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

Viability of building rehabilitation with real option approaches: an empirical study in Hong Kong 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 ascertain the viability of rehabilitation in the midst of uncertainties. Findings – The real option approaches produce two outcomes values, the option premium and the hurdle value, which are able to provide insight into the likelihood of rehabilitation for facilities managers/property owners in the intricate and dynamic markets. The higher the option premium, the more attractive a rehabilitation project will be. And the hurdle value usefully reveals a critical timing for exercising rehabilitation. Research limitations/implications – This paper provides a necessary support for sustaining the rehabilitation schemes. It presents an adequate alternative to examine the value of rehabilitation by taking into account uncertainties in real life. It is useful for facilities managers and property owners, who sometimes neglect potential benefit/loss in the uncertainties when making an investment decision. Practical implications – This paper has established the framework for evaluating the rehabilitation schemes that has practical implications for decision making. The facilities manager, property owner and government should make some adjustments in formulation of their rehabilitation policies and strategies. Originality/value – This paper provides facilities managers with a means in which the real option approaches are embedded to express benefit/costs of rehabilitation. With the aid of this information, facilities managers/property owners are able to evaluate rehabilitation more effectively and enhance the decision‐making quality. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Facilities Emerald Publishing

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

Facilities, Volume 29 (11/12): 14 – Aug 23, 2011

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
0263-2772
DOI
10.1108/02632771111157150
Publisher site
See Article on Publisher Site

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 ascertain the viability of rehabilitation in the midst of uncertainties. Findings – The real option approaches produce two outcomes values, the option premium and the hurdle value, which are able to provide insight into the likelihood of rehabilitation for facilities managers/property owners in the intricate and dynamic markets. The higher the option premium, the more attractive a rehabilitation project will be. And the hurdle value usefully reveals a critical timing for exercising rehabilitation. Research limitations/implications – This paper provides a necessary support for sustaining the rehabilitation schemes. It presents an adequate alternative to examine the value of rehabilitation by taking into account uncertainties in real life. It is useful for facilities managers and property owners, who sometimes neglect potential benefit/loss in the uncertainties when making an investment decision. Practical implications – This paper has established the framework for evaluating the rehabilitation schemes that has practical implications for decision making. The facilities manager, property owner and government should make some adjustments in formulation of their rehabilitation policies and strategies. Originality/value – This paper provides facilities managers with a means in which the real option approaches are embedded to express benefit/costs of rehabilitation. With the aid of this information, facilities managers/property owners are able to evaluate rehabilitation more effectively and enhance the decision‐making quality.

Journal

FacilitiesEmerald Publishing

Published: Aug 23, 2011

Keywords: Real option; Option premium; Hurdle value; Rehabilitation; Buildings; Hong Kong

References

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