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The selection of effective retrofit scenarios for panel houses in urban neighborhoods based on expected energy savings and increase in market value: The Vilnius case

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The selection of effective retrofit scenarios for panel houses in urban neighborhoods based on expected energy savings and increase in market value: The Vilnius case
  The selection of effective retrofit scenarios for panel houses inurban neighborhoods based on expected energy savings andincrease in market value: The Vilnius case Edmundas Zavadskas a, *, Saulius Raslanas b , Artu¯ras Kaklauskas b a  Department of Construction Technology and Management, Vilnius Gediminas Technical University, Sauletekio al. 11, LT-10223 Vilnius, Lithuania b  Department of Construction Economics and Property Management, Vilnius Gediminas Technical University, Sauletekio al. 11, LT-10223 Vilnius, Lithuania Received 25 October 2006; received in revised form 16 April 2007; accepted 17 April 2007 Abstract Some of the problems associated with assessing the retrofit effectiveness of apartment buildings in urban areas are considered. The retrofit of houses should be followed by the amelioration of their surroundings. The priority order of districts to be renovated depends on the condition of thebuildings in a district and on strategic urban development programmes. In order to determine the profitability of investments in housing retrofit, anumber of retrofit scenarios should be developed. The authors of this paper offer a new approach to determining the retrofit effectiveness of housesbased both on expected energy savings and the increase in market value of renovated buildings. In line with the proposed approach, retrofitscenariosforapartmentbuildingsinVilniusweredeveloped,i.e.retrofitinvestmentpackagesforvariousdistrictswerepreparedandarrangedinthepriority order for their application according to the method of geographical analysis suggested by the authors. # 2007 Elsevier B.V. All rights reserved. Keywords:  Large-panel buildings; Energy savings; Increase in market value; Method of geographical analysis; Investment packages; Retrofit scenarios; Vilniuscase 1. Introduction Most Europeancountrieshavesucceeded inreducingenergyconsumption of new dwellings by more than 50% withoutincreasing their building cost, and therefore, energy efficiencyhas achieved great acceptance among building owners [3].These buildings represent about 20% of the building stock butconsume only 5% of energy. Concentration on improving theenergetically poor building stock has great potential. The lack of interest in housing retrofit can be explained by the fact thateconomic interest in a building expires after 30 years.When the problems involved in housing retrofit, especiallythe solutions aimed at energy conservation, are considered, theincreased market value of renovated buildings is not alwaystaken into account. The experience has shown that reconstruc-tion of local heating units as well as the renovation andregulation of heating systems are effective measures of savingenergy. However, insulation of walls, replacement of windows,renovation of roofs, etc., which also help save energy,are not soeconomically effective because of large investments needed(they are usually repaid only in more than 20 years) [17]. Thebenefits of retrofit are often considered in terms of reducedthermal energy costs. However, retrofitting also improves thecondition of all building elements as well as prolonging thelifetime of a building. It makes possible a considerablereduction in building maintenance costs and investments in therepair and replacement of worn-out elements, which would beinevitable in the future. By ignoring these significant factors,the above approach makes it difficult to prove the need for amore extensive renovation intended to improve the condition,energyconservation,andarchitecturalandaestheticappearanceofabuilding(whentryingtogettherequiredloan).Theorderof priorities in implementing retrofit scenarios of apartmentbuildings in particular urban neighborhoods is determined bystrategic urban development programs and the currentcondition of the buildings and the environment in a district. 