Factors influencing the adoption of real option analysis in RED appraisal: an emergent market perspective

Abstract

Arising from the growing academic discourse on the inadequacies of the traditional investment techniques, and the benefits of the real option analysis (ROA) in investment appraisal, most investment appraisers are still unwilling to incorporate ROA into the appraisal practice. This study examines the factors influencing the adoption of ROA in development appraisal in an emerging market like Nigeria. Primary data employed for the study was obtained through questionnaire administered on the property development/appraisal officers at the head offices of the estate surveying and valuation (ESV) firms and the property development companies (PDCS) in three first tier property markets of Lagos, Abuja and Port Harcourt in Nigeria. Statistical techniques such as Mean rating, frequency distribution and principal component analysis were employed. The result of the mean analysis reveals that client, market and individual factors were major constraining influences. However, the PCA reveals that firm/management factors, individual factors, client factors and computational/market factors were the major factors influencing the choice of real estate development (RED) appraisal techniques in the Nigeria emerging market. These have variances of 15.767%, 12.895%, 7.818% and 6.992% respectively. The study concluded that while the individual appraiser may not be able to act outside of the company’s/firms policies, there is a need for a paradigm shift within the RED industry to be able to meet up with contemporary demands with respect to RED appraisal techniques and increasing market and investors sophistication.