High Rise vs Low Rise: does Building Typology Matter in High Density Property Investments?

It is argued in the literature that skyscrapers are the most profitable building typology that guarantees an efficient use of land when both land values and population density are high. Nonetheless evidence from on-going projects in Europe shows that many investments in skyscrapers construction fail and are abandoned in favour of low-rise high density buildings. When construction has started, tall building projects must be completed in order to gain profits and returns on investment. Due to the specific construction typology and phasing, the developer has no option to defer completion or proceed by sequential investments. On the contrary, low-rise high density buildings are characterized by high operational flexibilities as they can be expanded by sequential investments and easily modified over time in order to adapt to changes in the state variables (e.g. demand, construction costs, market prices, etc.). Investments in low-rise construction generate multiple interacting options or compounded options whose values may increase the project Net Present Value. This paper investigates the role of flexibility in high density building construction projects. We model the value of flexibility to proceed by sequential investments according to the Real Option Approach. Sequential investments can actually be seen as a series of compound and growth options, where an earlier investment cost represents the exercise price required to acquire the subsequent option to continue operating the project until the next stage comes due.