Valuing flexibility in a retrofit investment

2014 ◽  
Vol 16 (1) ◽  
pp. 3-21 ◽  
Author(s):  
Jussi Vimpari ◽  
Juho-Kusti Kajander ◽  
Seppo Junnila
Keyword(s):  
Real Estate ◽  
Real Options ◽  
Research Process ◽  
Real Options Analysis ◽  
Content Type ◽  
The Real ◽  
Real Options Valuation ◽  
Corporate Real Estate ◽  
Options Valuation

Purpose – The need for flexibility between organisational units is well established in corporate real estate. While the cost of flexibility is rather straightforward to approximate, measuring economical value of the flexibility is not straightforward. The purpose of this paper is to explore how real options analysis can be used for valuing flexibility in a real retrofit investment case, present a research process for valuing the flexibility in the retrofit investment case, and evaluate the empirical usability of real options valuation results compared with traditional discounted cash flow valuation results. Design/methodology/approach – The research is conducted as a case study. A newly introduced real options valuation method, the fuzzy pay-off method is used for analysing data from a Finnish office building retrofit investment case. The major difference in the selected method is that it uses fuzzy set theory instead of probabilistic theory, and the main advantage is the practical applicability, i.e. only three scenarios (minimum, best guess, and maximum) are needed for the valuation of flexibility. In the case, the scenarios are determined using a seven-phase research process that incorporates data available (e.g. rental agreements, building information) to a corporate real estate unit. The research process involves defining vacancy scenarios for rental agreements, transforming them into potential income achievable with flexibility, estimating cost of flexibility, comparing the potential income with the costs, and valuing the real options. Findings – The main finding of this paper is that real options analysis; especially the fuzzy pay-off method can be used for assessing the monetary value of flexibility. The applicability of the fuzzy pay-off method into a practical investment case was found straightforward because assignment of probabilities into different uncertainty scenarios was unnecessary. In the empirical case, it was found that flexibility investments were profitable only when parts of the building instead of the whole building were designed flexible. The present value of the pay-off from flexibility ranged from negative 58/sqm to positive 130/sqm, depending on the tenant. Originality/value – Real options literature, especially in the real estate and construction sector, has requested for new applications of real options analysis in practical setting. This paper adds to that request with an example of evaluating flexibility in a retrofit investment case. The empirical analysis produced in this paper was perceived valuable by case study investor and can be used as a guidance and motivation for further applications of real options in the industry.

scholarly journals Real Options Analysis for Acquisition of New Technology: A Case Study of Korea K2 Tank’s Powerpack

2018 ◽  
Vol 10 (11) ◽  
pp. 3866 ◽  
Author(s):  
Sungchul Kim ◽  
Ronald Giachetti ◽  
Sangsung Park
Keyword(s):  
Economic Analysis ◽  
Real Options ◽  
Real Option ◽  
The Real ◽  
Weapon Systems ◽  
Real Options Valuation ◽  
Real Option Valuation ◽  
Acquisition Strategy ◽  
Options Valuation

For sustainable defense management, it is essential to acquire weapons systems that can adapt to future uncertain threats and, at the same time, to invest efficiently with limited budgets. Economic analysis is used to examine the costs, benefits and uncertainties of alternatives. In particular, the use of the real options valuation, which is one of the methodologies of economic analysis, is expanding. The real options valuation has shown effectiveness across various industries to evaluate investment strategies. In this paper, we apply the real options valuation to the weapon systems development case and confirm its usefulness. Unlike previous studies, the real option valuation methodology is applied retroactively to the finished project, compared to existing research mainly applying real options to value research and development (R&D) without knowing how the project completed. We use the following procedure. (1) Define the uncertainties of the three acquisition alternatives (development, technology adoption, and purchase). (2) Calculate the benefits of the three acquisition alternatives with expected and actual data without uncertainties. (3) Model the decision tree without options and with options. (4) Analyze and compare results with benefit and benefit cost ratio. We analyzed the Korea K2 tank powerpack development case by applying real options. We could see that the real options could have reduced the risk of losses when the development risk is high and market uncertainty exists. From the case study of the development of the powerpack, we learned the following three lessons. First, we reaffirmed the importance of objective value analysis in project decision making. Second, we need to analyze the project value continuously and revise the acquisition strategy accordingly. Third, the effectiveness of the real options valuation was confirmed for sustainable defense management. In addition, the real option analysis data acquired from similar finished projects can be useful for establishing a new product acquisition strategy and, at every decision-making phase, the real option evaluation should be continuously performed with updated information. In this paper, we first perform real option valuation of finished weapon systems in the Korean defense field. This paper is valuable in establishing a rational methodology for applying economic analysis to weapon system acquisition projects.

