Author: Markus M. Harder
PhD Dissertation submitted February 2012 at the University of Cambridge
copyright 2012
Abstract
Uncertainty about the future can have a considerable effect on current investment decisions. Investment in stages can help in spreading real estate development risk as it offers flexibility for an otherwise inflexible asset class. Here I present a continuous-time model that allows the valuation of a vertical phasing project with n stages as a perpetual compound option. I find that the valuation of such a compound investment opportunity depends on parameters for all future stages, whereas the exercise policy per individual stage requires information solely on that stage; hence the optimal decision rule is independent of time, past stages, and future stages beyond the next. To give a broader perspective, I compare and contrast the vertical phasing option to other possible investment alternatives and illustrate cases for which the alternatives are most preferable. Because flexibility comes at a cost, it must be carefully and separately evaluated for each potential investment opportunity. For a manager the presented threshold policy is straightforward and easy to implement. Through practitioner interviews I offer insights into the current status of real estate investment analysis. Lastly, I provide models that have practical relevance and employ a simulation approach to create a refined investment analysis model that can be used by real estate professionals. |