Valuation of The Portuguese Real Estate Market: An Empirical Analysis

Year 2020, Volume: 5 Issue: 2, 82 - 90, 27.12.2020

Gualter Couto , Pedro Pimentel , Carla Oliveira Rui Castanho

Abstract

The contribution of real options analysis on the valuation of Portuguese undeveloped building sites is significant on the decision making regarding the apartment-buildings construction. Using the options model developed by Quigg (1993), and including the necessary readjustments for the Portuguese market, it was found that the scale price elasticity parameter and construction expenditures’ elasticity of scale parameter had a strong impact on building sites’ values. The empirical analysis revealed that the option to defer adds value to undeveloped building sites’ valuations. This fact cannot be ignored when deciding upon an investment’s implementation.

Keywords

Real options, real estate, optimal timing

Supporting Institution

FCT – Fundação para a Ciência e a Tecnologia

Project Number

UIDB/ECO/00685/2020

Thanks

This paper is financed by Portuguese national funds through FCT – Fundação para a Ciência e a Tecnologia, I.P., project number UIDB/ECO/00685/2020

Portekiz Gayrimenkul Pazarının Değerlendirilmesi: Ampirik Bir Analiz

Abstract

Portekiz'deki gelişmemiş şantiyelerin değerlemesine reel opsiyon analizinin katkısı, apartman inşasına ilişkin karar vermede önemlidir. Quigg (1993) tarafından geliştirilen ve Portekiz pazarı için gerekli yeniden düzenlemeleri içeren opsiyon modelini kullanarak, ölçek fiyat esnekliği parametresi ve inşaat harcamalarının ölçek esnekliği parametresinin şantiye değerlerinde güçlü bir etkiye sahip olduğu bulundu. Ampirik analiz, erteleme seçeneğinin gelişmemiş inşaat alanlarının değerlemelerini artırdığını ortaya çıkarmıştır. Bir yatırımın uygulanmasına karar verirken bu durum göz ardı edilmemelidir.

Keywords

Reel opsiyon, Emlak, Optimal Zamanlama

Project Number

UIDB/ECO/00685/2020

References

• Ambrose, B. (2005). Forced Development and Urban Land Proces. Journal of Real Estate Finance and Economics, 30(3), 245–265.
• Banha, F. (2000). Avaliação de Empresas: O Estado da Arte no Sector Imobiliário. Artigo de Opinião, Gesbanha – Gestão e Contabilidade, S.A..
• Black, F., and Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81, May-Jun, 637-659.
• Boyle, P. (1986). Option Valuation Using a Three-Jump Process. International Options Journal, 3, 7-12.
• Brennan, M., and Schwartz, E. (1985). Evaluating Natural Resource Investments. Journal of Business, 58 (2), 135-157.
• Bulan, L., Mayer, C. J., and Somerville,T. (2009). Irreversible Investment, Real Options, and Competition: Evidence from Real Estate Development. Journal of Urban Economics, 65, 237-251.
• Capozza, D., and Li, Y. (1994). The Intensity and Timing of Investment: The Case of Land. American Economic Review, 84 (4), 889-904.
• Cunningham, C. (2006). House Price Uncertainty, Timimg of Development and Vacant Land Prices: Evidence for Real Options in Seattle. Journal of Urban Economics, 59(1), 1–31.
• Cunningham, C. (2007). Growth Controls, Real Options, and Land Development. The Review of Economics and Statistics, 89(2), 343–358.
• Dixit, A., and Pindyck, R. (1994). Investment under Uncertainty. New Jersey: Princeton University Press, Princeton.
• Geltner, D. (1989). On the Use of the Financial Option Price Model to Value and Explain Vacant Urban Land. AREUEA Journal, 17 (2), 142-158.
• Holland, A., Ott, S., and Riddiough, T. (2000). The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data. Real Estate Economics, 28 (1), 33-64.
• Luehrman, T. (1998). Investment Opportunities as Real Options: Getting Started on the Numbers. Harvard Business Review, 51-67.
• MacDonald, R., and Siegel, D. (1986). The Value of Waiting to Invest. The Quartely Journal of Economics, 101 (4), Nov, 707-728.
• Majd, S., and Pindyck, R. (1987). Time to Build, Option Value, and Investment Decisions. Journal of Financial Economics, 18 (1), 7-27.
• Ministry of the Public Works, Transports and Habitation (2004). Transport and Habitation. State Secretary of the Habitation.
• Mun, J. (2003). Real Options Analysis Course: Business Cases and Software Applications. New York: Wiley & Sons.
• Quigg, L. (1993). Empirical Testing of Real Option-Pricing Modules. The Journal of Finance, 48, 621-640.
• Quigg, L. U of I’s Laura Quigg (1992). Applies Real Options Concept to Real Estate. ORER Letter, Spring/Summer, 10-13.
• Sing, T. F., and Patel, K. (2001). Evidence of Irreversibility in the UK Property Market. The Quartely Review of Economics and Finance, 41, 313-334.
• Titman, S. (1985). Urban Land Prices under Uncertainty. American Economic Review, 75 (3), 505-514.
• Trigeorgis, L. (1996). Real Options: Managerial Flexibility and Strategy in Resource Allocation. Cambridge, MA. The MIT Press.
• Williams, J. (1991). Real Estate Development as an Option, Journal of Real Estate Finance and Economics, 4, 191-208.
• Yamazaki, R. (2001). Empirical Testing of Real Option Pricing Models Using Land Price Index in Japan. Journal of Property Investment & Finance, 19 (1), 53-72.
• Yanxiang, A., and Cannaday, R. (2004). Value of the Option to Develop Residential Land: An Empirical Estimate. Real Estate Review, Winter, 32(4), 60 –65.
• Yao, H., and Pretorius, F. (2004). Empirical Testing of Real Options in the Hong Kong Residential Real Estate Market. Working Paper, University of Hong Kong.