Integrating real options analysis into practical property development decision-making; practitioners’ receptiveness and acceptance

Abstract

Studies have demonstrated the potential of RO/ROV in the property development decision making. However, practitioners are yet to accept, adopt and integrate real options analysis in Australian property development decision making process. The paper examines the receptiveness and acceptance of RO/ROV in the Australian residential property development market with the aim of determining the preparedness of practitioners to use RO in practical property development decision making. Through face to face semi-structured interviews with twelve participants selected from the Australian property development sector, data is collected and analysed using thematic analysis to determine the requirements necessary before adoption of real option analysis/flexibility in property development decision making. Acceptance and receptiveness of RO/ROV was unclear as participants were not unanimous in their response. Some stakeholders were quite positive about the potential of flexibility, but others were dismissive. Beyond developing quantitative models for real options analysis and valuation, the findings from the face to face semi-structured interviews suggest that practitioners are receptive to the RO/ROV models but clarity is needed regarding input variables in ROV models, justification of flexibility investments and highlighting benefits of ROV over current valuation models. Besides, simpler models and views of other stakeholders could be important in engendering acceptance of RO/ROV in practice. There should be clarity from the valuation community on values associated with flexibility before developers and investors can decide to embed flexibility in development projects. This is an initial evidence focusing on investigating the receptiveness and acceptance of real options/valuation theory in practice.