OPTION PRICING OF RESIDENTIAL DEVELOPMENT IN SINGAPORE

Abstract

The option to delay a real estate development is valuable. This is because as time passes, developers can gain additional information about evolving market conditions and consequently, the value of the direct real estate asset under potential development. This paper aims to use a real option valuation model to value the delay option embedded in a vacant land (the direct real estate asset). The study successfully explores the deployment of an open-end solution, that is commonly used to value financial options, to intuitively value real options of vacant land under potential development opportunities. The open-end trinomial solution can be appropriately used to formulate the real call option valuation model as well as the real put option valuation model. To test how good these models are, they are compared with the alternative Samuelson-McKean model of valuing the option-to-develop for vacant land.