Physical adaptability of buildings has a major role in creating competitiveness for property investors as well as creating a sustainable built environment. Current real estate investment analysis methods do not value investments into long-term adaptability because the discounting effect gives less weight to cash flows further in the future. This study attempts to apply a newly developed investment theory for justifying the investor value of long-term adaptability. The theory, which combines of real options valuation, investment analysis and building component lifecycle design, proposes that physical asset characteristics can create valuable real options (i.e. building adaptability) for the real estate investor. This paper applies the theory into a real life investment case, AINOA shopping center development, and evaluates the value of real options for the investor, LähiTapiola.
Picture: Decreasing economical lifecycle (average lease lengths) increases the need of building adaptability during the technical lifecycle of a building (Vimpari and Junnila, Building Research & Information, 2015)