2. The criteria used in rating retrofit scenarios The critical criterion when examining and proposing any of the alternative management schemes is the sustainable and Buildings 40 (2008) 573–587* Corresponding author. Tel.: +370 527 450 02; fax: +370 527 001 14. E-mail address: (E. Zavadskas).0378-7788/$ – see front matter # 2007 Elsevier B.V. All rights reserved.doi:10.1016/j.enbuild.2007.04.015  development of society [13]. Coherent and efficient retrofitscenarios are commonly based on a building’s state of degradation and its obsolescence. An advanced method, basedon multicriteria analysis, also helps design effective retrofitscenarios [5]. Before a decision is made to proceed with anyproject of building retrofit, a brief but reliable report is neededdescribing the current state of the building and estimating thecost of building operations to be performed [4]. The developedmethodology and software apply to specific refurbishmentwork and cost assessment of building renovation needs withrespect to energy conservation and improvement of the indoorenvironment.Several methods were proposed for rating buildings orretrofit scenarios based on criteria including thermal energyconsumption for heating, availability of cooling and otherappliances, retrofit impact on the environment, indoor climate,and costs [21].Thepotential forenergyconservationinapartment buildingswas investigated following the EPIQR methodology andseveral scenarios were evaluated for various apartmentbuildings [1]. Energy savings in each building were accountedfor in order to identify the most effective scenarios.Accordingto[30],designandrealizationofeffectivebuildingretrofit scenario requires an exhaustive study of all solutionsinvolvingplanimetricandvolumetricchanges,theeliminationof the deteriorated and obsolete elements of a building, theimprovement of its architectural and aesthetic appearance andindoor amenities, etc. The effectiveness of the building retrofitunder consideration depends on many factors, including costs,annual fuel savings, when the retrofit is completed, the tentativepayback period, harm to human health caused by the materialsused, aesthetics, maintenance, functionality, comfort, soundreduction, longevity of structures, etc.In general, housing renovation policy aims to:1. Reduce energy consumption by 50%, and thus to improvethe environmental value.2. Increase the market value of dwellings.3. Improve the condition of buildingsand prolong their lifetime(for about 30–40 years) as well as preserve housingresources.4. Raise the level of comfort in apartment blocks.5. Avoid maintenance expenses and investments in buildingswhich would otherwise be needed in the future.6. Improve the architectural appearance of the facades of apartment houses as well as harmonize them with theenvironment.7. Make residential areas more attractive to their residents;improve the residential quality of a building.8. Attract more middle-class residents to these areas.When apartment buildings do not meet the residents’ needs,the question arises of whether they should be renovated ordemolished. A consensus is growing that it is easier and lessexpensive to slow down building deterioration by investing inproper maintenance and, thereby, prolonging its service lifebefore reconstruction. To compare reconstruction to renovationin mathematical terms, the following formula [20] wasproposed: C    R þ  M   1 ð 1 þ i Þ  n i  þ  C  ð 1 þ i Þ n  (1)where  C   is the cost of new construction,  R  the cost of renova-tion,  M   denotes the savings in annual maintenance costs in thecase of new construction,  n  the expected prolonged service life(in years) of the renovated building, and  i  is the interest rate peryear. The right-hand side of this formula is the sum of therenovation costs plus the current value of higher maintenancecost and the discounted current value of the new constructionwhich might be delayed by  n  years. This basic formula hasseveral logical flaws. Some researchers believe that thevalue of the existing building should also be added to the renovationcost. Others argue the opposite, namely, that reconstructionshould bear as an extracost thewaste of demolishing a valuable(though old and ill-functioning) existing building, while therenovation option utilizes the existing value of the old buildingand just adds to it.Deciding between renovation and demolition can be madeeasier by the use of criteria for assessing thevalue of preservinga building. Not only technical building requirements but also,above all, the economic and ecological advisability of comprehensiverenovation measures ascompared to demolitionof a building and construction of a new one or to itsfundamental redevelopment must be examined more closely[19]. Once a decision to retrofit has been made, questions mustusually be answered about the extent to which retrofittingmeasures are necessaryand the extenttowhich one mustand/orcan retrofit the building structure and its technical systems. Thespeed and security of the return on one’s investment isbecoming increasingly important for property managers andowners as a criterion for their decision, in particular withrespect to the nature and extent of retrofit.In order to achieve the goals of an optimal retrofit strategy, itis essential that any given capital investment be directed to themost cost-effective group of energy-saving measures. This canbe achieved by ranking the measures in order of decreasingsavings—to investment ratio (SIR), where [6]SIR ¼ current value of the total lifetime energy savinginvestment