The term “Black Swan” has gained recent popularity to describe an extraordinary event that causes extensive damage. The combination of low predictability and major impact makes an…
Abstract
Purpose
The term “Black Swan” has gained recent popularity to describe an extraordinary event that causes extensive damage. The combination of low predictability and major impact makes an upswing in the magnitude of Black Swan events an important factor when making property market forecasts. The difficulty is that the preferred property forecast models traditionally depend on input data constructed on a normal (bell curve) conditions. As outliers, Black Swan events appear not to form part of the property forecast process. The aim of this research is to examine Black Swan events.
Design/methodology/approach
This research examines Black Swan events and tests their impact on the accuracy of short term, six month bi‐annual survey forecasts from leading economists and property analysts for key Australian property market determinants: economic activity (GDP), ten year bonds and CBD office vacancy rates for the 2005‐2011 period.
Findings
A range of statistical tests showed inconsistencies with the expert forecasts to actual performance and importantly all the experts appeared to miss the start of the Global Financial Crisis in the December 2008 period. The variations in the margin of forecast error suggest that the experts examine the selected property determinants independently. Also, for economic activity and CBD office vacancy rates, there is an interesting trend that in several consecutive time periods, a simple naïve “no change” forecast was better than those of the experts.
Originality/value
In an environment of increasing occurrence of Black Swan events, this inability to forecast short term property market determinants with confidence highlights serious issues with the current approach to forecasting property market performance. The first step for research in this area is to understand and frame the property risks associated with Black Swan events.
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In these ever challenging times, conventional property decision theory appears inadequate to deal with black swan events: those unforseen, rare and extreme natural and man-made…
Abstract
Purpose
In these ever challenging times, conventional property decision theory appears inadequate to deal with black swan events: those unforseen, rare and extreme natural and man-made disasters. The paper aims to discuss these issues.
Design/methodology/approach
This research maps, characterises and assesses these threats into: Known Knowns, Known Unknowns and Unknown Unknowns categories. Whereas, Known Knowns events can be managed and Unknown Unknowns events are difficult to even identify, those black swan Known Unknowns events that impact on a location, can be modelled based on available past and comparable evidence.
Findings
As a starting point, black swan management tools can utilise available prediction-based scale indices to highlight the possibility of these extreme events occurring in locations, and so form an important consideration for property asset managers in their decision-making process.
Originality/value
For property asset managers, this black swan management research attempts to identify, record and include those outlier events that directly impact on their property decision-making process. This can be undertaken by providing predictions as to the future occurrence of Known Unknown black swan events. These extreme events need to form an important part of a property asset manager's decision-making process. If overlooked, black swan events can have disastrous consequences for the valued client – building owner.
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David Higgins, Jacob Oluwoye and Dennis Lenard
New business opportunities and challenges are changing the structure of office, industrial and retail organisations and altering the pattern and demand for space. These agents of…
Abstract
New business opportunities and challenges are changing the structure of office, industrial and retail organisations and altering the pattern and demand for space. These agents of change on organisations’ decisions for new space formed the basis for a questionnaire survey of 167 new space occupiers. An index of degree of importance constructed from the results can provide a new platform for corporate real estate planning and a strategic approach to commercial property market decisions.
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The Bureau of Economics in the Federal Trade Commission has a three-part role in the Agency and the strength of its functions changed over time depending on the preferences and…
Abstract
The Bureau of Economics in the Federal Trade Commission has a three-part role in the Agency and the strength of its functions changed over time depending on the preferences and ideology of the FTC’s leaders, developments in the field of economics, and the tenor of the times. The over-riding current role is to provide well considered, unbiased economic advice regarding antitrust and consumer protection law enforcement cases to the legal staff and the Commission. The second role, which long ago was primary, is to provide reports on investigations of various industries to the public and public officials. This role was more recently called research or “policy R&D”. A third role is to advocate for competition and markets both domestically and internationally. As a practical matter, the provision of economic advice to the FTC and to the legal staff has required that the economists wear “two hats,” helping the legal staff investigate cases and provide evidence to support law enforcement cases while also providing advice to the legal bureaus and to the Commission on which cases to pursue (thus providing “a second set of eyes” to evaluate cases). There is sometimes a tension in those functions because building a case is not the same as evaluating a case. Economists and the Bureau of Economics have provided such services to the FTC for over 100 years proving that a sub-organization can survive while playing roles that sometimes conflict. Such a life is not, however, always easy or fun.
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David Higgins and Treshani Perera
Whilst existing literature on real estate risk management focusses almost exclusively on holistic risk management techniques, documented increases in frequency and magnitude of…
Abstract
Purpose
Whilst existing literature on real estate risk management focusses almost exclusively on holistic risk management techniques, documented increases in frequency and magnitude of unforeseen, rare and extreme events can throw up sudden, unexpected shocks that can challenge recognised real estate decision-making strategies. The paper aims to discuss this issue.
