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A risk‐based option pricing strategy for property valuation: an empirical study in Hong Kong

A risk‐based option pricing strategy for property valuation: an empirical study in Hong Kong Purpose – The purpose of this paper is to apply a risk‐based option‐pricing framework for property developers to come up with the critical investment timings, based on their tolerance of risk. Design/methodology/approach – The viability of a project is subject to the potential benefit and market conditions. Option embedded in the project is considered a perpetual call option that is an opportunity to establish a new building on a vacant land. With the aid of scenario testing, whether the immediate implementation is appropriate or not can be examined, and which key factor(s) affects the profit most can be assessed. Findings – The results reveal that the chosen study case, Chelsea Court project, is highly favorable from a financial standpoint. Research limitations/implications – Since the Samuelson‐McKean model specializes on non‐expired options that in general fit to the evaluation of options of a land development project with no maturity, it may be limited in evaluating projects with multi‐phases and a maturity date. Practical implications – This valuation framework allows flexibility to assess the plausible investment timing under various suspicious circumstances about the property market. Originality/value – The valuation framework presented in this paper provides advice for prospective property developers on whether to invest now or at a later stage to yield the best return. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Management of Property and Construction Emerald Publishing

A risk‐based option pricing strategy for property valuation: an empirical study in Hong Kong

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1366-4387
DOI
10.1108/13664380810882075
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to apply a risk‐based option‐pricing framework for property developers to come up with the critical investment timings, based on their tolerance of risk. Design/methodology/approach – The viability of a project is subject to the potential benefit and market conditions. Option embedded in the project is considered a perpetual call option that is an opportunity to establish a new building on a vacant land. With the aid of scenario testing, whether the immediate implementation is appropriate or not can be examined, and which key factor(s) affects the profit most can be assessed. Findings – The results reveal that the chosen study case, Chelsea Court project, is highly favorable from a financial standpoint. Research limitations/implications – Since the Samuelson‐McKean model specializes on non‐expired options that in general fit to the evaluation of options of a land development project with no maturity, it may be limited in evaluating projects with multi‐phases and a maturity date. Practical implications – This valuation framework allows flexibility to assess the plausible investment timing under various suspicious circumstances about the property market. Originality/value – The valuation framework presented in this paper provides advice for prospective property developers on whether to invest now or at a later stage to yield the best return.

Journal

Journal of Financial Management of Property and ConstructionEmerald Publishing

Published: Jun 30, 2008

Keywords: Property; Pricing policy; Hong Kong

References