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Viability of building rehabilitation with real option approaches: an empirical study in Hong Kong

Eddie C.M. Hui (Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong, China)
Otto M.F. Lau (Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong, China)

Facilities

ISSN: 0263-2772

Article publication date: 23 August 2011

Abstract

Purpose

The purpose of this paper is to evaluate the viability of rehabilitation from a financial standpoint and examine particularly whether a rehabilitation project is worth carrying out or not. Nowadays, rehabilitation has become all the more important in society. Theoretical option models may explain how to make an optimal decision, but in reality they seem to lack empirical evidence when it comes to some situation. This paper aims to use option models to gauge the likely gain/loss from rehabilitation in face of uncertainties. It seeks to bridge the gap in the rehabilitation field between theory and application for facilities managers and property owners alike.

Design/methodology/approach

The binomial option model and Samuelson‐McKean closed form model are utilised to evaluate the likely financial benefits of the two major rehabilitation schemes, exploring option premiums and hurdle values. The real option approaches provide a useful framework within which to gauge a likely gain (loss) and ascertain the viability of rehabilitation in the midst of uncertainties.

Findings

The real option approaches produce two outcomes values, the option premium and the hurdle value, which are able to provide insight into the likelihood of rehabilitation for facilities managers/property owners in the intricate and dynamic markets. The higher the option premium, the more attractive a rehabilitation project will be. And the hurdle value usefully reveals a critical timing for exercising rehabilitation.

Research limitations/implications

This paper provides a necessary support for sustaining the rehabilitation schemes. It presents an adequate alternative to examine the value of rehabilitation by taking into account uncertainties in real life. It is useful for facilities managers and property owners, who sometimes neglect potential benefit/loss in the uncertainties when making an investment decision.

Practical implications

This paper has established the framework for evaluating the rehabilitation schemes that has practical implications for decision making. The facilities manager, property owner and government should make some adjustments in formulation of their rehabilitation policies and strategies.

Originality/value

This paper provides facilities managers with a means in which the real option approaches are embedded to express benefit/costs of rehabilitation. With the aid of this information, facilities managers/property owners are able to evaluate rehabilitation more effectively and enhance the decision‐making quality.

Keywords

Citation

Hui, E.C.M. and Lau, O.M.F. (2011), "Viability of building rehabilitation with real option approaches: an empirical study in Hong Kong", Facilities, Vol. 29 No. 11/12, pp. 485-498. https://doi.org/10.1108/02632771111157150

Publisher

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Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited