ASSET MATURITY AND THE CASE FOR REFURBISHMENT
In a race to meet the demands of a developing, diversified economy, has the UAE reached the stage where refurbishment is becoming a more viable alternative to building new? As in any developed country, the demand for space and the way in which the built environment serves the needs of the population continues to evolve. The coronavirus pandemic has brought the way we use space into the forefront of our thinking, but this is not the only factor driving this evolution.
A maturing property market, cost awareness, appreciation for sustainable practices, new legislation and increased understanding of operational requirements have all contributed to the present conditions in which strategic asset management decisions are made. The pace at which construction activity has been undertaken in the UAE has seemed relentless, driven by a “build it and they will come” model that is beginning to reach saturation point. As the sector switches to an increasingly demand-based model and an appreciation of established buildings and communities, we examine the key considerations for deciding to refurbish rather than build new.
Money Talks
The business case for refurbishment is easy to make. Refurbishment requires less capital investment than building new and can provide the desired outcome in far less time, with average large-scale refurbishments taking a year from inception to completion, while new builds can take around three times longer. The benefits from the completed project can therefore be realised sooner, creating a more immediate return on the capital investment from savings in energy reduction, or increased capacity to provide the desired building function.
The most tangible financial impact arises from reduced operating costs, in which the most significant opportunity comes from reducing energy demands of a building by introducing more efficient equipment and components. In the UAE, with its hot climate, this often means retrofitting air conditioning systems, which consume disproportionately more electrical energy than any other system (approximately 80 per cent for typical office buildings according to a study by the College of Engineering, UAE University). As many buildings reach the 20-year point within their lifecycle, many of the air conditioning assets along with other high value mechanical and electrical assets will become due for replacement. The cost of replacing these assets should have been accounted for within a planned asset replacement schedule and sinking fund, however, even where the most diligent of asset planning exists there will still likely be a commercial impact associated with replacing these assets.
The sinking fund will likely not have been designed to provide the cost to upgrade systems where technology has advanced, so, if such technology is to be installed, additional capital investment will be required. This cost, however, will be significantly less than constructing a new building. Just like a decision within the design stages of a new building, a short-term capital investment can have long term cost benefits. It has become much more important in the UAE for building owners and occupiers to understand the current condition of their assets, where they fall within their expected lifecycle and have effective sinking funds in operation to make fully informed and well-timed capital investment decisions.
Of course, there will always be exceptions to the rule. Depending on the nature of the building and the extent of the refurbishment required, possibly due to the building’s age, build quality and current condition, demolishing and starting a new build can be more cost effective. This is perhaps more appropriate to lower rise and lower density developments, rather than medium to high density projects that have many more electrical and mechanical assets.
Sustainability
It has been widely recognised that buildings and construction are responsible for around 38 per cent of all carbon emissions globally. As a country that has seen a major construction boom over the last 30 years, with new towers and infrastructure appearing every year as a visible sign of economic progress, the UAE cannot ignore the environmental impact — and therefore the potential to reduce such impact — it has within this sector. As the built-up area increases, as does the demand for energy and therefore the level of operational emissions.
Perhaps less widely recognised is the differentiation between embodied and operational emissions. New buildings can be designed and built to increase efficiency by lowering demand for energy, and therefore associated operational impact, but these benefits will only be realised incrementally in future years. An immediate impact of the construction activity is felt through embodied carbon associated with extraction or raw materials, transportation and construction activity. According to the Building and Infrastructure Consumption Emissions paper published by C40 Cities, Arup and University of Leeds in August 2019, embodied emissions can account for up to 50 per cent of building and construction emissions, which would equate to up to 19 per cent of all carbon emissions globally. Therefore, there is a strong argument that the process of constructing buildings is as important as their operational life when considering environmental impact. Efforts to decarbonize construction has been discussed as a major contributor in the fight against climate change, and ultimately to achieve a sustainable reduction in total carbon emissions. Accordingly, a methodology for calculating the embodied carbon of materials has been published by the Royal Institution of Chartered Surveyors (RICS) in 2012 in support of the whole life analysis of the construction lifecycle (Methodology to Calculate Embodied Carbon of Materials Information Paper IP 32/2012, first edition).
However, the research by C40 Cities, Arup and University of Leeds goes further suggesting six key ways in which a reduction in buildings and construction emissions can be achieved. Examples include; using materials more efficiently, using existing buildings better, switching to lower emission materials, using low carbon cement, recycling building materials and the use of low emission construction machinery. Decisions to refurbish rather than demolish and build new are therefore a key part of this thinking, as the assessment of whether existing buildings can be adapted must be a consideration before new construction takes place, if these savings are to be achieved.
As approximately 60 per cent of embodied carbon emissions are associated with the structural elements of a building (particularly those using cement, which has a high embodied carbon level due to the high temperatures that limestone needs to be heated to as part of production), the decision to refurbish and therefore re-use these building elements, has an immediate impact on reducing carbon emissions. Therefore, simply encouraging refurbishment and reducing demand for new build could have the greatest environmental impact within the buildings and construction industry.
