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Staging option application to residential development: real options approach

Kwabena Mintah (School of Property, Construction and Project Management, RMIT University, Melbourne, Australia)
David Higgins (School of Engineering and the Built Environment, Birmingham City University, Birmingham, UK)
Judith Callanan (School of Property, Construction and Project Management, RMIT University, Melbourne, Australia)
Ron Wakefield (School of Property, Construction and Project Management, RMIT University, Melbourne, Australia)

International Journal of Housing Markets and Analysis

ISSN: 1753-8270

Article publication date: 6 December 2017

Issue publication date: 23 January 2018

515

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.

Keywords

Citation

Mintah, K., Higgins, D., Callanan, J. and Wakefield, R. (2020), "Staging option application to residential development: real options approach", International Journal of Housing Markets and Analysis, Vol. 11 No. 1, pp. 101-116. https://doi.org/10.1108/IJHMA-02-2017-0022

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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