Conceptualising real options analysis for risk and uncertainty management in Australian property developments

Abstract

Property developments are inherently uncertain and risky. As a result, several risk management techniques are adopted by property developers in the Australian property development sector to mitigate the impact of potential downside risks. However, uncertainty can create potential upside opportunities for property developers during the property development process which can be explored through flexibility/real options analysis. Several quantitative models and applications have been executed in the literature on flexibility/real options analysis, but practical adoption is still lacking because practitioners are yet to fully understand the theory and its potential benefits. In this paper, a conceptual model is developed to capture flexibilities/real options and linked to the property development process to determine the exact stages within the property development process where real options could be embedded to retain the potential for capturing future upside benefits from uncertainty. Through face to face semi-structured interviews with twelve different stakeholders in the Australian property development industry, thematic analysis and extensive literature review on real options theory, a conceptual model is developed. There are several flexibilities/real options naturally embedded at different stages of the property development process. Other flexibilities can be embedded in the development process deliberately by property developers with the intention of capitalising on upside opportunities in future. These flexibilities embedded at different stages of the development process has the potential to serve as a risk mitigation tool for property developers in Australian property development sector. The model can serve as a practical tool and a visual aid for property development practitioners and stakeholders to determine the exact stages in the property development process where real options are embedded and the specific types of options. It will also aid in deepening the understanding of practitioners regarding real options in property development and further enhance potential acceptance and adoption in the Australian property industry. The linkage to the property development process can enhance easy identification of flexibilities/real options at different stages of the property development process. A model that links real options to the different stages of the property development process is new in the literature.