Risk and Uncertainty Analysis of Commercial Real Estate Developments: A Comparison of Traditional and Contemporary Approaches

Uduakobong E. Akpan, Olusegun A. Ogunba and Timothy T. Ayodele

AfRES from African Real Estate Society (AfRES)

Abstract: The study assessed the degree to which the traditional NPV captured the risk and uncertainty inherent in real estate development projects in Lagos, Nigeria, using case studies. This was with a view to enhancing real estate investment decision making in developing countries of Africa. Two commercial real estate developments were selected as case studies for the study. Probabilistic risk analysis models (risk adjusted discount rate and certainty equivalent models) were used to assess the risk inherent in the development projects while real option analysis (Samuelson Mckean Model) was used to test the effect of flexibility on the investments (uncertainty analysis). The methodology involved first carrying out an appraisal of the case studies using the traditional NPV. Thereafter, the appraisal outcomes of the NPV analysis were compared to outcomes using contemporary models (risk and uncertainty analysis). The findings of the study showed that the contemporary models - which were not much in use in the study area - provided much more profound investment advice for clients and a much more robust basis for client decision making than the traditional NPV model. The study concluded that contemporary models deserve to be in much more use in the developing economies of Africa.

Keywords: Development appraisal; NPV; real option analysis; Risk Analysis (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2023-01-01
New Economics Papers: this item is included in nep-ppm, nep-rmg and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
https://afres.architexturez.net/doc/oai-afres-id-afres2023-026 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:afr:wpaper:afres2023-026

Access Statistics for this paper

More papers in AfRES from African Real Estate Society (AfRES) Contact information at EDIRC.
Bibliographic data for series maintained by Architexturez Imprints ().