New Songdo City and the value of flexibility : a case study of implementation and analysis of a mega-scale project

Abstract

In the modern real estate industry, mega-scale developments have been a notable feature. The distinctiveness of these projects is that they are enormous in scale and thus require many years to develop. Unlike regular sized projects, they have greater opportunities to alter strategies, plans or designs during the multiple years of development. This provides the developer with alternative options to mitigate potential risks or seize upside opportunities. The “Real options” theory is especially applicable for valuation and decisionmaking of mega-scale real estate development projects. Relying on the dynamic decisions of the developer, for example, the project can proceed, be delayed or be abandoned. Either way, the developer can avoid downside risks and attain a more optimal value for the project. The New Songdo City (NSC) project in South Korea is an archetype of the mega-scale development phenomenon. “New Songdo City” is a massive city development project on 1,415 acres of reclaimed land in Incheon, near Seoul. The project features innovative and valuable aspects that are milestones for the real estate industry. Not only is NSC of megascale and multi-phase, but it is highly international in nature (foreign lead developer and architect, much foreign capital, and aimed at international world-class occupants). It also features imaginative conceptual planning, local and international developer partnership and sophisticated investment and financing techniques. The project highlights the importance of the interaction of local circumstances and other participants, helping to avoid risks and enhance the future values of the project. New Songdo City thus provides an excellent laboratory to explore both the broader strategic and historical development of a Mega-Project and also the applicability of modern, cuttingedge analytical tools for valuing flexibility in project design and implementation. This thesis seeks to explore both of these aspects, including an in-depth review of the history and strategic prospects for the project as well as a specific quantitative model focusing on the value of phasing in the project. The quantitative model is innovative in that, while previous literature has developed classical economics-based real options models of NSC, this is the first application of the “engineering-based approach” advocated by Professor de Neufville and the MIT Engineering Systems Division. This approach allows the model to be more transparent and user-friendly to decision-makers, assisting the valuation of flexibility in the project in a manner more supportive for practitioners. Thesis Supervisor : David Geltner Title : Professor of Real Estate Finance, Department of Urban Studies and Planning

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