Real options interactions in Russian real estate

Abstract

Nonetheless there are numerous methodological and analytical works devoted to real options method itself, just a few of them concentrated on real options portfolio valuation. We try to analyze interactions of several real options in a base-case real estate development project in Russia. After analyzing a number of real estate projects we build a typical base-case cash flow structure of development project. Having constructed financial model and using simulations we analyze a premium for managerial flexibility (real options) in a base-case development project. To build the financial model we use approach offered by Trigeogris (1993). It is interesting that real options portfolio premium for managerial flexibility in development project of commercial and living real estate is now more than 10 percent. We also support earlier results of non-additivity characteristic of real option values when they co-exist in one project.