IDEAS home Printed from https://ideas.repec.org/a/eee/lauspo/v107y2021ics0264837721002076.html
   My bibliography  Save this article

Investments on urban land valuation by real options – The Portuguese case

Author

Listed:
  • Couto, Gualter
  • Martins, Dulce
  • Pimentel, Pedro
  • Castanho, Rui Alexandre

Abstract

This study aims to evaluate unexploited urban land in Portugal, for the construction of new apartments, with the real options analysis's contribution, using the Quigg model, adapted to the reality of the Portuguese market. This work defines a value associated with the land, referring to the construction option. This option gives the right, but not the obligation, to build the project at any time. Therefore, the new land value is maximized in the optimal timing to define the best moment to carry out the investment. The study shows that in the Portuguese case, when the time horizon changes from 5 to 10 years, both the value of the deferral options and the global value of the land increase considerably, exposing the deferral options' sensitivity to the time horizon variable in the process of evaluation. Besides, considering the land evaluation process in Portugal, it is possible to conclude that, on average, the deferral option represents 9,09% of the land's final value, varying between 1,40% and 20,10%. The decision to defer the construction of the investment project adds value to the undeveloped land and should be considered in the investment decision-making process.

Suggested Citation

  • Couto, Gualter & Martins, Dulce & Pimentel, Pedro & Castanho, Rui Alexandre, 2021. "Investments on urban land valuation by real options – The Portuguese case," Land Use Policy, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:lauspo:v:107:y:2021:i:c:s0264837721002076
    DOI: 10.1016/j.landusepol.2021.105484
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264837721002076
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.landusepol.2021.105484?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    2. Codosero Rodas, José Maria & Castanho, Rui Alexandre & Cabezas Fernández, José & Naranjo Gómez, José Manuel, 2020. "Sustainable valuation of land for development. Adding value with urban planning progress. A Spanish case study," Land Use Policy, Elsevier, vol. 92(C).
    3. Williams, Joseph T, 1991. "Real Estate Development as an Option," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 191-208, June.
    4. Rena Sivitanidou & Petros Sivitanides, 2000. "Does the Theory of Irreversible Investments Help Explain Movements in Office-Commercial Construction?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(4), pages 623-661.
    5. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    6. David Geltner, 1989. "On the use of the Financial Option Price Model to Value and Explain Vacant Urban Land," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 142-158, June.
    7. José María Codosero Rodas & José Cabezas Fernández & José Manuel Naranjo Gómez & Rui Alexandre Castanho, 2019. "Risk Premium Assessment for the Sustainable Valuation of Urban Development Land: Evidence from Spain," Sustainability, MDPI, vol. 11(15), pages 1-21, August.
    8. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-514, June.
    9. Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
    10. Pierluigi Morano & Francesco Tajani & Marco Locurcio, 2015. "Land Use, Economic Welfare and Property Values: An Analysis of the Interdependencies of the Real-Estate Market with Zonal and Socio-Economic Variables in the Municipalities of Apulia Region (Italy)," International Journal of Agricultural and Environmental Information Systems (IJAEIS), IGI Global, vol. 6(4), pages 16-39, October.
    11. Quigg, Laura, 1993. "Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-640, June.
    12. José Maria Codosero Rodas & José Manuel Naranjo Gómez & Rui Alexandre Castanho & José Cabezas, 2018. "Land Valuation Sustainable Model of Urban Planning Development: A Case Study in Badajoz, Spain," Sustainability, MDPI, vol. 10(5), pages 1-18, May.
    13. Sing, Tien-Foo & Patel, Kanak, 2001. "Evidence of irreversibility in the UK property market," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(3), pages 313-334.
    14. A. Steven Holland & Steven H. Ott & Timothy J. Riddiough, 2000. "The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(1), pages 33-64.
