"WHITE" SITE VALUATION: A REAL OPTION APPROACH

Abstract

The Urban Redevelopment Authority (URA) introduced the "white-site" concept in 1995. With the switch use option embedded in these white sites, developers can respond to market demand and supply conditions more effectively by adjusting the space between different uses without having to pay a hefty differential premium. This study proposes a binomial tree switch use option model to empirically estimate the switch use option premium for five selected white sites. The results show that the China Square parcel "A" site has the highest premium of 5.91%, whereas the China Square parcel "G" site has the lowest premium of 4.77%. The sensitivity analysis shows that as the spread between the two rentals rl and r2 increases, the premium increases correspondingly. At the largest gap of $16.00, the premium is computed at 9.86%. (China Square parcel "A"). A 1% increase in the risk free interest rate increased the premium by 0.15% (from 5.91% to 6.06%). As the conversion cost increases from 20% to 35%, the premium decreases by the largest percentage of 1.1% (from 5.91% to 4.81%). A 1% increase in the capitalization rate for user 1 (from 7% to 8%) brings about the largest decrease in premium of 0.83% (from 5.91% to 5.08%). Whereas a 1% increase in the capitalization rate for user 2 (from 5% to 6%) brings about the highest increase in premium of 1.3% (from 4.88% to 6.18%). As the quantum of floor space adjustment increases from 5% to 10%, the premium increases by 5.92% (from 5.91% to 11.83%).