Design/methodology/approach
To advance real estate decision-making practice in this area, this research paper takes the skilfully conceptualised downside risk framework presented by Diebold et al. (2010), being the known (K), the unknown (u) and the unknowable (U) risk categories, to provide a blueprint for effective real estate decision making in a changing global environment.
Findings
In recording categories of risk, managing uncertainty can be achieved by an interrelated approach of adaption, robustness and resilience. This is important part of a real estate manager’s decision-making toolkit as risk recognition and knowledge of KuU event categories can augment an effective management strategy.
Originality/value
The mastery of modern real estate risk management can be better served by understanding and managing extreme downside risk events. Creating a comprehensive risk management framework can enhance comparative real estate performance whereby unprepared competitors fail in a world increasingly affected by large, highly improbable and unpredictable events.
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Kwabena Mintah, David Higgins and Judith Callanan
Uncertainties in residential property investment performance require that real estate assets are designed in a flexible manner to respond to impacts of market dynamics. Though…
Abstract
Purpose
Uncertainties in residential property investment performance require that real estate assets are designed in a flexible manner to respond to impacts of market dynamics. Though estimating the cost of flexibility is straightforward, assessing the economic value of flexibility is not. The purpose of this study is to explore the potential practical application of real option analysis to determine the economic value of a switching output flexibility embedded in a residential property investment in Australia. The study involves the exploration of an optimal strategy for investment in a residential development through real option analysis and valuation of a mixed use investment.
Design/methodology/approach
The real option valuation model developed by McDonald and Siegel (1986) is adopted for the evaluation because the switching output flexibility is likened to a perpetual American call option with dividend payout.
Findings
Through real option analysis, the economic value of switching output flexibility of the mixed use building was determined to be higher than the initial upfront costs. Moreover, a payoff of about $4million was determined to be the value of the switching output flexibility, therefore justifying upfront investments in flexibility as an uncertainty and risk management tool.
Practical implications
This application is an important demonstration of the practical use of options pricing techniques (real options analysis) and delivers further evidence needed to support the adoption of real option valuation in practice. Flexibility can also enhance risks and uncertainty management in residential property investment better than the adjustment of discount rates.
Originality/value
There is limited evidence on the use of real options techniques for the valuation of switching output flexibility in practice, and this comes as an original application; both the case study and data are all initial applications of switching flexibility in the Australian property market.
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David Higgins, Peter Wood and Chris Berry
As placemaking is rapidly changing the urban landscape, the way in which we view real estate assets and their value needs to adapt to meet evolving community demands, where people…
Abstract
As placemaking is rapidly changing the urban landscape, the way in which we view real estate assets and their value needs to adapt to meet evolving community demands, where people create places where they want to actually live, play, and work. Increasingly, space in the city is linked to younger generations and the emerging knowledge (gig) economy. This interconnection is shaping current and future cities skylines, with buildings that offer new working and living environments. Foremost are co-living/coworking spaces which are looking beyond the offering associated with traditional office and apartment complexes. Owners and investors need to understand the new avenues to create real estate value and seek opportunities to reap commercial rewards far beyond the historical property investment arrangements.
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The growing importance of ‘lived practices’ in entrepreneurship-related studies has sought to pose several questions and challenges for researchers/scholars in the field (Ruona &…
Abstract
The growing importance of ‘lived practices’ in entrepreneurship-related studies has sought to pose several questions and challenges for researchers/scholars in the field (Ruona & Gilley, 2009; Short, Keefer, & Stone, 2009). The issue of how current entrepreneurship research practices can become more applied in nature provides the basis for articulating more clearly what we mean by research impact and why it has become a central concern in the research field (Beyer & Trice, 1982; Huggins et al., 2008; Rynes, 2007; Starkey & Tempest, 2005). This debate has drawn specific attention to the need for applied research in entrepreneurial scholarship, which is more reflective of lived practice. The need to reach a balance between practitioners and academics’ expectations in terms of delivering research which is focussed towards achieving academic rigour and application to practice, which is both meaningful and relatable, is significant for both communities (Ram, Edwards, Jones, Kiselinchev, & Muchenje, 2017). This chapter seeks to assist and inspire both existing and future researchers in the field to make more informed choices and offer tangible evidence of good practice, serving as a guide to researchers wishing to develop engaged research. The authors hope that the nature of this chapter would seek to clarify the importance of engaged research in supporting how we understand and respond to the needs of entrepreneurial practice as a means of building trust and confidence in research reported. A key characteristic of the issue will be the different ‘framing’ of questions that can enhance practical knowledge.