Journal of Real Estate Finance and Economics, 27:2, 173±189, 2003
# 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Asset-Backed Securitization in Singapore: Value of
Embedded Buy-Back Options
TIEN FOO SING*
Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore 117566,
SEOW ENG ONG
Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore, 117566
C. F. SIRMANS
Department of Finance, University of Connecticut, 2100 Hillside Road, Storrs, CT 06269-1041
Asset backed securities have been promoted as an important ®nancing instrument for property developers to raise
capital in Singapore. In 1999 alone, S$1.92 billion worth of bonds have been issued via the securitization of six
commercial properties and one residential condominium project under construction. Buy-back option is a unique
feature embedded in the asset-backed securitization (ABS) in Singapore, which allow the originator to retain a
contingent claim on the upside potential of the asset price. Based on the multi-period binomial option pricing
framework proposed by Cox et al. (1979), the prices of the options embedded in the ABS contracts are estimated.
Using the securitization of the 132,111 square feet 268 Orchard Road of®ce building for illustration, the premium
of the options embedded in the 10-year ABS deal was estimated at S$28.47 million, or 15.48 percent of the bond
value. Recognition of the value of embedded options is important for structuring a fair and transparent ABS deal.
Key Words: asset-backed securitization, buy-back option, option premiums
Real estate investment in Singapore, as in many other Asian countries, has traditionally
been regarded as a direct investment. This perception is changing gradually in Singapore
following the 1998 liberalization of the ®nancial policies by the Monetary Authority of
Singapore (MAS), the de-facto central bank of Singapore. The promotion of an active
secondary real estate market via real estate securitization has been one of the MAS's
initiatives toward increasing the depth and diversity of Singapore's debt markets (Wong,
1998 and Lee and Ang, 1998). Six prime of®ce buildings and one residential project under
construction were securitized in 1999, which were popularly known as asset-backed
securitization (ABS) deals (Ong et al., 2000).
One key feature of the ABS deals in Singapore is the explicit incorporation of strategic
* Author for correspondence.