Real options and application to Australian proeprty development: A conceptual analysis

Problem/Purpose - The paper thoroughly reviews the major dissimilarities in the suppositions underlying the DCF and the real options approach, and develops a conceptual framework of real options for the entire real estate development process. Design/methodology/approach - Extensive literature review of journal publications on DCF valuation and real options valuation with critical analysis to result in the development of the conceptual framework for real options. Findings - The findings provide the evidence needed to support the practical appeal of the method to practitioners in the industry. This will enable property practitioners to capture the upside potentials and limit downside losses for investment projects. Research limitations/implications - In Australia according to KPMG (2013), property practitioners and stakeholders are applying discounted cash flow to evaluate the viability of development projects. Standard property development appraisal centred on DCF method discards the potential upside gains and fails to limit the possible downside losses of an investment from managerial flexibility. Achieving practical usability of the real options method would enhance risk assessments in property developments in Australia. Originality/value - The flexibility afforded to property developers to alter future decisions based upon the arrival of new information can be valuable due to the cyclical nature of property markets. Adoption of the real options method in practice has been very slow. This paper expands the theory of real options to enhance the practical usability of the method via a conceptual framework