Is There Hidden Value in Real Estate Investments? - Real Options Analysis Provides Rationale to Contingent Investment Decisions

The understanding of real options analysis (ROA) has been claimed by academics to be extremely valuable for the real estate industry; yet adoption of the method in practice has been very slow. The aim of this dissertation is to examine opportunities that ROA opens in real estate investment analysis and decision-making as well as to demonstrate the actual real option value in some topical areas of real estate investment. The study utilizes a mixed method research strategy with both quantitative and qualitative data. Case study research is used to collect data and to amount evidence to the research questions. Case studies conducted in this dissertation address the research problem from current areas causing uncertainties in the traditional discounted cash flow valuation of real estate investments, i.e. green building certificates, building flexibility, real estate portfolio management and public private partnerships. The dissertation finds that ROA can enhance real estate investment analysis and decision-making and proposes that i) ROA should be used in real estate investment analysis and management because it can identify value elements missed by standard valuation practices, ii) lifecycle performance of real estate assets can be enhanced with real options and iii) ROA can produce results that can encourage investments necessary for long-term success in the real estate industry. The calculated real option values for different demonstration cases were a 8.8 % premium in the green building certificate case, a range from €8/sqm to €195/sqm in the building flexibility case, a 6.6 % premium in the residential real estate portfolio case and an added value of €1,580,000 in the public private partnerships case. This dissertation contributes to the body of knowledge in the real estate investment field. The categorisation of previous research and building upon it new applications form a coherent whole of the method's potential in the real estate industry. The results enhance real estate investment analysis and decision-making by highlighting the role of uncertainty through different application levels. It points out that ROA can reveal new information and lines of actions, which can supplement or replace results of traditional DCF analysis. This is important for directing limited resources in long-term investments into right positions. The results presented in the papers enhances lifecycle performance of real estate investments from different viewpoints, which serves as a guidance for professionals in similar decisions as well as a starting point for developing new applications. The dissertation also discusses the practical adaptability of real options valuation techniques through different cases.