Real options analysis of revenue risk sharing in post-disaster housing reconstruction

Abstract

Purpose

Post-disaster housing reconstruction (PDHR) demands a considerable percentage of global property investment, yet the post-disaster environment presents intricate challenges to reconstruction financing for governments and at the same time, revenue uncertainty for private investors. The purpose of this study is to develop a methodology for tackling land shortage and the financial challenges of PDHR in the aftermath of a disaster.

Design/methodology/approach

This study developed a methodology based on a combined minimum revenue guarantee and maximum revenue cap model using a well-established real options analysis (ROA) for revenue risk sharing in PDHR projects and land readjustment (LR) for finance. The applicability of the purported model is demonstrated through an illustrative example.

Findings

The results show that flexibility in the options could increase the PDHR contractor’s risk profile by increasing the expected value of the contractor investment and reducing the probability of investment loss. On the other side, a cap on the contractor revenue stream would allow the government to benefit from any excess in revenue and would counterbalance the value of the option.

Practical implications

The framework proposed in this study could serve as a practical risk-revenue sharing in PDHR projects. Governments and policymakers could use the findings to enable the successful delivery of PDHR projects and consequently bring the quality of life of affected people to pre-disaster conditions.

Originality/value

This study can be considered as a first attempt toward the use of the Australian barrier style options structure, and the trinomial lattice valuation model in PDHR projects, which incorporates LR, public-private partnerships, governmental guarantees and PDHR concepts in one ROA-based framework.

Citation

Vahdatmanesh, M., Firouzi, A. and Rotimi, J.O.B. (2022), "Real options analysis of revenue risk sharing in post-disaster housing reconstruction", Journal of Financial Management of Property and Construction, Vol. 27 No. 3, pp. 281-305. https://doi.org/10.1108/JFMPC-02-2021-0018