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Staging option application to residential development: real options approach

Author

Listed:
  • Kwabena Mintah
  • David Higgins
  • Judith Callanan
  • Ron Wakefield

Abstract

Purpose - Real option valuation is capable of accounting for uncertainties in residential development projects but still lacks practical adoption due to limited evidence to support application of the theory in practice. The purpose of this paper is to use option valuation to value staging option embedded in residential projects and compare with results from DCF to determine which of the two methods delivers superior results. Design/methodology/approach - The fuzzy payoff method (FPOM), a real options model that uses scenario planning approach to generate a range of figures, from which a single-numerical value is computed for decision-making. Findings - The results showed that the use of a range of figures was able to represent uncertainties to a higher degree of accuracy than the static DCF. As a result, the FPOM was able to capture about 3 per cent of the value of the project that was missed by the DCF. The staging option offers an opportunity to abandon unprofitable phases of a project, thereby limiting downside losses. Thus, real option models are practically applicable to cases in property sector. Practical implications - Residential property developers must consider flexibility in financial feasibility evaluation of development because of the embedded value in uncertain property projects. It is important to account for optionality in financial evaluation of property projects for value maximisation. Originality/value - The FPOM has been used for the first time to evaluate a horizontal phasing of a residential development project.

Suggested Citation

  • Kwabena Mintah & David Higgins & Judith Callanan & Ron Wakefield, 2017. "Staging option application to residential development: real options approach," International Journal of Housing Markets and Analysis, Emerald Group Publishing Limited, vol. 11(1), pages 101-116, December.
    • Handle: RePEc:eme:ijhmap:ijhma-02-2017-0022
    DOI: 10.1108/IJHMA-02-2017-0022
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    Citations

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    Cited by:

    1. Marek Durica & Danuse Guttenova & Ludovit Pinda & Lucia Svabova, 2018. "Sustainable Value of Investment in Real Estate: Real Options Approach," Sustainability, MDPI, vol. 10(12), pages 1-18, December.
    2. Jiangang Shi & Kaifeng Duan & Shiping Wen & Rui Zhang, 2019. "Investment Valuation Model of Public Rental Housing PPP Project for Private Sector: A Real Option Perspective," Sustainability, MDPI, vol. 11(7), pages 1-18, March.
    3. Kwabena Mintah, 2018. "Real Options Analysis in Residential Property Development Decision-Making in Australia: Perspective of Executives," International Real Estate Review, Global Social Science Institute, vol. 21(4), pages 473-520.

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