Value Maximizing Decisions in the Real Estate Market: Real Options Valuation Approach

Abstract

The real estate market of EU countries has undergone a severe global financial crisis 2008–2009, recovered successfully later, and now experiencing significant uncertainty due to the COVID-19 pandemic event. Significant volatility of the real estate business is once again evident, just as it was following the global financial crisis. The paper aims to provide a case study of a real estate project by giving insight into the Latvian real estate project that had been experiencing similar economic uncertainty, to demonstrate hybrid real options valuation (ROV) method to adapt real estate investments to changing circumstances and to develop the decision-making solution to similar EU real estate problems during the pandemic. The paper provides the “step-by-step” ROV application’s methodology in real estate development projects. The presented methodology is a powerful managerial risk management tool for the executives of similar real estate development projects in the EU countries struggling to make investment decisions in the pandemic and post-pandemic period. Since any estimation includes assumptions, ROV results should be interpreted and perceived as approximations only. The future works can provide robust ROV analyses and interpretations regarding the demand for real estate, showing quantitatively how competition can impact strategic investment decisions.

Valuation of Patent-Based Collaborative Synergies under Strategic Settings with Multiple Uncertainties: Rainbow Real Options Approach

“…Kodukula and Papudesu argued that, typically, practitioners simplify their business life by aggregating uncertainties that drive the asset value and employ one combined volatility for the valuation (Kodukula and Papudesu 2006, p. 167). Monto Carlo simulation is one the most common methods for this (Kodukula and Papudesu 2006;Čirjevskis 2021b). Thus, on the empirical side of the research, the paper enhances practitioners' acceptance of advanced real options application as the extra valuation technique under multiple uncertainties, bridging the gap between theory and practice, and thereby contributing to the awareness and application of ROT.…”