Real options in real estate systematic literature review

Real options can account for a significant portion of the value of real estate assets. Methods exist to value real options in real estate but there is little evidence they are in widespread use. This systematic literature review examines the evolution of research on real options in real estate, identifying its main themes and drawing out its key insights. The tools developed to value real options in real estate and guide their optimal exercise are thought superior to net present value analysis for capital budgeting when outcomes are uncertain. Also among key insights of the literature is the identification of characteristics of real estate markets and assets that affect the flexibility of real estate owners to act in relation to their real options, and in doing so affect real option value and exercise decision making. These characteristics are among possible reasons explored in this review why uptake of real option valuation tools by real estate practitioners appears to be limited. This review submits there are factors at play increasing the likelihood of these tools being adopted in the future, including increased uncertainty driven by societies’ changing real estate requirements following the onset of the COVID-19 pandemic. The search for well-designed modifications of real options valuation tools, with the aim of stimulating their uptake, forms the basis of suggestions for future research.