Consideration of risk and its management is key in most real estate investment and development opportunities. Recognition of this, particularly in recent years, has led to various financial techniques being employed, including simulation analysis and Value at Risk (VaR), to assess various proposed transactions.

The U.K. Investment Property Forum has sought to establish a real estate sector standard for risk. This standard for risk has provided a greater insight into the risk structure and returns on investments for management to review.

Notwithstanding these approaches, they have nevertheless largely relied on traditional deterministic appraisals as a basis for assessing risk and return. In addition to understanding the risks and returns of a project is to apply a real options analysis (ROA).

In commercial real estate, the application of a ROA to date has largely been academically driven. While this has provided a strong theoretical base with complex numerical and analytical techniques employed, there has been limited practical application.

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