Maximizing Returns: Navigating KPIs in Real Estate Development

Unlocking the Secrets of Efficiency and Profitability for Investors and Developers

DALL-E

Welcome to our latest newsletter, focusing on the essential Key Performance Indicators (KPIs) crucial for navigating today's real estate development landscape. As the industry evolves, understanding and leveraging these KPIs—Nett to Gross Ratio, Plant-to-GIA Ratio, and Wall-to-Floor Ratio—becomes imperative for investors. These metrics are not just numbers; they are the foundation for project success, efficiency, and profitability. In a market where sustainability and optimisation are key, mastering these KPIs can transform your projects from standard to standout, ensuring they not only meet but exceed modern development expectations.

Now let’s dive in.

1. The Importance of Nett to Gross Ratio

One of the primary KPIs in commercial development projects is the building’s Nett to Gross ratio. This ratio measures the efficiency of space utilisation, directly impacting rental income and operational costs. For instance, a project that achieved a 90% Nett to Gross ratio, as opposed to one that only managed 80%, demonstrates how effective design can lead to more leasable space and higher revenues, proving the significant impact of this metric.

In basic terms to obtain this ratio you need to measure all the areas of the building that can be utilised and divide them by the Gross Internal Area of the building. The resulting value expressed as a % indicates how much of the area being built is able to generate revenue. Let’s look at a quick practical example. Let’s imagine a building achieves a Nett-to-Gross ratio of 70%. In this scenario, 100% is the total building, 30% is the Gross factor (or non lettable area like plant, vertical shafts) and 70% represents the proportion of the building that is lettable.

The Nett-to-Gross can also be broken down in sub-categories to drill down on specific parts of the development project:

• Overall Building Nett-to-Gross. = > total building efficiency and impact on revenue.

• Above Ground Nett-to-Gross = > useful to understand how basements impact efficiency.

• Average Office Floor = > is the core within the right ball park size?

• Average Nett-to-Gross across all Office Floors = > how efficient is the scheme?

2. MEP Plant to GIA Ratio

MEP Services are one of the key cost drivers in building projects. This ratio is crucial for maintaining the balance between necessary infrastructure and usable space. An overemphasis on MEP can lead to underutilised space, whereas insufficient MEP can result in operational inefficiencies.

Now let’s go back to the Scenario we looked at above. 30% is the total Gross factor which includes MEP, Structural elements, vertical shafts for lifts and ducts. Plant on average takes up 10% of the Gross Internal Area of a building and as we can see in this scenario it’s equivalent to c.30% of the total Gross Factor (30%). Clearly MEP Plant has quite a significant impact on our efficiencies and it’s an element of the project that we need to keep monitored.

I would strongly suggest to always set a Target Ratio for the development in order to drive optimisation. My recommendation is to set the target at 8%. In the table below you see a summary of the ranges of ratios one could typically expect in a project:

The best course of action to ensure that Plant is efficient is the following:

1. Ensure the target is communicated to the engineers as early as possible.

2. Monitor the value regular intervals to evaluate progress.

3. Don’t be afraid to get hands on with the engineers to zero in on any issues.

4. Make sure you have reliable Design Managers on board.

Every project is unique and often requires bespoke solutions to drive optimisation. Below are a few key areas to interrogate:

1. High Floor-to-Floor vS Low Floor-to-Floor.

2. Is it better to have more and smaller plant components (i.e. 4xAHUs vs 2xAHUs) or fewer larger ones?

3. What is the largest and heaviest piece of equipment?

4. How will plant elements in the building be replaced?

5. What space is required for horizontal distribution?

3. Wall-to-Floor Ratio

The Wall-to-Floor ratio is an important metric to keep monitored since the external facade on of the big three cost elements in a new development and typically represents 20% of the total construction costs.

The table below illustrated a typical range of values a new development project:

Obviously each project is different so it should be taken as a general guide. For instance the economics of a Tall Building in Central London will be able to tolerate more a Ratio at the worst end of the spectrum compared to a project in the Periphery of Milan.

The Wall-to-floor ratio is calculated by dividing the external wall area by the gross internal floor area. For example if we fix the Floor Area we can see how the ratio becomes worse for buildings where the Floor-to-Floor height increases. The ratio also gets worse the more complex the shape of the floor plan is. A regular floor plan will be more economical compared to a floor plan with many indentations.

A few examples are illustrated in the figure below:

(Source: Core Five)

We should also consider other aspects in the economics in order to get to a fully informed decision:

1. A low building with a large floor plate = > good wall-to-floor ratio = > bad for daylight due to deep floors = > higher electricity bills.

2. Building with narrow floor plates = > bad wall-to-floor ratio = > good daylight = > lower electricity bills.

3. Floorplate with indentations = > sub-optimal wall-to-floor ratio = > good daylight penetration.

In Summary

In conclusion, consistently monitoring your project KPIs is the cornerstone of achieving excellent value in office building projects. It requires a strategic long-term approach, where every decision is guided by these metrics. As you embark on your next project, keep these KPIs in mind and strive for that balance between design efficiency and functionality.

Here is a recap of the KPI targets:

1. Overall Building Nett-to-Gross = > 70%

2. Average Office Floor Nett-to-Gross = > 85%

3. Plant-to-GIA ratio = > 8%

4. Wall-to-floor ratio = > 0.4

Good luck with your projects and looking forward to hear your feedback in the comments section below.