Evaluation of large scale industrial development using real options analysis : a case study

Abstract

Recently, real-option analysis has gained attention as an innovative valuation method for complex real estate projects. However, considering its potential, this method has not become as popular as it should have. One major reason may be its complexity, and perhaps, its effectiveness is not yet widely known in the industry. Accumulating high-quality case studies can help demonstrate the effectiveness of any theory. Case studies can also help standardize the application process, providing guidelines that help people use the model more easily. In addition, it can reveal and provide solutions for various types of properties, and the means to accommodate the specifics of real-world problems met while applying the model. This case study deals with a large-scale industrial development project, which is suitable for the application of the real-option model. Usually industrial developers obtain large sites and then develop them in a phased manner. This allows them the freedom to choose phase timing and to modify their initial building plans more freely than with other types of property development.

(cont.) This flexibility adds certain amount of value to the land. We found that, with some modifications, the real-option model is fairly effective when applied to large-scale industrial development. The model facilitates more precise valuations of land by taking into account various options, such as waiting for better timing and selling the vacant land as is. This study also offers a method to analyze the proper timing of each phase's commencement-a useful decision-making tool for the developer.