Environmental Legislation
The UAE has successfully implemented a range of such measures, such as the Estidama Pearl Rating System in Abu Dhabi (2010), Dubai’s Green Building Regulations, the Al Safat Rating System (2011), and more recently, the Barjeel Green Building Regulations in Ras Al Khaimah (2019). According to the Emirates Green Building Council, a non-governmental organization that promotes sustainability in the built environment, retrofitting to improve energy efficiency and reduce operational cost has been widely adopted with almost 8,000 buildings in the UAE. This is subject to such activity within initiatives such as; the Dubai Retrofit Program and the Sharjah SEWA Retrofit Program. These programs mirror established international programs, such as the Royal Institute of British Architects (RIBA) Retrofit First campaign in the United Kingdom, which also benefited from tax incentives.
Functionality, Lifecycles and Location
The decision to retrofit as part of wider refurbishment is largely driven by the positioning of buildings and their operational assets within their respective lifecycles. As stock approaches a 20-year life, many high value/high energy consumption mechanical and electrical assets become due for replacement. This presents an opportunity to introduce more efficient equipment, either through upgrading, redesigning, or simply the removal of obsolete assets. In terms of asset obsolescence and life expectancy, typically the building structure and frame will outlast the fittings, fixtures and equipment many times over. Structural elements will often have a design life of 100 years, whereas major equipment will require replacing every 10-30 years. It will therefore be possible to refurbish a building numerous times before the structure deteriorates to a point when it is no longer functional, forcing the need to rebuild. As the stock in the UAE matures, the potential for refurbishment increases. There have already been many high-profile refurbishments, such as the Jumeirah Beach Hotel and the Atlantis Hotel in Dubai.
Hotel refurbishments in particular can be as much about the need for a ‘brand refresh’ than any other consideration. There are also other instances where refurbishment is considered separately from the asset lifecycle, such as the changing needs of the building user, change of regulations or other very specific measures that depend on the type of building. Examples could be an office building that conducts refurbishment of air conditioning systems as part of a renewed focus on employee occupational health, or an airport having to conduct periodic terminal refurbishment to adapt to changing aircraft designs and security requirements. Most major airports in the world are currently in the process of a significant refurbishment project or have just completed one, with Dubai and Abu Dhabi airports being no exception.
Changing technology can also influence both the timing and nature of a refurbishment, as the changing expectations of building users are met by the introduction of various smart technology solutions that make otherwise functional systems seem obsolete before the end of their operational life expectancy.
The full impact of the coronavirus pandemic on future working behaviours and the use of both office and residential space will not be seen for years to come, but it will no doubt provide further influence on decisions to refurbish buildings to provide the type of space demanded by occupiers. The location of the building can have a significant impact on the decision to refurbish. Access within developed sites in high density locations may increase the costs of demolition and new build further, particularly when proximity to other buildings and their current use is considered. Although not common in the UAE, terraced buildings have been a good example of such restrictions where it is difficult to take one building or unit out of its situational context, making demolition complicated.
Likewise, low density locations that are far from urban centers can also have complications for new build projects due to the distances involved in material transportation and access to labour supply. Refurbishments are an effective way to renew existing infrastructure with minimal disruption.
The Part-Completion Exception
A decision to refurbish or rebuild is not limited to projects that have been in use. It is also undertaken for projects that have been in existence for some time, but not actually completed. Many projects in various stages of completion that have stalled, usually for financial reasons, exist in the UAE. Sometimes these are completed after a considerable pause in the construction program, however, sometimes there is a decision to make due to the time elapsed, market conditions and viability of the original concept. For the same reasons as a completed building that reaches a certain point in its lifecycle, a partly completed building will face examination of the costs to complete, either with the original design or adapted to meet new requirements. Depending on the extent of these adaptations, it could be more cost effective to demolish and start again as we have seen recently at Mina Plaza in Abu Dhabi, which found itself in the middle of a larger masterplan design for which the buildings were no longer needed.
Conclusion
Refurbishment remains an attractive alternative to building new from a cost and sustainability perspective, but for refurbishment to be effective it must be undertaken by an informed property owner or occupier, with consideration given to current asset condition, costs of disposal and lifecycle costs. In a maturing property market, the UAE has the potential for a significant rise in the number of refurbishment projects.
Construction activity accounts for up to 50 per cent of building and construction emissions, and up to 25 per cent of total building lifecycle costs. The relatively high environmental impact at the construction stage compared to the overall lifecycle cost of the building means that more must be done to engage developers in sustainable building practices, such as compliance with legislation and incentives to implement green building initiatives. As public awareness of the climate change emergency and perceptions of how we consume energy change, there is pressure from expectations at the point of use that developers and owners cannot ignore.
Refurbishment is already recognised as a significant way to reduce carbon operational emissions in the UAE. The Dubai Supreme Council of Energy has a target to cut energy demand by 30 per cent by 2030, and sees refurbishment as a key contributor to achieving this. Less widely known is the additional associated impact of reducing embodied carbon through choosing to refurbish rather than build new. Embodied emissions can be further reduced through adopting sustainable practices during the construction stage, from sourcing low carbon materials to using low emission construction vehicles.
The impact of building new from a financial and environmental perspective is considerable. As the property market matures, refurbishment offers a viable alternative that can help significantly reduce both operational costs and carbon emissions.