Aligning corporate real estate to real estate investment functions: Improved property decision making using a real option approach

Abstract

Regarding the immense real estate divestitures that have taken place over the last couple of years, some stakeholders have begun to wonder if these short‐term activities may affect the long‐term competitive advantage of a company. While it appears reasonable that property divestitures enhance the financial situation of a company from a so‐called owner perspective, there is no equivalent quantitative evaluation for the loss in space utilisation and flexibility from a user perspective. Consequently, real estate decision making is based upon an insufficient information basis and is dominated by the investment perspective. In order to better align corporate real estate and real estate investment functions better, this paper introduces a formal decision model which describes the situation of corporate real estate decision makers. They have to trade off entrepreneurial flexibility gained by real estate holdings against the financial opportunity cost of freeing up capital. Making use of a prototype decision situation, the paper demonstrates how the decision maker can improve the underlying information basis for property divestment decisions, using a real option approach. Hence, real estate decisions gain in two respects: they are more transparent and, more importantly, their design is more suitable if the company wants to employ real estate holdings to increase the overall value of the company.

Citation

Pfnuer, A., Schaefer, C. and Armonat, S. (2004), "Aligning corporate real estate to real estate investment functions: Improved property decision making using a real option approach", Journal of Corporate Real Estate, Vol. 6 No. 3, pp. 243-264. https://doi.org/10.1108/14630010410812379