An application of Real Option Analysis for the assessment of operative flexibility in the urban redevelopment

The high variability of market prices and the uncertainty that, even in restrained timeframes, is characterizing the general economic situation, have led real estate operators to a prudent attitude, who tend to postpone or at least stagger the start of the initiatives on hold of more stable conditions. In this context it is appropriate to use evaluation tools enable to enhance the investment capacity to be adapted to possible changes of the conditions initially hypothesized. In the present research Real Options Analysis (ROA) is applied to the evaluation of an investment in urban redevelopment of a former industrial complex. The result obtained shows the efficacy of the instrument. Assuming that the entrepreneur considers affordable the implementation of the initiative if the outcome of the discounted cash flow analysis is at least equal to a threshold value calculated as a percentage of revenues, the application of ROA returns an extended NPV that meets this constraint, whereas the use of traditional NPV suggest to abandon the project idea. The binomial approach used also allows to accurately monitor the project's development, correlating it to the evolution of the market.