Jussi Vimpari

Value influencing mechanism of green certificates in the discounted cash flow valuation

The market value of green properties is already acknowledged in scientific literature, but it has still remained unclear how green certificates are incorporated into property valuation. In this study, value influencing mechanism of green certificates in property investment is studied. A widely used discounted cash flow (DCF) model for property valuation was constructed and communicated with spreadsheet to industry professionals for valuing an office property in metropolitan Finland. The goal was to understand the value influencing mechanism and even deeper to identify the differences in DCF parameters between certified properties and non-certified properties. The results show that a green certificate increases on average the property value with 9.0% in the DCF valuation model. Improved yield and net rental income were the main reasons for the higher property value. Interestingly, this is the first known study to empirically open the value influencing mechanisms of green properties presented in earlier theoretical studies.

Theory of valuing building life-cycle investments

The physical adaptability of buildings is very important in todays fast-changing business environment. The actors who invest in long-term adaptability are positioned better to the changes during the life cycle of a building. This conceptual paper argues that the current dominating real estate (property) investment analysis theories do not accommodate enough building design-related information (i.e. physical asset characteristics), which results in long-term loss of competitiveness and unsustainable use of built environment resources. It is demonstrated that physical asset characteristics can create valuable real options that should be acknowledged in real estate investment analysis and management. The real estate investment literature has not so far been able to produce a widely accepted financial model for justifying life-cycle investments. A theory is proposed here that can be used to value life-cycle investments in buildings. This new theory combines of real options valuation, investment analysis and building component life-cycle design. These themes are used to formulate a conceptual framework for valuing life-cycle investments. The framework is intuitive and transparent, and it can be easily added to current spreadsheet investment analysis tools.

Valuing flexibility in a retrofit investment

Purpose – The need for flexibility between organisational units is well established in corporate real estate. While the cost of flexibility is rather straightforward to approximate, measuring economical value of the flexibility is not straightforward. The purpose of this paper is to explore how real options analysis can be used for valuing flexibility in a real retrofit investment case, present a research process for valuing the flexibility in the retrofit investment case, and evaluate the empirical usability of real options valuation results compared with traditional discounted cash flow valuation results. Design/methodology/approach – The research is conducted as a case study. A newly introduced real options valuation method, the fuzzy pay-off method is used for analysing data from a Finnish office building retrofit investment case. The major difference in the selected method is that it uses fuzzy set theory instead of probabilistic theory, and the main advantage is the practical applicability, i.e. onl...

Valuing green building certificates as real options

Purpose – The purpose of this study is first to evaluate whether real options analysis (ROA) is suitable for valuing green building certificates, and second to calculate the real option value of a green certificate in a typical office building setting. Green buildings are demonstrated as one of the most profitable climate mitigation actions. However, no consensus exists among industry professionals about how green buildings and specifically green building certificates should be valued. Design/methodology/approach – The research design of the study involves a theoretical part and an empirical part. In the theoretical part, option characteristics of green building certificates are identified and a contemporary real option valuation method is proposed for application. In the empirical part, the application is demonstrated in an embedded multiple case study design. Two different building cases (with and without green certificate) with eight independent cash flow valuations by eight industry professionals are ...

Valuing retail lease options through time: Volatility spread between different types of retailers

Purpose Retail properties are a perfect example of a property class where revenues determine the rent for the property owners. Estimating the value of new retail developments is challenging, as the initial revenues can have a significant variance from the long-term revenue levels. Owners and tenants try to manage this problem by introducing different kind of options, such as overage rent and extension rights, to the lease contracts. The purpose of this paper is to value these options through time for different types of retailers, using real-life data with a method that can be easily applied in practice. Design/methodology/approach This paper builds upon the existing papers on real option studies but has a strong practical focus, which has been identified as a challenge in the field. The paper presents simple mathematical equations for valuing overage rent and extension options. The equations capture the value related to uncertainty (volatility) that is missed by standard valuation practices. Findings The results indicate that overage and extension options can represent a significant proportion of retail lease contract’s value and their value is heavily time-dependent. The option values differ greatly between tenants, as the volatilities can have a large spread across tenants. The paper suggests that the applicability of option pricing theory and calculus should not be considered as an insurmountable barrier any more, rather a greater challenge for the practical adaptability of the method can be the availability of real-life data that is a common problem in real option analysis. Practical implications The value of extension and overage options varies greatly between tenants. In general, the property owner can try balance the positive effects from the overage rents to the negative effects of tenant extensions. However, this study tries to highlight that, as usual, using the “law of averages” can result into poor valuation in this context as well. Even the data used in this study provide valuable findings for the property owner as an analytical deduction can be made that certain types of tenants have higher volatilities and this should be acknowledged when valuing options within lease contracts. Originality/value Previous literature in this topic often takes the input data for the option valuation as granted rather than trying to identify the real-life data available for the calculation. This is a common problem in real options valuation and it seems to be one of the reasons why option valuation has not been used widely in practice. This study has used real-life data to assess the problem and more importantly assessed the data across different types of tenants. The volatility spread between different types of tenants has not been discussed previously, even though it has a significant importance when using option pricing in practice.

Value of waiting – option pricing as a tool for residential real estate fund divestment management

Purpose – The value of waiting to invest has been acknowledged in management of real capital investments. Investment decision should be undertaken only if it can justify giving up the value of the option to wait; the same logic is proposed here to be applicable on divestment management of a real estate fund. The purpose of this paper is to test option pricing to quantify the option to wait in a residential real estate fund divestment. It is argued that standard industry valuation practices miss the value of active fund management that should be included when planning a fund divestment strategy. Design/methodology/approach – Dynamic programming, specifically binomial option-pricing model is suggested to complement the current industry standard valuation approaches. The approach is tested in an embedded case study where assets of a residential real estate fund are valuated using the model. Findings – Option pricing can provide risk-neutral quantified value whether an apartment building portfolio should be d...

Reducing construction phase greenhouse gas emissions of detached houses through material supply chain management

Construction phase greenhouse gas emissions are most important emission sources of new buildings from the perspective of climate change targets. Energy efficiency improvements have highlighted the role of such emissions. Although living environment of detached houses have been criticized from the greenhouse gas perspectives, it is shown that this may not be justified. In addition, detached houses offer a great way for major reduction of construction phase emissions of buildings. In the study it is presented that through building material supply chain management of detached houses, it is possible to achieve the construction emission level of below 40%in relationship to average emission level of new buildings.