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.

The cost of choice: how corporate real estate managers evaluate business space options

Firms are faced with a wider set of choices when they identify a need for new office space. They can build or purchase accommodation, lease space for long or short periods with or without the inclusion of services, or they can use “instant office” solutions provided by serviced office operators. But how do they evaluate these alternatives and are they able to make rational choices? The research found that the shortening of business horizons lead to the desire for more office space on short-term contracts often with the inclusion of at least some facilities management and business support services. The need for greater flexibility, particularly in financial terms, was highlighted as an important criteria when selecting new office accommodation. The current office portfolios held were perceived not to meet these requirements. However, there was often a lack of good quality data available within occupiers which could be used to help them analyse the range of choices in the market. Additionally, there were other organisational constraints to making decisions about inclusive real estate products. These included fragmentation of decisions-making, internal politics and the lack of assessment of business risk alongside real estate risk. Overall therefore, corporate occupiers themselves act as an interial force to the development of new and innovative real estate products.

The Finance Act 1998: can the owners of agricultural land continue to gain from their capital disposals?

This paper seeks to analyse and discuss, from the perspective of the owners of agricultural land, the main changes to the Capital Gains Tax regime introduced in the Budget of March 1998 and contained in the Finance Act 1998. The immediate replacement of indexation with a new Taper relief is examined, along with the phasing out of Retirement relief, and the interaction of Taper relief with Rollover relief.

Modelling of Johne's disease control options in beef cattle: a decision support approach

Johne's disease in cattle is a contagious wasting disease caused by Mycobacterium avium subspecies paratuberculosis (MAP). Johne's infection is characterised by a long subclinical phase and can therefore go undetected for long periods of time during which substantial production losses can occur. The protracted nature of Johne's infection therefore presents a challenge for both veterinarians and farmers when discussing control options due to a paucity of information and limited test performance when screening for the disease. The objectives were to model Johne's control decisions in suckler beef cattle using a decision support approach, thus implying equal focus on ‘end user’ (veterinarian) participation whilst still focusing on the technical disease modelling aspects during the decision support model development. The model shows how Johne's disease is likely to affect a herd over time both in terms of physical and financial impacts. In addition, the model simulates the effect on production from two different Johne's control strategies; herd management measures and test and cull measures. The article also provides and discusses results from a sensitivity analysis to assess the effects on production from improving the currently available test performance. Output from running the model shows that a combination of management improvements to reduce routes of infection and testing and culling to remove infected and infectious animals is likely to be the least-cost control strategy.

Determining the cost of in-field mitigation options to reduce sediment and phosphorus loss

The Mitigation Options for Phosphorus and Sediment (MOPS) project investigated the effectiveness of within-field control measures (tramline management, straw residue management, type of cultivation and direction, and vegetative buffers) in terms of mitigating sediment and phosphorus loss from winter-sown combinable cereal crops using three case study sites. To determine the cost of the approaches, simple financial spreadsheet models were constructed at both farm and regional levels. Taking into account crop areas, crop rotation margins per hectare were calculated to reflect the costs of crop establishment, fertiliser and agro-chemical applications, harvesting, and the associated labour and machinery costs. Variable and operating costs associated with each mitigation option were then incorporated to demonstrate the impact on the relevant crop enterprise and crop rotation margins. These costs were then compared to runoff, sediment and phosphorus loss data obtained from monitoring hillslope-length scale field plots. Each of the mitigation options explored in this study had potential for reducing sediment and phosphorus losses from arable land under cereal crops. Sediment losses were reduced from between 9 kg ha−1 to as much as 4780 kg ha−1 with a corresponding reduction in phosphorus loss from 0.03 kg ha−1 to 2.89 kg ha−1. In percentage terms reductions of phosphorus were between 9% and 99%. Impacts on crop rotation margins also varied. Minimum tillage resulted in cost savings (up to £50 ha−1) whilst other options showed increased costs (up to £19 ha−1 for straw residue incorporation). Overall, the results indicate that each of the options has potential for on-farm implementation. However, tramline management appeared to have the greatest potential for reducing runoff, sediment, and phosphorus losses from arable land (between 69% and 99%) and is likely to be considered cost-effective with only a small additional cost of £2–4 ha−1, although further work is needed to evaluate alternative tramline management methods. Tramline management is also the only option not incorporated within current policy mechanisms associated with reducing soil erosion and phosphorus loss and in light of its potential is an approach that should be encouraged once further evidence is available.

‘Containing Uncertainty: Options for British Nuclear Strategy’

If Britain wants to stem the tide of nuclear proliferation, it must continue to assume "the nuclear man's burden" and guarantee the security of non-nuclear allies, as it did in the Cold War.

The dynamics of commodity prices

In this paper we study the stochastic behavior of the prices and volatilities of a sample of six of the most important commodity markets and we compare these properties with those of the equity market. we observe a substantial degree of heterogeneity in the behavior of the series. Our findings show that it is inappropriate to treat different kinds of commodities as a single asset class as is frequently the case in the academic literature and in the industry. We demonstrate that commodities can be a useful diversifier of equity volatility as well as equity returns. Options pricing and hedging applications exemplify the economic impacts of the differences across commodities and between model specifications.

