Abstract
Deciding whether an investment should be made or not requires an evaluation of the investment’s effectiveness. The choice of evaluation methods is related to the basic objective conditioning the implementation of the investment project. It often happens that the conditions in which a specific investment has been formulated change and so does the basis for its implementation, and it is necessary to adapt it to the new conditions. These new conditions could be recognized during the exploitation of the project so it is hard to take them into consideration at the stage of planning. The paper aims to evaluate the investments in commercial real estate with the option of alternative way of usage. This evaluation was carried out using the classical (discounted) methods of economic efficiency of investments and real options. Two groups of pricing real options models were used in the study: binomial models and continuous-time models. Results based on varied valuation methods lead to different conclusions. Unlike the discount methods, the real option approach allows valuing the project flexibility (which cannot be valued by classical methods). This value of flexibility in certain conditions indicates what should be the path of development of the project related with the transformation of commercial real estate for other purposes.
Highlights
The problems discussed in the paper focus on the issues related to with the evaluation of the economic effectiveness of investments in commercial real estate
In reference to the remarks concerning the distinction between methods of the calculation of economic efficiency of investment, the valuation was carried out in two ways
Among the factors affecting the conversion of the existing commercial space to office space there can be mentioned a significant increase in the supply of commercial space, higher architectural standards of real estate for commercial activities, the prospect of building new commercial real estate, increased demand for office space
Summary
The problems discussed in the paper focus on the issues related to with the evaluation of the economic effectiveness of investments in commercial real estate. The occurrence of an uncertainty and risk on a larger scale than in operative decisions, the effects of which are short-lived because investment processes often run over a long time; The various ways of usage of real estate in business operations allow us to describe them using several functions (Bryx, 2006; Kucharska-Stasiak, 2006). These functions depend on the value in use relat- ed with the property, which implies the manner of their economic usage (Matkowski, 2004). The use of these methods requires (as discussed earlier) the inclusion of the risks and
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