cost (2)If a measure has a SIR greater than 1, the predicted savingsexceedtheinvestment,andthemeasurecanberegardedascost-effective. The higher the SIR, the larger the return on theinvestment. To calculate the SIR, the current value of the totalenergy saved must be found. Finding this value requires thediscounting of all future savings to their equivalent currentvalue, using the following equation:PV c  ¼ C   1 ð 1 þ r  Þ  n r    (3)This gives the current value, PV c , for an annual saving  C  ,occurring for  n  number of years (lifetime of measure), with areal discount rate of   r  . E. Zavadskas et al./Energy and Buildings 40 (2008) 573–587  574  The implementation of some energy-saving retrofit mea-sures is associated not only with reduced energy consumptionbut also with the improved condition of building elements,durability, and the value of the building [15,16]. However,investments in property should not be assessed only as staticcosts; instead, long-term security and stability of value as wellasre-usabilityandprofitability oftheretrofittedbuildingshouldbe considered. It is recommended that comprehensiverenovations be carried out in order to increase a building’svalue and to ensure long-term security of that value [19].Renovation aimed to increase building value for users hasnot only technical, ecological, and economic aspects but also asocial dimension that should be considered. Renovation will bemade onlyifthereisademand andacceptance amongthe users.The cost of a market-oriented retrofit is not simply the marketvalue. There exists some difference between them, known astheacceptanceofthemarket.Ifeconomicfunctionofabuildingis fulfilled, the added value can increase its acceptance amongthe users and so increase the demand. The increase in pricedepends on the cost of the retrofit scenario. From theperspective of real estate market value, an effective retrofitmay be described by the following market value ratio (MVR):MVR ¼  M  va   M  vb C  r (4)where  M  va  is the market value of the building after retrofit,  M  vb the market value of the building before retrofit,  C  r  denotes theretrofit costs of the building [28,29]. If the package of invest-ments in retrofit has an MVR greater than 1, the package can beregarded as cost-effective from the perspective of real estatemarket value.From the perspective of value, it is hardly reasonable todevelop retrofit packages, which if implemented, would makeapartment values, when their average current price plus the costof dwelling retrofit are taken into account, equal to or evenhigher than the prices of newly constructed apartments. Thecost of investment packages depends on the difference betweenthe market value of 1 m 2 of new dwelling area and the averageprice of 1 m 2 of old dwelling area, plus the cost of retrofitmeasures per 1 m 2 of area. Therefore, the efficiency of retrofitfrom the market value perspective can be expressed by themarket value ratio as follows:MVR ¼ a ð  M  vn   M  vo Þ C  r (5)where  M  vn  is the market value of 1 m 2 of new dwelling area,  M  vo  is the market value of 1 m 2 of old dwelling area,  a  is theaverage coefficient of correction, depending on a particulardistrict where retrofit is made.In general, when energy savings and the increase in marketvalue are taken into account, a package  k   of retrofit measures iseffective whenSIR k  > 1 ;  MVR k  > 1 (6)The following criteria in particular are relevant in therenovation/reconstruction discussion: costs (taking intoaccount the construction of a new building, the costs of demolition, relocatingtenants,renovationcosts,operatingcostsof a new building (as compared to the renovated building)),defects and drawbacks of the building (associated with heatinsulation, concrete quality, humidity, ground water, sound-proofing, the condition of the living environment, ventilation,parking space), architecture of the building (aesthetics, types of layout), urban planning aspects (nature of the development inthe area, availability of public transport system, engineeringinfrastructure) and social infrastructure (building status, tenantsatisfaction). When considering renovation, the major factors,such as social infrastructure and some problems, relating tourban development, in particular, should be considered first.Notonlytechnicalbuildingrequirements,butthe economicandecological purposefulness of comprehensive renovation mea-sures as compared to demolition and constructing a newbuilding, must be examined more closely. The assessment of the property with the option to rebuild, as compared to theexisting building value, should be made and potential profit-ability of various renovation possibilities should be analysed.Only then should one begin the analysis of the building itself orwork to answer the questions of technical detail. If a buildinghas an insufficiently developed social infrastructure, then, thisis an argument for