Publications

- October 1, 2022: Vol. 34, Number 9

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Accentuate the positive: Unlocking the value in uncertainty using real options as a tool in real estate decision making

by David Rees

We have a long journey still ahead of us, but, on the evidence to date, the 21st century will be a master class in the management of uncertainty. The dot-com bust that saw the Nasdaq Composite Index fall by 76 percent, peak to trough, between March 2000 and October 2002; the global financial crisis (2008); and the COVID-19 pandemic, out of a clear blue sky, have set the scene. Now, we face rising inflation.

Real estate has been in the eye of all these storms. Long-duration financial commitments, high transaction costs, and exposure to economic and regulatory shocks characterize real estate markets. Decisions to purchase, develop, refurbish or demolish assets often involve big initial outlays by owners and investors. A signed lease, likewise, is a binding commitment between a tenant and a landlord, often for an extended period. Choices, once made, can be costly, sometimes impossible, to reverse.

Real options vs. financial options

For these reason

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