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Article
Publication date: 1 February 2001

Tien Foo Sing

This paper recasts the land development problems of Williams (1991) and Quigg (1993) by explicitly dealing with the effects of scale elasticity of unit rental and unit…

Abstract

This paper recasts the land development problems of Williams (1991) and Quigg (1993) by explicitly dealing with the effects of scale elasticity of unit rental and unit construction cost in a real estate project. Two different diseconomies of scale constraints are imposed on the rental and cost variables. We assume a concave function for the rental variable with respect to the scale of development. Whereas, on the cost side, the diseconomies of scale effect of the variable component of the construction cost is incorporated via a elasticity of scale factor that is larger than unity. The comparative statics simulated positive relationships between the premium that keeps the option of waiting to develop alive and the volatilities of the unit rental and unit construction cost. It was also found that the cost elasticity of scale and the financing cost are factors that increase the premium of the waiting option, whereas, the rental yield factor reduces the incentive of waiting. A high rental yield tends to expedite a development project because the opportunity cost of not developing the land is high. In the case analysis involving a vacant land of 8,000 square meters at Spitafield, East London, a unit rental of £267.2 per square meter (psm) is obtained, which would breakeven a cash flows of the project when the traditional “invest now or never” assumption is made. Compared with the optimal unit rental of £677.0 psm estimated by the real option model, the traditional DCF results tend to accept the feasibility of the real estate project too early and at too low a cut‐off rental.

Details

Journal of Property Investment & Finance, vol. 19 no. 1
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 7 August 2017

Zhi Dong and Tien Foo Sing

The purpose of this paper is to examine developers’ optimal development timing when developers are heterogeneous and have different marginal costs in a real estate…

Abstract

Purpose

The purpose of this paper is to examine developers’ optimal development timing when developers are heterogeneous and have different marginal costs in a real estate development market.

Design/methodology/approach

This study uses a multiple-player game theoretic real option model and provides tractable results of asymmetric development strategies from a two-stochastic-variable model. Anecdotal evidence and market observations are presented.

Findings

Stronger developers (with low marginal costs) exercise real estate development options earlier than weaker developers (with high marginal costs). However, the interval time between developments by stronger and weaker developers decreases in rental volatilities. Real estate with a high positive externality are developed earlier than real estate with a low or negative externality.

Practical implications

Weaker and smaller developers are advised to undertake projects having positive externalities from vicinities. Government agencies are recommended to use tools of zoning and urban planning to prioritise developments introducing positive externalities and to facilitate the growth of weaker and smaller developers. This may subsequently help reduce incentive for land banking and oversupply in real estate space market.

Originality/value

This research is probably the first to explicitly incorporate developers’ heterogeneous strength in real estate development timing options with multiple developers in a competitive market. It sheds additional insights into the understanding of potential problems of development cascades, under the interactive effects between exogenous policy changes and endogenous response from asymmetric developers.

Details

Journal of Property Investment & Finance, vol. 35 no. 5
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 1 December 2001

Tien Foo Sing and Kanak Patel

The lack of transaction data has been identified as one of the major obstacles for the empirical evaluation of real option. Quigg’s study in 1993 was one of the first to…

Abstract

The lack of transaction data has been identified as one of the major obstacles for the empirical evaluation of real option. Quigg’s study in 1993 was one of the first to empirically estimate the premium for the option of waiting to develop using data from 2,700 land sales in Seattle. This study modified Quigg’s methodology and applied it to estimate the premium for the option of waiting to develop based on a sample of data from 2,286 property transactions in the UK collected over a 14‐year sample period from 1984 to 1997. Based on a one‐factor contingent claim valuation model, we found that the average premiums for the timing options were 28.78 percent for office sector, 25.75 percent for industrial sector and 16.06 percent for retail sector. We also tested the robustness of the theoretical‐based land value estimates in explaining the market‐based land values. The regression results showed a statistically significant relationship in logarithm form between the market‐based residual land value and the model‐based land values (with embedded timing option), with R2 of 0.75, 0.79 and 0.82 for office, industrial and the retail sectors respectively.

Details

Journal of Property Investment & Finance, vol. 19 no. 6
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 6 July 2015

William Wilson, Sumadhur Shakya and Bruce Dahl

The purpose of this paper is to develop an analytical model to value traits at different developmental phases and to determine the value of drought tolerance (DT) in wheat…

Abstract

Purpose

The purpose of this paper is to develop an analytical model to value traits at different developmental phases and to determine the value of drought tolerance (DT) in wheat using GM technology.

