Theory of valuing building life-cycle investments

Abstract

The physical adaptability of buildings is very important in today's fast-changing business environment. The actors who invest in long-term adaptability are positioned better to the changes during the life cycle of a building. This conceptual paper argues that the current dominating real estate (property) investment analysis theories do not accommodate enough building design-related information (i.e. physical asset characteristics), which results in long-term loss of competitiveness and unsustainable use of built environment resources. It is demonstrated that physical asset characteristics can create valuable real options that should be acknowledged in real estate investment analysis and management. The real estate investment literature has not so far been able to produce a widely accepted financial model for justifying life-cycle investments. A theory is proposed here that can be used to value life-cycle investments in buildings. This new theory combines of real options valuation, investment analysis and building component life-cycle design. These themes are used to formulate a conceptual framework for valuing life-cycle investments. The framework is intuitive and transparent, and it can be easily added to current spreadsheet investment analysis tools.