demolition, and vice versa. If a building hasan intact social infrastructure, then, this is an argument forrenovation.A decision about renovating or demolishing a buildingmainly depends on its physical condition, blending in theenvironment, maintenance quality, the planned service life, theextent of degradation, the expected economic effect of renovation, the cost of demolishing an old building and theconstruction of a new one, as well as social infrastructure andthe priorities of urban development. One of the retrofiteffectivenesscriteriaisMVR,thereforeitcanbeusedatthefirststage of decision-making about the renovation or demolition of a building. The cost-benefit analysis can be made for a short,middle, or long term. Renovation measures are a goodinvestment only if they improve the residential quality of abuilding. Improved residential quality means more than simplyreducing energy consumption; renovation to increase valuemust do more than achieve thermal renovation. If the building’seconomic function is fulfilled, the added value due to market-oriented renovation can increase its acceptance by the tenantsandsoincreasethedemand.Investmentvalue inthe singlemostlikely scenario is equivalent to market value which would belikelytoresult inaholddecisionandthusthe scenarioapproachpotentially provides extra insight. However, not all retrofitmeasures can improve residential quality. If retrofit scenariowhich can raise residential quality is used, but its calculatedMVR is less than one, then the renovation can be effective fromthe perspectivethermal energy savingin the long term. In termsof market value, it is not advisable to develop retrofitinvestment scenarios which, when implemented, would makeapartment values equal to or even greater than those of newlyconstructed dwellings in the same area, when their averagecurrent market value and the cost of retrofit are taken intoaccount. In this case, the renovation utilizes the existing value E. Zavadskas et al./Energy and Buildings 40 (2008) 573–587   575  of the old building and just adds to it, butthevalue is lower thanthe renovation scenario cost. Renovation becomes economic-ally inefficient, i.e. market value increment of dwelling due torenovation is lower than the cost of renovation. In this case, it isnot comprehensive, substantial, and sustainable renovation.Therefore, we must distinguish between energy-efficientretrofitting and market value-efficient retrofitting of buildings.An effective decision implies energy-efficient retrofitting andmarket value-efficient retrofitting. When, in renovationscenario  k   MVR k  < 1, then, it is the market value-inefficientretrofitting scenario. The problem arises what to do with suchbuildings. Probably, they should be reconstructed. To make adecision, a comprehensive analysis of the state of the building,its deterioration, architecture, costs of construction of a newbuilding, the costs of demolition, relocation of the tenants,renovation costs, operating costs of a new buildingas comparedto the renovated building, the increased rent as well as someaspects of urban planning and social infrastructure should bemade. If the amount of comprehensive, substantial, andsustainable renovation investment exceeds the investmentlimit, it makes more sense for building owners or otherinvestors to demolish the old building and finance theconstruction of a new one with the required energy efficiencyand othercharacteristics.However,ifenergyprices are likelytogrow, energy-efficient retrofitting would be a more attractiveinvestment opportunity.Developing renovation packages for apartment houses of particular districts it is possible to determine the effectivenessof these packages (from  i  to  j ) by calculating their values SIR i up to SIR  j  and MVR i  up to MVR  j  in a single step. If at least oneoftheindicatorsSIR k  ofthepackage k  islessthanone,orMVR k  is less than one, orboth their values are less than one, then, sucha package cannot be considered cost-effective. Only thepackages with SIR > 1 and MVR > 1 should be furtheranalysed, and the  k  max  package, ensuring the highest energysaving and market value increase, i.e.  k  max  = {max PV c k  ;max(  M  va k    M  vb )}, should be chosen, taking into account theavailable financial resources.When choosing a retrofit package, a number of criteria, suchas retrofit cost, thermal energy savings, the extent of buildingdeterioration and obsolescence, indoor and outdoor environ-mental quality, as well as technical, economic, ecological, andsocial aspects should be considered. The market value of realestate reflects and is affected by the interaction of four basicforces that influence human activity: social trends, economicdevelopment, governmental control and regulations, andenvironmental conditions. The forces are interactive becausetheyexert pressure onhumanactivities and are, inturn, affectedby these activities. The