Towards phronetic knowledge for strategic planning in corporate real estate management

2014 ◽  
Vol 16 (3) ◽  
pp. 203-219 ◽  
Author(s):  
Maartje van Reedt Dortland ◽  
Hans Voordijk ◽  
Geert Dewulf
Keyword(s):  
Real Estate ◽  
Real Options ◽  
Case Studies ◽  
Real Option ◽  
Content Type ◽  
The Real ◽  
Corporate Real Estate ◽  
Estate Management ◽  
Real Estate Management ◽  
Corporate Real Estate Management

Purpose – The objective of this paper is to provide insights about the potential of real option thinking for corporate real estate management (CREM) from the owner-user perspective. A promising approach to classifying and evaluating flexibility in real estate is the real options approach. Most literature on real options look from an investor perspective. Design/methodology/approach – First, a review on real option thinking in the real estate and large engineering projects literature is provided using Flyvbjerg’s (2001) typology of knowledge systems. Next, the effects of exercising real options for various stakeholders in CREM is analysed in two case studies. Findings – The literature review shows that little research has been done on conditions and values needed to make real options applicable in the CREM practice of the owner-user of real estate. The case studies show that real options are more valuable to one stakeholder than to another. Practical implications – Based on the knowledge on conditions for and the consequences of exercising real options for various stakeholders, insight can be gained into the applicability of real options to the owner-user of real estate and how real options reasoning fits within this practice. A phronetic type of knowledge is needed that incorporates stakeholders’ interests. Originality/value – Creating phronetic knowledge would allow understanding why and how real options are used, or could be used in the future, and heuristics could be developed. In this way, real estate management should become more resilient to changes.

Defining a corporate real estate management's (CREM) brand

2014 ◽  
Vol 16 (1) ◽  
pp. 60-76 ◽  
Author(s):  
Abdul Jalil Omar ◽  
Christopher A. Heywood
Keyword(s):  
Real Estate ◽  
Real Estate Market ◽  
Relationship Building ◽  
Content Type ◽  
Study Approach ◽  
Brand Development ◽  
Corporate Real Estate ◽  
Multiple Case ◽  
Business Functions

Purpose – This paper aims to explore how branding theory can be used to understand corporate real estate management's (CREM's) relationships with its customers. Specifically, the perspectives of CREM executives and customers are used to develop a statement of a CREM brand. Design/methodology/approach – A multiple case study approach from four industry sections that consist of telecommunications, logistic, retail, and education from an emerging real estate market (Malaysia) and a mature real estate market (Australia). CREM executives and CREM customers from each case were interviewed to obtain information on CREM within organisations. Findings – The findings indicate that CREM supports the business by managing organisations' strategic real estate resources as its brand. CREM executives focus more on the technicality of real estate functions, while CREM customers expect corporate real estate (CRE) to support their business functions. Research limitations/implications – A CREM brand is important to CREM relationship building with the targeted customers. Successful brand development is able to increase CREM visibility to customers and at the same time gain appreciation of its contributions to the organisations. Originality/value – This is the first study that investigates CREM from a branding perspective. The mechanism for communicating CREM contributions using branding helps to increase acceptance from the customers.

