Insights

Photo of Eldar Urmancheyev, Founder and CEO of the Investor's Guardian

Dr Eldar Urmancheyev

Founder & CEO

Mission Impossible: How to be a sophisticated investor in construction development at the digital age?

According to a common definition, a sophisticated investor is an investor who has sufficient knowledge and experience to weigh the risks and merits of an investment opportunity. If we apply this definition to the domain of construction development, this person seems to be all but a superhuman. In this area in order to make an informed decision about the feasibility of an investment project the investor has to be qualified at least in all of these fields simultaneously: Urban Planning, Data Collection, Architecture (from both technological and aesthetic point of view), Marketing, Finance, Engineering, Sales, Administration, Public Relations (PR) and Government Relations (GR), Law, Asset Management, Facility Management, Construction Technology.

This is clearly not possible even for most corporate investors, let alone individuals and smaller companies. The conventional solution is to hire a construction manager (CM) who would at his discretion manage the day-to-day development of the project, making up for the ‘blind spots’ in the Investor’s expertise. But is this an optimal solution?

Resolving the CM vs Investor Conflict: the TIG approach

At the TIG, our experience and years of research suggest that it is not. In fact, the link between the investor and the CM is one of the major contributors to the systemic investment risks. The main reason for this is the conflict of interest that underpins almost every investor-CM deal in two most crucial aspects—time and money.

Investor is interested in the quickest completion of the development cycle possible. Every day eats off the bottom line.

CM is interested in maximizing his fees. The longer the development cycle — the bigger are his fees and lower the administrative expenses.

For the Investor the formula of success is simple: minimal costs, maximum revenue.

The more issues the CM finds with the project that it received from the architects, the more services it can sell to the Investor.

So, how to structure a construction development project to avoid this conflict of interest? There are two possible solutions:

Consecutive Financial Model

Consecutive Financial Model (CFM) is TIG’s own financial modeling technology. Over the course of our business we came to the conclusion that conventional business plans based on historical data, projections and assumptions do not empower our clients. We have come with our own solution to comprehensive financial planning, which we called Consecutive Financial Model.

CFM includes the full range of data points, algorithms and formulas that allow to create a fact-based model of any development project. This model is dynamic and speaks with investors in their own language—the language of the bottom line. Every new piece of information revealed through the quantitative research and LOD X (see below) is added to the model. As a result, the Investor is able to see how the choices of architectural solutions, materials, planning and other ‘specialist’ aspects of the project influence the financial outcome in a form of a dynamic spreadsheet that can be effectively used any members of staff.We used the CFM on both volatile and recessing markets (Russia, Ukraine) and relatively stable markets (EU, USA). Although the advantages of the CFM over a traditional business plan approach are even more impressive at volatile markets, they will be appreciated by investors at both of these types of economics. The critical differences between traditional business plans and the CFM can be summarised as follows:

Traditional Business Plans

Consecutive Financial Model (CFM)

Based on historical data

Allows to conservatively look into the future

Reveals a cross-section of a moment of time in the past, suggesting a fixed number of scenarios (typically, optimistic, pessimistic and conservative). These scenarios cannot be utilised effectively in the development of the project because of their static nature.

CFM is a dynamic model that encourages the management of the project to add all emerging data and therefore keeps the investor closely informed about all the changes to the milestone and final financial results of the development project.

No personal responsibility of the source data provider. All risks for the failure of the initial idea are on the investor's side.

All data sources are personified, they have a limited responsibility over the correctness and fullness of data.

Milestone results are presented in business plans only in generalised form that is not informative in predicting the results of changes of particular factors.

Investor has a picture of all financial indicators at any given period of time. This allows to take target emergency action whenever underperformance occurs.

Early BIM Implementation ("LOD X")

One of the key points of the TIG approach to investor protection is the adoption of BIM (Building Information Modeling) approach from the beginning of the very beginning of the investment cycle. Our experience strongly suggests that the use of BIM at all stages of the development is not an expensive "decoration" of the construction process, but a powerful instrument of control and planning on behalf of the investor. We believe that the use of BIM from the earliest stages of the development is the only way for the investor to retain its control over the expenditure and deadlines that can ultimately lead to more predictable, positive results of the investment cycle. In particular, we introduced a new method of using BIM before the detailed BIM (or 3D) models are even created (and paid for by the investor!). We call it LOD X.

What is LOD?
LOD or the Level of Development is a BIM reference that defines what types of information about each element should be included into BIM model. Higher numbers after LOD stand for more detailed information. LOD X developed by the TIG is the least detailed type of BIM model that can be designed by only two specialists within a short period of time, making sure that further more labour-intensive design operations comply with basic requirements and regulations.

LOD X is the level of development utilised at the earliest stage of the project. Typically the buildings are represented on this level only as solid blocks with floor-by-floor division. This model is developed jointly by a BIM engineer and an expert on local building regulations. As a result, such key parameters as the location, number of floors, total area and other are checked and confirmed before the expensive process of planning and design begins. Gradually, the BIM model is populated by further information obtained through Quantitive Research.

Quantitive Marketing Research

The key advantage of the TIG approach to the planning of the future construction development project is the use of real-world, sociologically confirmed and verified data about the size of the market and the expectations of the customers. Using our own technology we have been able to predict the number of potential customers with unprecedented precision—for residential developments, for example, up to a hundred people.

Such precision and level of verification becomes possible through our proprietary algorithm of massive polls by a group of qualified survey mediators. Our survey methods are quite different from typical internet marketing or focus group methods. Their key advantages are:

Summary

The TIG approach to investor assistance can be summarised as evaluate before you act (or spend money). We are proud to be the first company to integrate a full-fledged BIM methodology with our own dynamic modelling technology (Consecutive Financial Model) and proprietary market research algorithms within one single cost-effective package designed specifically for construction development investors.

If you would like to find out how the Investor's Guardian can help you maximise the effect of your investment get in touch today.