Sequential investments: the value of flexibility to invest in marinas

Real estate markets are still affected by the global financial crisis. Despite the property market crisis, the touristic sector in Italy shows positive signals thanks to the new tourist flow coming from East Europe and China. Investors’ interest in this sector has grown year over year due to the undersupply of marinas compared to the growing demand of berths and wharfs, particularly in areas, where the marine touristic sector represents a chance in terms of growth and occupation. Investments in this sector are characterized by high, irreversible sunk costs and uncertainties over future demand and returns. It is quite common today to design marinas, which can be expanded by sequential investments in order to adapt to changes in the evolution over time of decision variables (e.g. demand, rate of return, etc.). Traditional Discounted Cash Flow (DCF) analysis fail to capture the value of growth options embedded in these projects. According to the real option approach, the paper analyses the optimal investment strategy of an entrepreneur who wants to invest in marinas development programmes. We model the entrepreneur’s investment decision taking into account not only the value of the immediate investment, but rather the value of sequential investment opportunities and real options interactions. We consider interdependent projects, where investing in the first project provides the opportunity to acquire at maturity (by means of a new capital outlay) the net benefits of further investments. The model is tested on an Italian case study with respect to property investments in the construction of a new marina.