ANALYSIS OF PROJECT COMPLETION PERIOD ON URA LAND SALES SITES USING REAL OPTIONS APPROACH

Abstract

This paper applies the Black and Scholes option-pricing model proposed by Black and Scholes (1973) to evaluate the option to defer the project completion period (PCP) of the Urban Renewal Authority (URA) land sales sites subjected to conditions stipulated by the URA. Based on the 107 URA residential sales sites tendered out since 1996, our empirical results showed that the average option premium was estimated at $10,562,655 or 14.1% of exercise price. The regression results showed that the option premiums of non-landed properties are significantly related to the site area, plot ratio and the selling price. On the other hand, the site area, market condition and Treasury bill rate spread have a significant impact on the option premium of landed properties. On the other regression analysis carried out on all sample lands indicates that the type of residential development the land is zoned for and the site area have a significant effect on the option premium. Sensitivity analyses conducted showed that the option premiums are positively related and sensitive to changes in volatility, risk-free rate and time to expiration but are not significantly impacted by changes in the required rate of return. This study have found out that the variation of the PCP significantly impacts on the value of the option premium embedded in the lands. With this finding, it is hoped that the government authorities as well as developers are able to understand how this variation in PCP can affect the profitability of a project; thus enabling them to make more informed decisions.