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“Green” refurbishments under uncertainty

Author

Listed:
  • Bonde, Magnus

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

  • Song, Han-Suck

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

Abstract

It is often argued that great energy savings can be accomplished by upgrading existing energy-inefficient building stock. However, even if these investments are profitable at the time, it might be even better to postpone these measures as even better investments can be realized later on. Such behavior can be analyzed by applying the real options analysis (ROA) framework. In addition, the retrofit scenario differs from the new development case, as the former is affected by the value of the already existing building, since this value must be “surrendered” in order to acquire revenues from the retrofitted building. The main purpose of this paper is to evaluate green refurbishments using the real options methodology. In doing so, we are able to accurately estimate the “embedded” real option values of deferring green refurbishments, thereby adding to current explanations of the energy-efficiency gap. This paper also discusses policy suggestions to reduce the value of waiting and thus trigger these refurbishments today.

Suggested Citation

  • Bonde, Magnus & Song, Han-Suck, 2016. "“Green” refurbishments under uncertainty," Working Paper Series 15/11, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    • Handle: RePEc:hhs:kthrec:2015_011
    as

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    File URL: http://urn.kb.se/resolve?urn=urn:nbn:se:kth:diva-181323
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Refurbishment; Real options; Green building; Timing option; Real estate;
    All these keywords.

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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