Design/methodology/approach

A stochastic binomial real-options model of GM traits was developed to estimate the value of a DT wheat trait.

Findings

The results indicate that the value of DT wheat using GM technology is in-the-money at each development phase. The greatest value would accrue for the Prairie Gateway and Northern Great Plains regions in the USA.

Research limitations/implications

The approach is useful for valuing high-cost risky investments in technology and results provide guidance for development strategies.

Originality/value

The model is original and its applications to wheat are unique.

Details

Agricultural Finance Review, vol. 75 no. 2
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 1 June 2002

Tien Foo Sing

Option to review land rents to prevailing market rents and option to renew leases for another term are two important options embedded in the public industrial land leases…

Abstract

Option to review land rents to prevailing market rents and option to renew leases for another term are two important options embedded in the public industrial land leases in Singapore, managed by the Jurong Town Corporation (JTC). The land rents of JTC leases are reviewed every year subject to a cap on the land rent increase. The rent cap, which is historically lower than the prevailing market growth rate, widens the gap between the contract rent and the prevailing market rent as the lease progresses. This creates disincentives to the lessor for not exercising the rent review option, because the option is in‐the‐money. The rent gap, on the other hand, is also translated into substantial profit rents for lessees who hold onto the leasehold interests of industrial lands. By assuming two different probability distributions for the ex‐ante prevailing market rents, the profit rents were simulated to derive at the values of a hypothetical 30‐year lease, which range from US$47.93 (S$86.45) per square meter (psm) (Sungei Kadut, Kranji) to US$236.05 (S$425.74) psm (West Coast Highway). Based on these simulated 30‐year leasehold values and assumptions of other input parameters: equated yield (e = 10 percent), risk free rate (Rf = 4.52), volatility of leasehold value (σ = 15 percent), term of lease (T = 30 years) and rental growth cap (g = 7.6 percent), the premiums for the lease renewal options were estimated to be in a range of US$4.55 (S$8.21) psm to US$22.26 (S$40.15) psm.

Details

Journal of Property Investment & Finance, vol. 20 no. 3
Type: Research Article
ISSN: 1463-578X

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Book part
Publication date: 29 January 2018

Giuseppe Cappiello, Paola Garrone and Paolo Nardi

Infrastructure projects lend themselves quite naturally to the domain of collaborative networks, because they are not feasible without the coordinated efforts of several…

Abstract

Infrastructure projects lend themselves quite naturally to the domain of collaborative networks, because they are not feasible without the coordinated efforts of several independent and heterogeneous actors. This chapter analyzes the nature and role of multilateral collaboration in the early stages of local infrastructure projects.

After having developed a conceptual model of collaborative approaches to early project stages, a survey was designed and targeted at experienced and informed managers of utilities that develop infrastructural facilities in Italy.

The empirical analysis reveals that collaboration with local governments and other stakeholders is sought by managers mainly to acquire knowledge about project options and feasibility, and to improve public acceptance.

Details

Cross-Sectoral Relations in the Delivery of Public Services
Type: Book
ISBN: 978-1-78743-172-0

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Article
Publication date: 7 March 2018

Beatriz Ortiz, Mario J. Donate and Fátima Guadamillas

This paper concentrates on the antecedents of external knowledge acquisition of companies based on their inter-organizational relationships. Specifically, it considers…

Abstract

Purpose

This paper concentrates on the antecedents of external knowledge acquisition of companies based on their inter-organizational relationships. Specifically, it considers social capital (i.e., the result of a firm’s inter-organizational relationships) as an essential precursor of knowledge identification capabilities and deliberated knowledge acquisition strategies. This study aims to propose that cognitive and relational dimensions of a firm’s inter-organizational social capital are mediating factors of the relationship between structural social capital and knowledge identification capabilities and the relationship between structural social capital and the deliberated acquisition of external knowledge, respectively. The relationship between knowledge identification capability and external knowledge acquisition is also analyzed.

Design/methodology/approach

This is a cross-sectional quantitative study with a sample of 87 firms from Spanish biotechnology and pharmaceutical industries. From an extensive literature review, we developed three hypotheses that were tested using the partial least squares technique and structural equations model.

