Real option analysis. The viability of real estate projects
-
DOIhttp://dx.doi.org/10.21511/imfi.17(4).2020.24
-
Article InfoVolume 17 2020, Issue #4, pp. 271-284
- 1142 Views
-
277 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Traditional methods used for real estate project valuation, such as the static Net Present Value, have some limitations, as these methods do not consider the possibility of a change in the initial conditions of the project or during its development. On the other hand, the real options approach allows for flexibility in evaluating a real estate project, improving the decision-making process as it helps identify the optimal strategy and timing for the construction phases. The paper deals with evaluating an actual real estate project in La Rioja (Spain) using different options to estimate its final Net Present Value. The results show that the real estate project would be profitable under several scenarios, although the valuations can vary significantly among the different types of options. This is because some options add more value to the project than others, depending on their cost and the uncertainty they eliminate. In contrast, the results obtained using the traditional static method would have led a real estate developer to discard the project completely, as its Net Present Value would have been negative. This confirms that the introduction of flexibility in real estate developments creates additional value by allowing developers and investors to dynamically react to changes in the market, thus making better investment decisions and finding real estate investment opportunities that otherwise would not be considered at all.
- Keywords
-
JEL Classification (Paper profile tab)C15, G13, O22
-
References24
-
Tables0
-
Figures9
-
- Figure 1. Tree 1 option to expand
- Figure 2. Tree 2 option to expand
- Figure 3. Tree 1 option to contract
- Figure 4. Tree 2 option to contract
- Figure 5. Tree 2 option to choose
- Figure 6. Option to choose. Tree with chosen options in each node
- Figure 7. Tree 1 option to wait
- Figure 8. Tree 2 option to wait without barrier
- Figure 9. Tree 2 option to wait with barrier
-
- Alonso, S., Azofra, V., & de la Fuente, G. (2009). Las opciones reales en el sector eléctrico. El caso de la expansión de Endesa en Latinoamérica. Cuadernos de Economía y Dirección de la Empresa, 12(38), 65-94.
- Balibrea, J. (2011). Desarrollo de una metodología basada en la teoría de opciones reales para la valoración de proyectos de inversión en energías renovables (Tesis doctoral). E.T.S. de Ingenieros de Caminos, Canales y Puertos. Universidad Politécnica de Madrid.
- Banco de España. (2015). Boletín Estadístico del Banco de España.
- Capozza, D., & Li, Y. (1994). The Intensity and Timing of Investment: The Case of Land. The American Economic Review, 84(4), 889.
- Cox, J. C., Ross, S. A., & Rubinstein, M. (1979). Option pricing: A simplified approach. Journal of Financial Economics, 7(3), 229-263.
- Ford, D. N., Lander, D. M., & Voyer, J. J. (2002). A real options approach to valuing strategic flexibility in uncertain construction projects. Construction Management and Economics, 20(4), 343-351.
- García, E. P. A. (2017). Aplicación de opciones reales en la valoración financiera de un campo petrolero. ODEON, 12, 7-54.
- González, E. (2003a). Valoración de empresas de internet mediante opciones reales. In Anales de economía aplicada. XVII Asepelt. Asociación Española de Economía Aplicada, ASEPELT.
- González, E. (2003b). Valoración de un proyecto de edificación mediante opciones reales. In Anales de economía aplicada. XVII Asepelt. Asociación Española de Economía Aplicada, ASEPELT.
- Grenadier, S. R. (1995). Flexibility and tenant mix in real estate projects. Journal of Urban Economics, 38(3), 357-378.
- Kodukula, P., & Papudesu, C. (2006). Project valuation using real options: a practitioner’s guide. J. Ross Publishing.
- Leporati, M. (2013). Valoración de proyectos Retrieved from de tiendas de conveniencia en nuevos mercados a través de opciones. Análisis financiero, 123, 6-30.
- Mascareñas, J. (2007). Opciones reales en la valoración de proyectos de inversión (Monografías de Juan Mascareñas Sobre Finanzas Corporativas). Universidad Complutense de Madrid.
- Mascareñas, J. M., Lamothe, P., López, F. J., & de Luna, W. (2003). Opciones reales y valoración de activos cómo medir la flexibilidad operativa en la empresa. Madrid: Pearson Educación.
- Ministerio de Fomento. (2016). Boletín estadístico y estadísticas del Ministerio de Fomento.
- Neufville, R. de, Scholtes, S., & Wang, T. (2006). Opciones reales en Hoja de Cálculo: Caso de un edificio de aparcamiento. Traducido por Escudero, Laura de Valuing Options by Spreadsheet: Parking Garage Case Example. Journal of Infrastructure Systems, 12(2), 107-111.
- Pardo, L., Rodríguez, J. J., & Rodríguez, M. (2004). Opciones reales en la valoración de proyectos de inversión en acuicultura. In Anales de Economía Aplicada. XVIII Asepelt.
- Quigg, L. (1993). Empirical testing of real option-pricing models. The Journal of Finance, 48(2), 621-640.
- Rocha, K., Salles, L., Alcaraz, F., Sardinha, J. A., & Teixeira, J. P. (2007). Real estate and real options. A case study. Emerging Markets Review, 8(1), 67-79.
- Schwartz, E. S., & Moon, M. (2000). Rational pricing of internet companies. Financial Analysts Journal, 56(3), 62-75.
- Schwartz, E. S., & Moon, M. (2001). Rational pricing of internet companies revisited. Financial Review, 36(4), 7-26.
- Titman, S. (1985). Urban Land Prices Under Uncertainty. The American Economic Review, 75(3), 505-514.
- Trigeorgis, L. (1993). The nature of option interactions and the valuation of investments with multiple real options. The Journal of Financial and Quantitative Analysis, 28(1), 1-20.
- Williams, J. T. (1991). Real estate development as an option. Journal of Real Estate Finance and Economics, 4(2), 191-208.