Content area
Full Text
1 Introduction
Real estate development is the continual reconfiguration of the built environment to meet society's needs. A real estate development project starts as an idea that comes to fruition when consumers (owners or tenants) occupy the space realized by the developer. Value creation in developing real estate assets derives from providing usable space over time with associated services ([38] Miles et al. , 2007). The combination of space, time and services is thus required to allow consumers to enjoy the benefits of a newly developed or reconfigured real estate property. The price at which the space is sold or rent out to users should ultimately reflect such expected benefits proving that the entire project was justified. Project appraisal is commonly carried out using the standard net present value (NPV) technique.
Some key features of real estate development must be emphasized. First, the development process - which typically occurs in stages - is hardly straightforward or linear. No model can capture the constant repositioning that occurs in the developer's mind or the nearly constant renegotiation between the developer and the other participants in the process. Second, development is creative. At times, the developer may choose to move in a different direction or order than those originally planned. Third, at every stage, the developer may decide to reconsider all the remaining stages of the development process. In this sense, developers make decisions fully aware of their future implications not just for the immediate next steps but for the life of the project. Thus, although the definition of real estate development is simple, the underlying activity becomes more and more complex requiring more knowledge than ever before. Because reality often deviates from original assumptions and projections with end-of-period payoffs differing from what previously foreseen due to events such as the volatility of prices or the passing of a new law, real estate development is affected by uncertainty around future project returns which, in turn, gives rise to risk[1] . For this reason, the developer is called on to allocate resources and choose among mutually exclusive investment projects based on risk control.
Under these circumstances, the adoption of the static "now or never" NPV rule forces real estate developers to only passively react to exogenous environmental changes...