    15. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    16. Capozza, Dennis R & Schwann, Gregory M, 1990. "The Value of Risk in Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 3(2), pages 117-140, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
    2. Clapp, John M. & Bardos, Katsiaryna Salavei & Wong, S.K., 2012. "Empirical estimation of the option premium for residential redevelopment," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 240-256.
    3. Steven Ott & W. Hughen & Dustin Read, 2012. "Optimal Phasing and Inventory Decisions for Large-Scale Residential Development Projects," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 888-918, November.
    4. Renigier-Biłozor Małgorzata & d’Amato Maurizio, 2017. "The Valuation of Hope Value for Real Estate Development," Real Estate Management and Valuation, Sciendo, vol. 25(2), pages 91-101, June.
    5. Huimin Yao & Frederik Pretorius, 2014. "Demand Uncertainty, Development Timing and Leasehold Land Valuation: Empirical Testing of Real Options in Residential Real Estate Development," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 829-868, December.
    6. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    7. d’Amato, Maurizio & Zrobek, Sabina & Renigier Bilozor, Malgorzata & Walacik, Marek & Mercadante, Giuseppe, 2019. "Valuing the effect of the change of zoning on underdeveloped land using fuzzy real option approach," Land Use Policy, Elsevier, vol. 86(C), pages 365-374.
    8. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    9. Rose Neng Lai & Lawrence Hoc Nang Fong, 2021. "Development Strategies in a Market of High Vacancies and Sticky Rates – The Case of the Hotel Industry," International Real Estate Review, Global Social Science Institute, vol. 24(3), pages 363-383.
    10. Kyungwon Kim & Jae Wook Song, 2018. "Managing Bubbles in the Korean Real Estate Market: A Real Options Framework," Sustainability, MDPI, vol. 10(8), pages 1-25, August.
    11. Andrianos Tsekrekos & George Kanoutos, 2013. "Real Options Premia Implied from Recent Transactions in the Greek Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 152-168, July.
    12. David Kim Hin Ho & Eddie Chi-man Hui & Muhammad Faishal Bin Ibrahim, 2009. "Asset Value Enhancement of Singapore’s Public Housing Main Upgrading Programme (MUP) Policy: A Real Option Analysis Approach," Urban Studies, Urban Studies Journal Limited, vol. 46(11), pages 2329-2361, October.
    13. John Clapp & Katsiaryna Bardos & Tingyu Zhou, 2014. "Expansions and Contractions of Major US Shopping Centers," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 16-56, January.
    14. Bulan, Laarni T., 2005. "Real options, irreversible investment and firm uncertainty: New evidence from U.S. firms," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 255-279.
    15. Yuming Fu & Maarten Jennen, 2009. "Office Construction in Singapore and Hong Kong: Testing Real Option Implications," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 39-58, January.
    16. Lu, Chien-Lin & Liao, Wen-Chi & Peng, Chien-Wen, 2020. "Developers’ perspectives on timing to build: Evidence from microdata of land acquisition and development," Journal of Housing Economics, Elsevier, vol. 49(C).
    17. Robert Grovenstein & James Kau & Henry Munneke, 2011. "Development Value: A Real Options Approach Using Empirical Data," The Journal of Real Estate Finance and Economics, Springer, vol. 43(3), pages 321-335, October.
    18. Cunningham, Christopher R., 2006. "House price uncertainty, timing of development, and vacant land prices: Evidence for real options in Seattle," Journal of Urban Economics, Elsevier, vol. 59(1), pages 1-31, January.
    19. Muhammad Zaim Razak & Haniza Khalid & Azhar Mohamad, 2018. "Speculative Behavior in Vacant Land Development: Evidence for Real Options in Malaysia," The Developing Economies, Institute of Developing Economies, vol. 56(4), pages 245-266, December.
    20. Laarni T. Bulan, 2005. "Real options, irreversible investment and firm uncertainty: New evidence from U.S. firms," Review of Financial Economics, John Wiley & Sons, vol. 14(3-4), pages 255-279.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:lauspo:v:107:y:2021:i:c:s0264837721002076. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joice Jiang (email available below). General contact details of provider: https://www.journals.elsevier.com/land-use-policy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.