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The Impact of Aligning the Strategies of CREM with Those of a Corporate Business Using Real Options

Author

Listed:
  • Singita Makaringi
  • Khabane Mokoka
  • Jake Schmidt

Abstract

The article investigates the benefits of incorporating corporate real estate management (CREM) in the main business units of the company. Prior studies have illustrated that CREM unit in major companies is treated as a separately entity with less focus on its contribution to maximization of shareholders¡¯ wealth. This article uses real option approach, specifically Samuelson-McKean (1965) model to extrapolate the value of CREM of listed South African insurance company. The results show that when CREM is insourced and treated as a significant part of the main insurance, shareholders¡¯ wealth is maximised-value of the company increases, total costs are managed and financial parameters increase investment value-volatility can be as high as 100%. Although, the data is on financial services, the results can be replicated in other industries given that the analysed company has exposure to a number of industries.

Suggested Citation

  • Singita Makaringi & Khabane Mokoka & Jake Schmidt, 2019. "The Impact of Aligning the Strategies of CREM with Those of a Corporate Business Using Real Options," Applied Finance and Accounting, Redfame publishing, vol. 5(1), pages 1-11, February.
    • Handle: RePEc:rfa:afajnl:v:5:y:2019:i:1:p:1-11
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    References listed on IDEAS

    as
    1. Edward H. Bowman & Gary T. Moskowitz, 2001. "Real Options Analysis and Strategic Decision Making," Organization Science, INFORMS, vol. 12(6), pages 772-777, December.
    2. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
    3. Naga Lakshmi Damaraju & Jay B. Barney & Anil K. Makhija, 2015. "Real options in divestment alternatives," Strategic Management Journal, Wiley Blackwell, vol. 36(5), pages 728-744, May.
    4. Grenadier, Steven R, 1996. "The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-1679, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    corporate real estate management; real option;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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