To do or not to do: the real state of real estate

2019 ◽  
Vol 9 (2) ◽  
pp. 1-23
Author(s):  
Rukhman Solangi ◽  
Waheed Ali Umrani ◽  
Iqra Solangi ◽  
Mumtaz Ali Memon
Keyword(s):  
Small Business ◽  
Real Estate ◽  
Ethical Decision Making ◽  
Ethical Issues ◽  
Content Type ◽  
The Real ◽  
The Real Estate ◽  
Academic Level ◽  
In The Beginning

Learning outcomes This case will enable students to develop an understanding of starting a single proprietorship business focusing on the real estate; understand the possible challenges that an entrepreneur faces in the beginning; apply ethical decision-making frame works when faced in ethically conflicting situation; andlook at the career anchoring theory. Case overview/synopsis The case study takes a look at the ways and means of starting a small business depending on the owner managers experience, capabilities and skills including networking which are germane to success. It also highlights the ethical issues that small business proprietors have to face in order to make money and grow. The setting of the case is a town in Sindh province of Pakistan, which setting generally represent the arena where such business (Single Proprietorship) develop and get involved in the economic development of a backward area. Finally, the case study highlights the significant but realistic expose of career anchor theory, which stipulates that people normally start with a job but switch jobs over their working life. Complexity academic level Graduate and undergraduate. Supplementary materials Teaching Notes are available for educators only. Please contact your library to gain login details or email [email protected] to request teaching notes. Subject code CSS 3: Entrepreneurship.

The state of value creation in the real-estate sector – lessons from lean thinking

2014 ◽  
Vol 32 (1) ◽  
pp. 28-47 ◽  
Author(s):  
Tuuli Jylhä ◽  
Seppo Junnila
Keyword(s):  
Real Estate ◽  
Value Creation ◽  
Service Providers ◽  
Added Value ◽  
Lean Thinking ◽  
Content Type ◽  
The Real ◽  
The Real Estate ◽  
Real Estate Sector

Purpose – Although great emphasis has been given to the added value of real estate, the current studies miss the phase when the actual value is created, i.e., the production phase of real-estate services. Therefore, the purpose of this paper is to evaluate the current state of value creation of the commercial real-estate services from a lean thinking perspective. Design/methodology/approach – Value creation is studied in four Finnish cases through 122 interviews and eight workshops. Findings – Cross-case analysis identified six sources of waste resulting as poor value creation: sub-process optimisation instead of optimising the entire process, the price minimisation instead of cost minimisation, difficulties responding to customer value, overloaded employees, inability to make improvements, and poorly managed information. Research limitations/implications – Although the findings are grounded on a solid data collection and analysis, the case study nature of the research and the Finnish case study settings create limitations for the generalisation of the findings. Practical implications – Service providers and other process owners can use the findings to improve their value creation and increase the productivity of their service processes. Originality/value – This is one of the first research studies that utilise lean thinking in commercial service processes in the real-estate sector and thus provides new insight into how to increase productivity through waste minimisation.

scholarly journals Real estate business model innovation and the impact of ego network structure

2017 ◽  
Vol 40 (6) ◽  
pp. 648-670
Author(s):  
Åsa Yderfält ◽  
Tommy Roxenhall
Keyword(s):  
Real Estate ◽  
Business Model ◽  
Network Structure ◽  
Business Model Innovation ◽  
Innovative Development ◽  
Content Type ◽  
The Real ◽  
The Real Estate ◽  
The Impact