Lessons from the private finance initiative in the UK: benefits, problems and critical success factors

Purpose – This paper summarises the main research findings from a detailed, qualitative set of structured interviews and case studies of private finance initiative (PFI) schemes in the UK, which involve the construction of built facilities. The research, which was funded by the Foundation for the Built Environment, examines the emergence of PFI in the UK. Benefits and problems in the PFI process are investigated. Best practice, the key critical factors for success, and lessons for the future are also analysed. Design/methodology/approach – The research is based around 11 semi-structured interviews conducted with stakeholders in key PFI projects in the UK. Findings – The research demonstrates that value for money and risk transfer are key success criteria. High procurement and transaction costs are a feature of PFI projects, and the large-scale nature of PFI projects frequently acts as barrier to entry. Research limitations/implications – The research is based on a limited number of in-depth case study interviews. The paper also shows that further research is needed to find better ways to measure these concepts empirically. Practical implications – The paper is important in highlighting four main areas of practical improvement in the PFI process: value for money assessment; establishing end-user needs; developing competitive markets and developing appropriate skills in the public sector. Originality/value – The paper examines the drivers, barriers and critical success factors for PFI in the UK for the first time in detail and will be of value to property investors, financiers, and others involved in the PFI process.

Handbook of research methods and applications in empirical finance

The objective of this book is to present the quantitative techniques that are commonly employed in empirical finance research together with real world, state of the art research examples. Each chapter is written by international experts in their fields. The unique approach is to describe a question or issue in finance and then to demonstrate the methodologies that may be used to solve it. All of the techniques described are used to address real problems rather than being presented for their own sake and the areas of application have been carefully selected so that a broad range of methodological approaches can be covered. This book is aimed primarily at doctoral researchers and academics who are engaged in conducting original empirical research in finance. In addition, the book will be useful to researchers in the financial markets and also advanced Masters-level students who are writing dissertations.

Linking urban water balance and energy balance models to analyse urban design options

Using a water balance modelling framework, this paper analyses the effects of urban design on the water balance, with a focus on evapotranspiration and storm water. First, two quite different urban water balance models are compared: Aquacycle which has been calibrated for a suburban catchment in Canberra, Australia, and the single-source urban evapotranspiration-interception scheme (SUES), an energy-based approach with a biophysically advanced representation of interception and evapotranspiration. A fair agreement between the two modelled estimates of evapotranspiration was significantly improved by allowing the vegetation cover (leaf area index, LAI) to vary seasonally, demonstrating the potential of SUES to quantify the links between water sensitive urban design and microclimates and the advantage of comparing the two modelling approaches. The comparison also revealed where improvements to SUES are needed, chiefly through improved estimates of vegetation cover dynamics as input to SUES, and more rigorous parameterization of the surface resistance equations using local-scale suburban flux measurements. Second, Aquacycle is used to identify the impact of an array of water sensitive urban design features on the water balance terms. This analysis confirms the potential to passively control urban microclimate by suburban design features that maximize evapotranspiration, such as vegetated roofs. The subsequent effects on daily maximum air temperatures are estimated using an atmospheric boundary layer budget. Potential energy savings of about 2% in summer cooling are estimated from this analysis. This is a clear ‘return on investment’ of using water to maintain urban greenspace, whether as parks distributed throughout an urban area or individual gardens or vegetated roofs.

Options for support to agriculture and food security under climate change

Agriculture and food security are key sectors for intervention under climate change. Agricultural production is highly vulnerable even to 2C (low-end) predictions for global mean temperatures in 2100, with major implications for rural poverty and for both rural and urban food security. Agriculture also presents untapped opportunities for mitigation, given the large land area under crops and rangeland, and the additional mitigation potential of aquaculture. This paper presents a summary of current knowledge on options to support farmers, particularly smallholder farmers, in achieving food security through agriculture under climate change. Actions towards adaptation fall into two broad overlapping areas: (1) accelerated adaptation to progressive climate change over decadal time scales, for example integrated packages of technology, agronomy and policy options for farmers and food systems, and (2) better management of agricultural risks associated with increasing climate variability and extreme events, for example improved climate information services and safety nets. Maximization of agriculture’s mitigation potential will require investments in technological innovation and agricultural intensification linked to increased efficiency of inputs, and creation of incentives and monitoring systems that are inclusive of smallholder farmers. Food systems faced with climate change need urgent, broad-based action in spite of uncertainties.

Modelling of control options for an outbreak of Mycoplasma gallisepticum in egg production: a decision support tool

Mycoplasma gallisepticum (MG) is a bacterium that causes respiratory disease in chickens, leading to reduced egg production. A dynamic simulation model was developed that can be used to assess the costs and benefits of control using antimicrobials or vaccination in caged or free range systems. The intended users are veterinarians and egg producers. A user interface is provided for input of flock specific parameters. The economic consequence of an MG outbreak is expressed as a reduction in expected egg output. The model predicts that either vaccination or microbial treatment can approximately halve potential losses from MG in some circumstances. Sensitivity analysis is used to test assumptions about infection rate and timing of an outbreak. Feedback from veterinarians points to the value of the model as a discussion tool with producers.