interaction of the social, economic,governmental, and environmental forces that affect real estatevalue must be studied.The index SIR refers to energy conservation, while MVRshows the market value for the evaluation of the retrofitpackages. After renovation the market value of the buildingincreases because the quality of dwelling as well as indoor andoutdoor environmental quality, comfort level and livingconditions are greatly improved, while maintenance costs,etc. are decreased. These criteria are reflected to some extent inthe two indices SIR and MVR. Thus, in this case, a contributionprinciple can be observed, implying that any dwellingimprovement is worth as much as the increase of the property’smarket value it brought about, regardless of the cost of improvement, i.e. the actual increase of the total property valueis more important than the cost of improvement. The abovecriteria are included in the research through the geographicalanalysis of districts based on SIR and MVR. 3. The Application of geographical analysis in decision-making on the retrofit of panel houses in residentialneighborhoods The preparatory period for the renovation of residentialneighborhoods includes:1. Carrying out preliminary research.2. Determining the retrofit areas.3. Determining the retrofit objectives.4. City planning.5. Discussing renovation problems.6. Preparing a social development plan.7. Planning specific construction operations.It would be more rational to renovate apartment housesbased on territorial principle, i.e. arranging the districts in theorder of priority and renovating them in a complex way,renewing dwelling houses and their environment. Besides, therenovationshouldbeeconomicallybeneficial.Thelimitsoftheneighborhood can be determined based on its physical bordersas well as taking into account some economic and legislativeaspects. From the economic point of view, the neighborhoodisdelimited depending on the uses of land, while the limits of urban zones are established by legislation. The renovation of buildings should not be separated from the improvement of environmental conditions. The latter is difficult to analyse ineconomic terms. It is difficult to accurately predict the cost of the works to be performed in this field. Moreover, designsolutions as well as economic effects may vary to a largeextent. However, if the environmental conditions areimproved, the market value of the land will considerablyincrease and the area will become much more attractive toinvestors. Therefore, it is clear that the renovation of aneighborhoodshouldnotberestrictedtotherenewalofhouses,but should be extended to the whole territory. Moreover, therenovation of apartment houses should be followed by thestate-financed construction of administrative and publicbuildings, schools, recreational areas, parks, squares, roads,etc. Only in this case a monotonous residential area canbecome a functional part of the city, providing its residentswith all the conditions of urbanized life. Usually, therenovation of neighborhoods is effective if it proceeds withoutanydelaysandiscompletedin10–15years.Duringthis periodthe neighborhoods should become so attractive that they couldkeep their residents from moving out. At the beginning, somepilot projects must be implemented for getting the experience E. Zavadskas et al./Energy and Buildings 40 (2008) 573–587  576  anddemonstratingtheresultsofrenovation,andthenthewholeneighborhood can be renewed.The renovated buildings raise the market value of theneighboring houses, and the progression principle comes intooperation. Renovation should also follow ‘‘the sustainableenvironment’’ principle which would help the neighborhoodacquire some new quality. A complex analysis of renovationshould include cost analysis and the variation of apartmentvalues depending on particular districts of the city. The specificcharacter of the district largely determines the market value of apartments. The plans for district development and the state of the neighboring districts are also important. Districts with welldeveloped infrastructure (workplaces, transport system, healthand consumer services) have many advantages compared to thedistrictswithpoorinfrastructure. Thedemand,offerandmarketvalue of a particular district are strongly influenced by thechanges taking place in other neighborhoods, and vary to aconsiderable extent, depending on how attractive they are toresidents [18]. Vilnius neighborhoods can be divided intoseveral groups according to their attractiveness to residents andmarket value of property (apartment):   Group 1: highly prestigious neighborhoods.   Group 2: prestigious neighborhoods.   