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Real Options Approach for Valuing Green Certificates

Real Options Approach for Valuing Green Certificates. Jussi Vimpari, M.Sc. (Tech) Researcher / Doctoral candidate Aalto University / Real Estate Business Research Group. Contents. Background of the research Option characteristics of green certificates Real options valuation

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Real Options Approach for Valuing Green Certificates

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  1. Real Options Approach for Valuing Green Certificates Jussi Vimpari, M.Sc. (Tech) Researcher / Doctoral candidate Aalto University / Real Estate Business Research Group

  2. Contents Background of the research Option characteristics of green certificates Real options valuation Research methodology, data and results Conclusions

  3. Background • Green building certificates as a value measure of sustainability • DCF analysis is the most common real estate valuation method • Practitioners do not have a consensus how green certificates affect the parameters used in the DCF • Findings of the research argue that option pricing theory should be used for valuing green certificates

  4. Real option valuation • Adaptation of option pricing theory to real assets • Praised for a more superior capability of taking into account uncertainty investments • Aim is to focus sources of uncertainty and create flexibility (options) to prepare for the uncertainty • To authors’ knowledge have not been used in valuing green building certificates

  5. Option characteristics of green building certificates

  6. Fuzzy pay-off method for real option valuation • Developed by Collan et al. (2009) for real option valuation • Fuzzy set theory used instead of probability theory • Real option value is calculated using three valuations, where the “normal” valuation has complete membership and worst and best scenarios have complete non-membership • Very intuitive and easy to use, can use data from DCF

  7. Research methodology and data • Eight industry professionals asked to valuate (10 year DCF) an office building with/without a certificate • The valuation was carried out for three scenarios for both buildings • Identified what is the impact of the certificate in property value when market develops in worst, normal, and best scenarios

  8. Results Mean 8.8 %

  9. Conclusions • Green certificates have several characteristics that makes it well founded to value them as real options • The uncertainty in green certificates can be numerically analyzed with real options valuation • One could argue that it is better to analyse the different scenarios of the impact of a certificate rather than trying to include everything into a single valuation • The real option in this case was the flexibility to adapt into future market conditions because the role of green certificates in the future is uncertain

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