Assessing the Added Value of Phased Renovation in Residential Buildings with Real Option Analysis
An Application to the Dutch Social Housing Sector
M.J. Joon (TU Delft - Architecture and the Built Environment)
V.H. Gruis – Mentor (TU Delft - Architecture and the Built Environment)
A. Straub – Mentor (TU Delft - Design & Construction Management)
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Abstract
Dutch social housing corporations must phase out the worst-performing energy labels (E, F, G) by 2028 and deliver a CO₂-neutral stock by 2050, while minimising costs in in a construction market with ever changing construction costs. Nearly all social housing corporations are therefore renovating their portfolios. The standard valuation tool in the sector used for making renovation decisions, Discounted Cash Flow (DCF) analysis, does not account for the potential value of flexibility when applying a phased renovation strategy. Consequently, the integral-versus-phased renovation choice is made without an explicit valuation of timing flexibility. This thesis develops and applies a Real Options Analysis (ROA) framework and model that quantify the financial value of flexibility under construction cost uncertainty, in order to support the renovation timing decisions of Dutch social housing corporations. The phased programme is framed as a
portfolio of nine American put options on construction cost. Component-level volatility is calibrated from the BDB renovation cost index. A multi-group, Cox-Ross-Rubinstein (CRR) Binomial Lattice Model is created in Microsoft Excel and combined with two discounted cash flow scenarios that compare integral and phased execution. The framework is applied to a fictional case and to an existing renovation in Rijswijk. In the fictional case, the value of flexibility is positive but modest, in the order of one per cent of total budget. One and two-way sensitivity analyses identify construction cost volatility (σ) and the gap between WACC
and renovation cost inflation (μ) as the principal drivers of the comparison. However, the probability of the options landing in-the-money remain below 5% for all component groups, meaning that the flexibility advantage is realised in only a small share of cost-paths. The contribution of this thesis lies in extending Real Options Analysis to mandatory-investment problems with timing flexibility within a finite horizon: a transparent and applicable framework that supports renovation decision-making in the Dutch social housing sector.