Improving Redevelopment of Real Assets

Property asset management is keenly influenced by the market rental price for the services and asset quality. Renovation is conceived as a form of redevelopment that returns the property back to its pristine state after experiencing quality deterioration. We formulate a two-factor renovation model under rental price and quality uncertainty and a fixed investment cost. The renovation policy is determined from the economic boundary conditions as an analytical solution in an implicit form. From this, we establish that the incremental value from renovating the asset quality has to exceed the investment cost by a mark-up factor that exceeds one. Further, the most the property owner is willing spend on renovating the property is positively influenced by the prevailing rental price but negatively by the underlying volatilities. Owners renovate their properties whenever rental prices are propitious and volatility is falling.