Enhancing Real Estate Project Feasibility Through Real Option Analysis

Real estate development projects are often influenced by market uncertainty, long timelines, and changing economic conditions. Traditional evaluation methods, such as Discounted Cash Flow (DCF) analysis, assume fixed future cash flows and may not fully capture the value of strategic flexibility. In this study, a residential real estate project was first evaluated using DCF, which showed that immediate investment was not financially favourable. To better understand the potential for flexibility, a Real Option Analysis (ROA) was applied using a binomial tree framework, focusing on the option to defer investment by one year. This approach helps to assess whether waiting can improve project outcomes under uncertain conditions. Additionally, a limited sensitivity analysis was conducted to observe how factors, such as rental income growth and construction cost changes, could affect the results. Overall, the study highlights how applying ROA offers a more flexible and responsive way to evaluate real estate investments compared to static models