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Journal cover: Journal of Property Investment & Finance

Journal of Property Investment & Finance

ISSN: 1463-578X
Previously published as: Journal of Property Valuation and Investment

Online from: 1999

Subject Area: Built Environment

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Real options in real estate development


Document Information:
Title:Real options in real estate development
Author(s):Dominik I. Lucius, (European Business School, Schloß Reichartshausen, Oestrich-Winkel, Germany)
Citation:Dominik I. Lucius, (2001) "Real options in real estate development", Journal of Property Investment & Finance, Vol. 19 Iss: 1, pp.73 - 78
Keywords:Pricing, Real estate, Real options, Theory
Article type:Literature review
DOI:10.1108/14635780110365370 (Permanent URL)
Publisher:MCB UP Ltd
Abstract:The interpretation and valuation of real options by means of options pricing theory can be regarded as a relatively new paradigm of investment theory. Option pricing theory based investment valuation represents a sound theoretical basis and offers principally a simple decision base. The approach recognises entrepreneurial flexibility and risk explicitly. It implies a positive correlation between flexibility respectively uncertainty and the value of options. Traditional deterministic-dynamic standard methods of valuation are not able to value flexibility or risk effectively so that option values are adequately reflected. As property investors gradually embrace modern financial concepts it is clear that real estate valuation theory will have to change. One of the most promising areas that could have an important implication on the further development of valuation is the application of the real options paradigm. The author investigates the transfer of general real options theory through an examination of academic results in the field of real estate development. He comes to the conclusion that current research generates highly academic-abstract results with limited practical value. So far a limited number of quantitative studies regarding the valuation real estate projects with the real options method have been conducted. Practical valuations have yet to be comprehensively carried out. For doing so, further research concerning the basic prerequisites of real options theory has to be undertaken.



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