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by Richard de Neufville, David Geltner
Flexibility and Real Estate Valuation under Uncertainty
Cover
Title Page
Foreword
Authors’ Preface
What this book is about, and how to use it.
The Value Proposition
Accessibility
How to Use this Book
Acknowledgments
About the Companion Website
1 Discounted Cash Flow Valuation
1.1 Why the Focus on the Discounted Cash Flow Model?
1.2 Structure of a Discounted Cash Flow Spreadsheet
1.3 The Cash Flow Projection
1.4 Discount Rate
1.5 Market Value and Forward‐Looking (Ex‐Ante) Analysis
1.6 Backward‐Looking (Ex‐Post) Analysis
1.7 Conclusion
2 Economics of the Discounted Cash Flow Valuation Model
2.1 Choice of Discount Rate
2.2 Differences between Discount Rate, Opportunity Cost of Capital, and Internal Rate of Return
2.3 Net Present Value
2.4 Relationship between Discount Rate, Growth Rate, and Income Yield
2.5 Relationship between Discount Rate and Risk
2.6 Conclusion
3 Future Scenarios Matter
3.1 The Standard Discounted Cash Flow Model Appears to be Deterministic
3.2 We Live in a World of Uncertainty
3.3 Discounted Cash Flow Pro Forma Cash Flows Are Expectations
3.4 Flexibility and Options
3.5 Conclusion
4 Scenario Analysis
4.1 Discounted Cash Flow Scenario Analysis
4.2 Scenarios Affect Value
4.3 Flexibility Has Value
4.4 Conclusion
5 Future Outcomes Cover a Range of Possibilities
5.1 Distribution of Future Outcomes
5.2 Quantifying Input Distributions
5.3 Distributions of Outcomes Differ from Distributions of Inputs
5.4 Flaw of Averages
5.5 Conclusion
6 Simulation of Outcomes
6.1 Generating Scenarios
6.2 Real Estate Simulation in a Nutshell
6.3 Simulation Is an Efficient Process
6.4 Number of Trials
6.5 Conclusion
7 Modeling Price Dynamics
7.1 Pricing Factors
7.2 Random Walks
7.3 Real Estate Pricing Factor Dynamics
7.4 Conclusion
8 Interpreting Simulation Results
8.1 Target Curves
8.2 Comparing Target Curves
8.3 Value at Risk
8.4 Scatterplots
8.5 Conclusion
9 Resale Timing Decision: Analysis
9.1 The Resale Timing Problem
9.2 Extending the Time Horizon of the Discounted Cash Flow Model
9.3 IF Statements
9.4 Trigger Value for Stop‐Gain Rule
9.5 Value of Example Stop‐Gain Rule
9.6 Conclusion
10 Resale Timing Decision: Discussion
10.1 Sensitivity Analysis
10.2 When to Use the Stop‐Gain Rule
10.3 Implications of Flexibility for Property Valuation
10.4 Conclusion
11 Development Project Valuation
11.1 Time‐to‐Build Difference between Development Projects and Existing Assets
11.2 Lower Opportunity Cost of Capital for Construction Costs
11.3 Illustrative Example
11.4 Residual Value of Development Land
11.5 Investment Risk in Development Project
11.6 Conclusion
12 Basic Flexibility in Development Projects
12.1 Review of Call (and Put) Options
12.2 Land as a Call Option on Development
12.3 Drivers of Option Value
12.4 A Practical Example of a Call (and Put) Option
12.5 Flexibility and Scenario Analysis for Development Projects
12.6 Conclusion
13 Option Dichotomies
13.1 Three Dichotomies for Thinking Generally about Development Options
13.2 Defensive versus Offensive Options
13.3 Options “On” and “In” Projects
13.4 Timing Options versus Product Options
13.5 Conclusion
14 Product Options in Development
14.1 Concept of Base Plan
14.2 Product Expansion Flexibility
14.3 Product Mix Flexibility
14.4 Conclusion
15 Timing Options in Development
15.1 Project Start‐Timing Flexibility (The Delay Option)
15.2 Project Production Timing Flexibility
15.3 Modular Production Timing Flexibility
15.4 Phasing Timing Flexibility
15.5 Types of Phasing
15.6 Recognizing Defensive and Offensive Options in Simulation Results
15.7 Conclusion
16 Garden City: An Example Multi‐Asset Development Project
16.1 Overview of Multi‐Asset Development Project
16.2 Structure of a Realistic Multi‐Asset Spreadsheet Pro Forma
16.3 Cash Flows for the Example Pro Forma
16.4 Temporal Profile for Base Case
16.5 Expected Economics of the Garden City Project
16.6 Conclusion
17 Effect of Uncertainty without Flexibility in Development Project Evaluation
17.1 Modeling Uncertainty for the Multi‐Asset Development Project
17.2 Generating Random Future Scenarios
17.3 Outcomes Reflecting Uncertainty for the Multi‐Asset Development
17.4 Effect of Different Probability Inputs Assumptions
17.5 Conclusion
18 Project Start‐Delay Flexibility
18.1 Project Start‐Delay Option
18.2 Option Exercise Decision Rule
18.3 Defining “Profit” in the Decision Model
18.4 Value of Start‐Delay Flexibility in the Garden City Project
18.5 Conclusion
19 Decision Rules and Value Implications
19.1 Simple Myopic Delay Rule
19.2 Trigger Values
19.3 Value Implications of the Decision Rules
19.4 Effect of Trigger Values (Start or Delay Bias)
19.5 Review the Meaning of Flexibility Value
19.6 Conclusion
20 Modular Production Timing Flexibility
20.1 Modular Production Timing Flexibility
20.2 Modeling the Modular Production Option
20.3 Value of Modular Production Timing Flexibility
20.4 Effect of Trigger Values (Bias toward Pause or Continue)
20.5 Effect of Combining Start‐Delay and Modular Production Delay Flexibility
20.6 Conclusion
21 Product Mix Flexibility
21.1 Product Mix Flexibility
21.2 Modeling the Product Mix Option
21.3 Value of Product Mix Flexibility
21.4 Effect of Combining Product Mix Flexibility and Timing Options
21.5 Effect of Correlation in the Product Markets on the Value of Product Mix Flexibility
21.6 Effect of Volatility on the Value of Flexibility
21.7 Conclusion
22 Project Phasing Flexibility
22.1 Modeling the Sequential Phase Delay Option
22.2 Modifying the Garden City Project Plan
22.3 Project Economics
22.4 The Delay Decision Model
22.5 Exploring the Value of Project Phasing Flexibility
22.6 Conclusion
23 Optimal Phasing
23.1 Effect of Increasing the Number of Phases
23.2 Principles for Optimal Phasing
23.3 What Is the Difference between a Phase and an Expansion Option?
23.4 Conclusion
24 Overall Summary
Appendix Quantifying Real Estate Uncertainty
A.1 The Real Estate System
A.2 Sources of Uncertainty and Some Practical Advice for Simulation
A.3 The Nature of Real Estate Price Dynamics and Uncertainty
A.4 Putting It All Together
Glossary
Acronyms and Symbols
Index
End User License Agreement
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