Built to adapt: the financial potential of convertible buildings

Koch Pina, Vitalija Danivska and Hilde Remoy

ERES from European Real Estate Society (ERES)

Abstract: Current pressures for sustainable built environment are forcing to rethink existing practices. Convertible buildings, designed to adapt to future uses, offer potential benefits such as extended functional lifespan, increased sustainability, and reduced environmental impact. And whilst design aspects of convertible buildings have been studied for years, their financial viability remains underexplored, particularly regarding the trade-offs between higher initial investments and potential long-term advantages. Therefore, this study aims to provide insights into the financial implications of such designs. This study is based on interviews with 16 stakeholders in the real estate sector, including architects, consultants, municipal actors, developers, and investors. These interviews identify key design parameters and their effects on financial metrics, particularly in the Discounted Cash Flow (DCF) model. A sensitivity analysis assesses the influence of three primary variables—additional initial investment, conversion costs, and gross exit yield (GEY)—on the Internal Rate of Return (IRR). The results of this study demonstrate the financial potential of convertible buildings in comparison to standard buildings. Convertible buildings demonstrate similar profitability to redeveloped standard buildings and outperform standard buildings that are maintained or converted. Even though more research is needed, especially with real case buildings, this study underscores the potential of convertible buildings as a financially viable and sustainable investment, contingent on careful consideration of design and market factors. Convertible buildings could offer options for investors with long-term investment strategies and potential sustainability premiums. However, to encourage this type of development, tax incentives or favourable financing terms might still be needed.

Keywords: convertible buildings; Financial Feasibility; Real Estate Investment (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2025-01-01
New Economics Papers: this item is included in nep-env
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