Viability of building rehabilitation with real option approaches: an empirical study in Hong Kong

Abstract

Purpose – The purpose of this paper is to evaluate the viability of rehabilitation from a financial standpoint and examine particularly whether a rehabilitation project is worth carrying out or not. Nowadays, rehabilitation has become all the more important in society. Theoretical option models may explain how to make an optimal decision, but in reality they seem to lack empirical evidence when it comes to some situation. This paper aims to use option models to gauge the likely gain/loss from rehabilitation in face of uncertainties. It seeks to bridge the gap in the rehabilitation field between theory and application for facilities managers and property owners alike.Design/methodology/approach – The binomial option model and Samuelson‐McKean closed form model are utilised to evaluate the likely financial benefits of the two major rehabilitation schemes, exploring option premiums and hurdle values. The real option approaches provide a useful framework within which to gauge a likely gain (loss) and ascertai...