Real options and game theoretical approaches to real estate development projects: multiple equilibria and the implications of different tie-breaking rules

This paper contributes to a fast growing literature which introduces game theory in the analysis of real option investments in a competitive setting. Specifically, in this paper we focus on the issue of multiple equilibria and on the implications that different equilibrium selections may have for the pricing of real options and for subsequent strategic decisions. We present some theoretical results of the necessary conditions to have multiple equilibria and we show under which conditions different tie-breaking rules result in different economic decisions. We then present a numerical exercise using the in formation set obtained on a real estate development in South London. We find that risk aversion reduces option value and this reduction decreases marginally as negative externalities decrease.

Corporate real estate management in the retail sector: a study of the relationship between the management of the corporate real estate and corporate performance

Retail organisations have often been cited as being at the forefront of corporate real estate management. This research found that the retail sector can be characterised by diversity both in terms of the degree to which organisations are vertically integrated and in terms of the range of modes of retailing they engage in. This in turn led to highly diverse real estate portfolios. Given this diversity it may be surprising that the over riding strategy which the vast majority of sample firms adopted was focused on supporting the core retail activity. However the way in which they implement this strategy, again reflected the diversity in the sector. In terms of the future, the senior real estate managers were focusing on the medium term particularly looking at the way change would impact their functional strategy. This study provides a snap-shot of current practice and contributes to the debate however it also recognised that there is a need to answer the more fundamental questions.

Some uniform stability and convergence results for integral equations on the real line and projection methods for their solution

The paper considers second kind equations of the form (abbreviated x=y + K2x) in which and the factor z is bounded but otherwise arbitrary so that equations of Wiener-Hopf type are included as a special case. Conditions on a set are obtained such that a generalized Fredholm alternative is valid: if W satisfies these conditions and I − Kz, is injective for each z ε W then I − Kz is invertible for each z ε W and the operators (I − Kz)−1 are uniformly bounded. As a special case some classical results relating to Wiener-Hopf operators are reproduced. A finite section version of the above equation (with the range of integration reduced to [−a, a]) is considered, as are projection and iterated projection methods for its solution. The operators (where denotes the finite section version of Kz) are shown uniformly bounded (in z and a) for all a sufficiently large. Uniform stability and convergence results, for the projection and iterated projection methods, are obtained. The argument generalizes an idea in collectively compact operator theory. Some new results in this theory are obtained and applied to the analysis of projection methods for the above equation when z is compactly supported and k(s − t) replaced by the general kernel k(s,t). A boundary integral equation of the above type, which models outdoor sound propagation over inhomogeneous level terrain, illustrates the application of the theoretical results developed.

Financialisation, the valuation of investment property and the urban built environment in the UK

The financialisation literature has been criticised for its limited empirical base and its failure adequately to link the everyday world with that of high finance. The paper addresses these shortcomings by examining the calculative practice of property valuation. The way that valuations are performed affects their results and, therefore, the operation of the property market. The paper traces the evolving influence of finance capital on the valuation of commercial property in the UK by constructing a historiography of investment valuation since 1960. Traditional approaches to valuation have been increasingly challenged by those derived from financial economics. However, the former remains the dominant method for undertaking market valuation. Its grounding in comparison – a centring and standardising process – offers an explanation for some of the changes in the urban built environment that are ascribed to financialisation. This suggests that a more detailed and historically sensitive interpretation of financialisation is required.

Separating real incentives and accountability

In experimental investigations of the effect of real incentives, accountability—the implicit or explicit expectation of a decision maker that she may have to justify her decisions in front of somebody else—is often confounded with the incentives themselves. This confounding of accountability with incentives makes causal attributions of any effects found problematic. We separate accountability and incentives, and find different effects. Accountability is found to reduce preference reversals between frames, for which incentives have no effect. Incentives on the other hand are found to reduce risk seeking for losses, where accountability has no effect. In a choice task between simple and compound events, accountability increases the preference for the simple event, while incentives have a weaker effect going in the opposite direction. It is thus shown that the confounding of accountability and incentives is relevant for studies on the effect of the latter, and that existing conclusions on the effect of incentives need to be reconsidered in light of this issue.

Timing and the holding periods of institutional real estate

Literature on investors' holding periods for securities suggests that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with shorter holding periods. In real estate, high transaction costs and illiquidity imply longer holding periods. Research on depreciation and obsolescence suggests that there might be an optimal holding period. Sales rates and holding periods for U.K. institutional real estate are analyzed, using a proportional hazards model, over an 18-year period. The results show longer holding periods than those claimed by investors, with marked differences by type of property and over time. The results shed light on investor behavior.

