A Real Options Approach to Development Land Valuation

Norman E. Hutchison and Rainer Schulz

ERES from European Real Estate Society (ERES)

Abstract: Flexibility is an inherent part of project developments, and the value associated with flexibility is an integral part of the total value of undeveloped sites. The standard decision rule states that the development should be undertaken when the residual value is positive and left undone if it is negative. However, if it is possible to postpone the development decision, then the standard rule can lead to premature development and an underassessment of land value. The real options approach treats explicitly the flexibility that is inherent in any project development and seems to be an attractive complement to standard valuation approaches. Empirical studies on real options are generally in short supply. A way to assess the content of the theory and its applicability is to compare valuations undertaken using a real options approach, with observed transaction prices.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2005-01-01
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