Group 3: non-prestigious neighborhoods.Thefirststepsinrenovatingtheapartmenthousesshouldbeinline with the strategic aims of urban development stated in thestrategic plan. The strategic plan of city development is workedout in several stages: first, a particular vision of a city or town iscreated, then, the analysis of current social and economicproblems is made and, finally, the priorities of long-term urbandevelopment are established. The competitiveness of any city ortown as a complex social, economic and urban entity can bedescribed by a set of criteria. For a city to be competitive on aninternationalscale,thevaluesofallthecriteriadescribingitneednotbethehighest.Thestrategyofurbandevelopmentdefinesthemain movers or starting points for further activity involving thedevelopment of other areas as well.From the perspective of their location the strategically vitaldistrictsare thosewhere theairport,railway andbusstations arelocated, as well as the central districts of the city. Therefore,they can be considered perspective and the market value of realestate can be expected to grow in these districts. The image of the above districts and their attractiveness play an importantpart in maintaining the competitiveness of the city. This meansthat apartment houses on their territory should be renovated inthe first place. Some of the areas may have the environment notproperly adapted to residents’ needs. The strategic plan of citydevelopment should include some measures aimed at convert-ing industrial enterprises into commercial or housing facilities.This could increasethe propertyvalue inthe area.Everydistrict(neighborhood) should be evaluated based on the list of priorities in the long-term development plan of the city.The degradationofthe apartment houses isagood reason forstarting the renovation. To make the final decision, the state of the buildings in various neighborhoods should be thoroughlyanalysed. The order of priority for renovating the standarddistricts which are of the same importance for strategic citydevelopment is determined based on the age and condition of their apartment houses. The state of the houses is described interms of the defects found, deterioration of particular buildingelements, the state of engineering services, thermal character-istics of enclosures and heating systems, which are usuallyoutdated single-pipe unbalanced systems, not allowing fortemperature regulation in the premises and individual meteringof the consumed thermal energy. The priority for beingrenovated should be given to a district the houses and theenvironment of which are in a worse state compared to thecondition of other districts.To make a particular area more attractive, a complexapproach to renovation should be used, implying that bothdwelling houses and the environment should be enhanced. Therenovation of districts with medium or low values of geographical location indicators can hardly be expected toconsiderably increase the market value of property. The latterwill never reach the market value of property located in highlyprestigious districts because the significance of ‘geographicallocation’ criterion of these districts is very high.A district is unattractive to residents if its houses aredegraded and the infrastructure, transport system and environ-mental conditions are poor. Besides, the level of noise,pollution and crime rate are high, etc. The investments in therenovation ofneglected districts may be largerthan the increasein property value after renovation, i.e. they can even beunprofitable. However, the willingness of the residents of thesedistricts to renew their houses and their financial stateas well asthe financial support of renovation by municipalities should betaken into account.The priorities of the districts in the renovation project can beestablished based on multicriteria analysis of their significancein the strategic plans of city development, the state of theirdwelling houses and the environment, renovation costs, theexpected reduction of thermal energy consumption, the marketvalue of property in the houses of old and new construction andthe expected increment of market value of the renovatedhouses. Whenever these indicators change, the priorities of districts for renovation also change. Determining the growth of the market value of property due to renovation, some othermeasures which could also increase its market value should betaken into account. These are the so-called ‘‘external’’ effects.This could be the laying of the tram route, the construction of asupermarket or bridge, etc. on the renewed territory, whichwould undoubtedly raise the market value of property in thearea.Geographical analysis of the districts to be renovated iscarried out in the following steps:1. The urban area is divided into three groups depending on itsattractiveness to residents and market value of property.They include highly prestigious, prestigious and non-prestigious districts.2. Depending on the renovation objectives, various retrofitinvestment packages are formed. E. Zavadskas et al./Energy and Buildings 40 (2008) 573–587   577
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