Real estate capital flows and transitional economies

reign real estate capital was a major source of financing domestic property market office construction in Central Europe after the fall of the Berlin Wall in 1989. During the 1990s, over 800 office buildings were either newly constructed or refurbished in Budapest, Prague and Warsaw. The primary focus of this analysis is explaining the spatial construction and redevelopment patterns of the post-1989 office buildings in these cities. Secondarily, we analyze the correlation of foreign direct investment flows to annual construction of office buildings. We seek to explain the location of new or refurbished office buildings in the central business district (CBD) or in non-CBD locations in terms of the effect of time, size of property and other variables, and test whether there is a positive correlation relationship of foreign direct investment flows and new office construction or refurbishment. Integrating relevant foreign direct investment (FDI), economic geography and property theories in the research, the authors attempt to bridge existing gaps in the literature.

Timing and the holding periods of institutional real estate

The literature on investors’ holding periods for equities and bonds suggest that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with short-term trading and hence shorter holding periods. High transaction costs and the perceived illiquidity of the real estate market leads to an expectation of longer holding periods. Further, work on depreciation and obsolescence might suggest that there is an optimal holding period. However, there is little empirical work in the area. In this paper, data from the Investment Property Databank are used to investigate sales rate and holding period for UK institutional real estate between 1981 and 1994. Sales rates are investigated using the Cox proportional hazards framework. The results show longer holding periods than those claimed by investors. There are marked differences by type of property and sales rates vary over time. Contemporaneous returns are positively associated with an increase in the rate of sale. The results shed light on investor behaviour.

Asset allocation, cross-class correlation and the structure of property returns

Practical applications of portfolio optimisation tend to proceed on a “top down” basis where funds are allocated first at asset class level (between, say, bonds, cash, equities and real estate) and then, progressively, at sub-class level (within property to sectors, office, retail, industrial for example). While there are organisational benefits from such an approach, it can potentially lead to sub-optimal allocations when compared to a “global” or “side-by-side” optimisation. This will occur where there are correlations between sub-classes across the asset divide that are masked in aggregation – between, for instance, City offices and the performance of financial services stocks. This paper explores such sub-class linkages using UK monthly stock and property data. Exploratory analysis using clustering procedures and factor analysis suggests that property performance and equity performance are distinctive: there is little persuasive evidence of contemporaneous or lagged sub-class linkages. Formal tests of the equivalence of optimised portfolios using top-down and global approaches failed to demonstrate significant differences, whether or not allocations were constrained. While the results may be a function of measurement of market returns, it is those returns that are used to assess fund performance. Accordingly, the treatment of real estate as a distinct asset class with diversification potential seems justified.

Real Estate & the New Economy: The Impact of Information and Communications Technology

Private sector commercial property represents some #400 bn, or 34% of total UK business assets and is a vital fabric for housing commercial enterprise. Yet social and economic forces for change, linked with new technology, are making owners and occupiers question the very nature and purpose of property and real estate.

The impact of information and communications technology on commercial real estate in the new economy

Purpose – This paper seeks to critically review the conceptual frameworks that have been developed for assessing the impact of information and communications technology (ICT) on real estate. Design/methodology/approach – The research is based on a critical review of existing literature and draws from examples of previous empirical research in the field. Findings – The paper suggests that a “socio-technical framework” is more appropriate to examine ICT impact in real estate than other “deterministic” frameworks. Therefore, ICT is an important part of the new economy, but must be seen in the context of a number of other social and economic factors. Research limitations/implications – The research is based on a qualitative assessment of existing frameworks, and by using examples from commercial real estate, assesses the extent to which a “socio-technical” framework can aid understanding of ICT impact. Practical implications – The paper is important in highlighting a number of the main issues in conceptualising ICT impact in real estate and also critically examines the emergence of a new economy in the information society within the general context of real estate. The paper also highlights research gaps in the field. Originality/value – The paper deconstructs the myths of the “death of real estate” and “productivity increase means jobs loss”, in relation to office real estate. Finally, it examines some of the ways in which ICT is impacting on real estate and suggests the most important components for a future research agenda in the field of ICT and real estate impact, and will be of value to property investors, facilities managers, developers, financiers, and others.