PurposeThis paper aims to analyze how a real estate business model innovation developed in a real estate network, with a special focus on the relationship between ego network structure and the innovative development of the business model. Design/methodology/approachThe paper is a single case study of a Swedish real estate network of 38 actors. The data were collected at the individual actor level using multiple sources: 12 semi-structured in-depth interviews, 94 min of meetings and 28 written contracts. The empirical findings resulted in four propositions. FindingsThis study demonstrates that it was primarily the building user who was behind the innovative development of the real estate business model innovation, whereas the real estate company acted as a network hub and network resource coordinator. The ego network structures significantly affected the outcome. Practical implicationsReal estate companies should act as hubs, coordinating all the network actor resources the building user needs in the value-creation process. To be effective hubs, the representatives of real estate companies must create extensive personal and open ego networks to acquire central network positions. Originality/valueFew studies examine business model innovation, particularly in the real estate context. Though large real estate businesses usually operate in the networks of various actors, analyses based on the network perspective are also lacking. This case study builds a valuable understanding of how network processes in real estate networks can be used as tools to foster real estate business model innovation, which in turn can lead to more competitive real estate companies and building users.

scholarly journals Measuring Synergies of Banks’ Cross-Border Mergers by Real Options: Case Study of Luminor Group AB

2021 ◽  
Vol 14 (9) ◽  
pp. 403
Author(s):  
Andrejs Čirjevskis
Keyword(s):  
Real Options ◽  
Value Added ◽  
Corporate Financing ◽  
The Real ◽  
Measurement Models ◽  
Cross Border ◽  
Valuation Method ◽  
Real Options Valuation ◽  
Market Value Added

Applying the real options valuation to measure merger and acquisition (M&A) synergy is highly debatable, with questions arising from the usefulness of this approach in real-world settings. Understanding the full benefits (and possible limits) of real options applications to measure synergy in cross-border merger activities remains a challenge. The main objective of the paper is to explore multiple types of synergies in the recent, highly strategic cross-border merger—the Luminor Group AB deal—and to value those synergies with the real options application. The research found that the sum of values of different types of synergies in M&A deals as the market value added provided by this deal could be valued with real options applications. A real options application may serve as a decision-making tool and at the same time be a useful valuation method of M&A deal synergies. The implications of this paper are twofold. First, the research contributes to corporate financing by providing relevant synergy measurement models in M&A deals. Second, the paper contributes to “grand challenges’’ research topics of international businesses by illustrating how a group of multinational banks solved the problem of income inequality across countries, and balanced inequality within their networks through a cross-border merger.

Modelling sustainability maturity in corporate real estate management

2014 ◽  
Vol 16 (2) ◽  
pp. 126-139 ◽  
Author(s):  
Rasita Masalskyte ◽  
Mia Andelin ◽  
Anna-Liisa Sarasoja ◽  
Tomi Ventovuori
Keyword(s):  
Real Estate ◽  
Research Process ◽  
Maturity Model ◽  
Theory Approach ◽  
Content Type ◽  
Holistic Understanding ◽  
Corporate Real Estate ◽  
Estate Management ◽  
Real Estate Management ◽  
Corporate Real Estate Management

Purpose – Sustainability in corporate real estate management (CREM) has been lately recognized as an integral part of almost every business. However, its perception might extremely differ in various industries. Sustainable CREM practices have been extensively analyzed in recent studies, yet real estate is an ambiguous field and the practices still lack holistic understanding. This research aimed to summarize and systematize the present sustainable CREM practices and propose a generic sustainability maturity model for CREM. Design/methodology/approach – The research process was implemented in accordance with the grounded theory approach. Research data were collected in semi-structured interviews with major Finnish companies, recognized for their environmental work. The scope of the research was nine interviews. Findings – The result of this research is the generic sustainability maturity model for CREM. It consists of 18 most typical sustainable CREM practices at the companies interviewed. The model demonstrates the value of implementing sustainable CREM. Originality/value – Sustainability maturity model for CREM is an indicative tool for sustainability maturity assessment in CREM. The model demonstrates how CREM contributes to company's sustainability and provides a holistic approach towards the existing sustainable CREM practices. Additional practical implications of the model include sustainable CREM benchmarking and communication with stakeholders.

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