Real option valuation of retail properties in South Africa
Date
2011-03-28
Authors
Christodoulou, George Nick
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Abstract
This study focused on real option valuation (ROV) as a complementary method
to the popular income-capitalization method (ICM) when valuing retail properties
in South Africa.
The ICM may be approached in two ways viz. the direct capitalization method
(DCM) and the discounted cash-flow (DCF) approach. In South Africa the
former is primarily employed to determine the ‘fair-value’ of a retail property. A
combination of the two approaches yields the most accurate valuation but
requires a higher dependency on input variables.
Retail centre transactions qualified as suitable case studies if they allowed for
additional ‘bulk’ to be developed (option to expand) and the purchaser paid a
premium above a calculated theoretical ‘fair value’. A ROV framework based on
the binomial (financial) option pricing model was developed to value the
expansion option for each case study. The value of this real option accounts for
any premium paid over-and-above the theoretical ‘fair-value’.
In all four case studies the premium paid was captured by the ROV framework,
albeit at differing holding-periods. Although the result is not statistically
significant it bestows credibility on ROV as a complementary tool to the ICM. In
summary, ROV quantified the ‘gut-feel’ or intuition-based motives by investors
when paying premiums for expandable retail properties in South Africa.
Description
MBA - WBS
Keywords
Retail properties, Real option valuation