Fax: +27 (0) 11 484 2361 E-mail: [email protected] Directors: Rob Black Ian Gildenhuys Pusetso Makote Craig Hall
Klerksdorp
Business address: 2nd Floor, 22 Boom Street Klerksdorp South Africa Tel: +27 (0) 18 464 1641 Fax: +27 (0) 18 464 1644 E-mail: [email protected] Director: Bertus van Eeden Associate: Stephanus de Vos
DIRECTORY OF OFFICES 83 Vanderbijlpark
Business address: Delfos Boulevard ArcelorMittal South Africa (Engineering Building) Vanderbijlpark South Africa Tel: +27 (0) 16 889 4159 Fax: +27 (0) 16 889 4159 E-mail: [email protected] Directors: Johan Kemp Tobie van Wyk Associate: Corné Bodenstein
PROJECT MANAGEMENT
National
Business address: 17 The Boulevard Westway Office Park Westville, Durban South Africa Tel: +27 (0) 31 275 4200 Fax: +27 (0) 31 265 0038 E-mail: [email protected] Director: Martin Donnelly
Kwa-Zulu Natal
Business address: 17 The Boulevard Westway Office Park Westville, Durban South Africa Tel: +27 (0) 31 275 4200 Fax: +27 (0) 31 265 0038 E-mail: [email protected] Director: Greg Pearson
84 DAVIS LANGDON DIRECTORY OF OFFICES Gauteng
Business address: 3rd Floor, MPF House 32 Princess of Wales Terrace Sunnyside Office Park Parktown, Johannesburg South Africa Tel: +27 (0) 11 544 1800 Fax: +27 (0) 11 642 2289 E-mail: [email protected] Director: Rob Fleming
Western Cape
Business address: 45 Buitengragt Street Cape Town South Africa Tel: +27 (0) 21 423 7840 Fax: +27 (0) 21 423 7841 E-mail: [email protected] Director: Nigel Sessions
BUILDING SERVICES
Cape Town
Business address: 45 Buitengragt Street Cape Town South Africa Tel: +27 (0) 21 423 7840 Fax: +27 (0) 21 423 7841 E-mail: [email protected] Director: Willie Boylan
Durban
Business address: 17 The Boulevard Westway Office Park Westville, Durban South Africa Tel: +27 (0) 31 275 4200 Fax: +27 (0) 31 265 0038 E-mail: [email protected] Director: Andries Schoeman
DIRECTORY OF OFFICES 85 Johannesburg
Business address: Ground Floor, MPF House 32 Princess of Wales Terrace Sunnyside Office Park Parktown, Johannesburg South Africa Tel: +27 (0) 11 544 1800 Fax: +27 (0) 11 642 2289 E-mail: [email protected] Directors: Johan Kemp Alastair Reid Otto la Grange Associate: Deon Nell
Pretoria
Business address: 1st Floor, Lakeview II 138 Middel Street New Muckleneuk, Pretoria South Africa Tel: +27 (0) 12 460 5100 Fax: +27 (0) 12 460 5677 E-mail: [email protected] Directors: Don Reid Otto la Grange Associate: Deon Nell VALUATION SERVICES
Davis Langdon Valuation & Building Consultants and Abalaing Valuers
Alberton
Business address: 1st Floor, Allied House 36 Voortrekker Street Alberton South Africa Tel: +27 (0) 11 907 2682 Fax: +27 (0) 11 907 9332 E-mail: [email protected] Directors: Jan Kloppers Sam Ramafola
86 DAVIS LANGDON DIRECTORY OF OFFICES Kempton Park
Business address: 3rd Floor, ABSA Building 5 Wolff Street, Kempton Park South Africa Tel: +27 (0) 11 394 6203 Fax: +27 (0) 11 394 7200 E-mail: [email protected] Director: Clyde Aitken
Pretoria
Business address: Ground Floor, Lakeview II 138 Middel Street New Muckleneuk, Pretoria South Africa Tel: +27 (0) 12 346 1611 Fax: +27 (0) 86 669 8107 E-mail: [email protected] Manager: Deon van Onselen
Somerset West
Business address: 3A Arun Place Sir Lowry's Pass Rd Somerset West South Africa Tel: +27 (0) 21 852 3884 Fax: +27 (0) 21 852 8752 E-mail: [email protected] Directors: Piet Swanepoel Erwin Wallendorf
Vereeniging
Business address: Suite No 3, Medical Centre 36 Senator Marks Ave Vereeniging South Africa Tel: +27 (0) 16 422 6330 Fax: +27 (0) 16 422 6339 E-mail: [email protected] Director: John Marokane Manager: Jan Viljoen
DIRECTORY OF OFFICES 87 SPECIFICATION CONSULTANCY
Davis Langdon Schumann Smith
Johannesburg
Business address: Ground Floor, MPF House Sunnyside Office Park 32 Princess of Wales Terrace Parktown, Johannesburg South Africa Tel: +27 (0) 11 642 8307 Fax: +27 (0) 11 642 2289 E-mail: [email protected] Director: John Chapman Specification Consultant: Ian Hamilton
88 DAVIS LANGDON DIRECTORY OF OFFICES WORLDWIDE & ASSOCIATED OFFICES
UNITED KINGDOM
England Richard Baldwin [email protected] Scotland Neil Dickson [email protected] Wales Paul Edwards [email protected]
EUROPE
Ireland Michael Webb [email protected] Russia Kevin Sims [email protected] Spain Francesc Monells [email protected]
MIDDLE EAST
Bahrain Steven Coates [email protected] Dubai Neil Taylor [email protected] Lebanon Muhyiddin Itani [email protected] Qatar Steven Humphrey [email protected]
AUSTRALASIA
Australia Mark Beattie [email protected] New Zealand Chris Sutherland [email protected]
DIRECTORY OF OFFICES 89 ASIA PACIFIC
Brunei Justin Teoh [email protected] China Joseph Lee [email protected] Hong Kong Kenneth Poon [email protected] India Jim Pollock [email protected] Indonesia Peter Robinson [email protected] Japan Takayoshi Sato [email protected] Korea Lee Mun-Su Max [email protected] Malaysia Ming Chee Loo [email protected] Philippines Alan Hearn [email protected] Singapore Eugene Seah Hsiu-Min [email protected] Thailand CP Leong [email protected] Vietnam David Lockwood [email protected]
AFRICA REGION
South Africa Indresen Pillay [email protected] Botswana Fred Selolwane [email protected] Mozambique Charle Viljoen [email protected] Nigeria John Tuffrey [email protected]
NORTH AMERICA
United States of America Nicholas Butcher [email protected]
90 DAVIS LANGDON DIRECTORY OF OFFICES