Real estate and real options - A case study

Real estate investments in emerging economies are characterized by low liquidity, slow payback and high sunk costs; enduring uncertainties about demand, price/m2 and land costs. The introduction of the real options methodology in their analysis considers a housing development as an investment opportunity encompassing several options regarding information acquisition, deferral and abandonment.The model proposed values these managerial flexibilities and shows improved risk management, identifying the optimal strategy (simultaneous vs. sequential) and timing for the construction phases. The maximum rent to pay for the exclusive rights on the land is also determined, a less capital intensive alternative to land ownership.