Findings

The results only support a mediating effect of cognitive social capital in the relationship between structural social capital and knowledge identification capability and a partial mediation effect of relational social capital in the relationship between structural social capital and knowledge acquisition. In addition, the findings show that firms with more advanced abilities to identify and assess the value of external knowledge will be likely to develop optimal deliberated strategies to acquire effectively such knowledge from its network partners.

Research limitations/implications

The limitations of this study are small sample size and the cross-sectional nature of the study. The study also focuses on only two specific and innovative industries.

Practical implications

Managers should understand that “good” management of inter-organizational social capital allows the firm to develop dynamic capabilities for the identification and acquisition of valuable knowledge. The results of the study show that managers should concentrate on building knowledge identification capabilities and should also be aware of the possibilities that social capital can provide to a firm to formulate and implement effective strategies for external knowledge acquisition.

Originality/value

To date, there are relatively few studies focussing on knowledge identification capability and its relationships with the dimensions of a company’s social capital as enablers of external knowledge acquisition. For managers, the identification of valuable knowledge by using inter-organizational relationships and networks is an essential issue, especially in innovative industries characterized by continuous change. Theoretically, this research highlights that social capital contributes to the development of dynamic capabilities, allowing the firm to sense and seize business opportunities based on external knowledge acquisition to achieve competitive advantages.

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Article
Publication date: 18 September 2018

Odilon Costa, Franz Fuerst and Wesley Mendes-da-Silva

While broader property-type categories of real estate markets have been scrutinized at microeconomic level in some segments – namely, residential, retail, industrial and…

Abstract

Purpose

While broader property-type categories of real estate markets have been scrutinized at microeconomic level in some segments – namely, residential, retail, industrial and hospitality, there is limited evidence showing that local office markets can be viewed as monolithic and economically integrated entities. The purpose of this paper is to investigate how occupiers differ in their willingness to pay for principal office rent determinants in the corporate and non-corporate sectors.

Design/methodology/approach

A sample of properties located in the largest office market in Latin America is partitioned based on the average size of leasable units. This approach captures interactions between different groups of investors and occupiers, and is commonly adopted by local market practitioners due to lack of detailed information on market participants. The pricing schedules for these two groups of buildings are then empirically compared through hedonic regression analysis and parameter stability tests.

Findings

The regressions show that corporate and smaller occupier properties form distinct spatial and non-spatial submarkets, but that their temporal patterns are quite similar. Thus, these property-type segments can be classified as imperfect substitutes with distinct pricing schemes, but not as a unique market, as their pricing schedules are not generalizable.

Practical implications

The results imply that “office properties” are too complex and disparate to be reliably examined with a simple aggregate approach as practiced in developed office market research since the 1980s. The fragmented reality of office properties has important implications for investment decisions and real estate valuation.

Originality/value

This paper shows that the corporate office market exhibits distinct characteristics and key determinants of office price and rent valuation differ significantly between the corporate and non-corporate segments. The corollary of these findings is that market studies that require reliable estimates of price drivers may be enriched by modeling these two segmented markets separately. It is also important to note that this distinction cuts across the established A/B/C office space quality classification.

Details

Journal of Property Investment & Finance, vol. 36 no. 4
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 2 August 2013

Jianfu Shen and Frederik Pretorius

The purpose of this paper is to construct option pricing models for real estate development by considering and incorporating institutional arrangements, direct…

Abstract

Purpose

The purpose of this paper is to construct option pricing models for real estate development by considering and incorporating institutional arrangements, direct interactions and financial constraints in the model. It extends the application of real option theory from the framework borrowed from financial option pricing, and considers the case where a development company has restrictions from outside environment and financial constraint. It explores the effects of these additional practical factors on real asset project value and development timing. This paper makes contributions to bridge the theoretical models and practical applications.

Design/methodology/approach

Real estate development is modelled in the binomial option pricing framework with the considerations of time‐to‐build, foregone rent if delaying, institutional environment and capital budgeting. The investment timings are derived from the models and sensitivity analysis is conducted to explore the effects of these factors.

Findings

Apart from the factors in traditional option pricing theory, this paper confirms that the contractual covenants, positive synergies between properties and financial status of the firm, which enhance or restrict real flexibility embedded in the development land, influence project value and investment timing. Numerical examples illustrate the effects of these factors. It is argued that the valuation of real options should place emphasis on industry‐specific characteristics and start from the perspective of the firm rather than individual options.

Practical implications

The models constructed in this paper and the results can be directly used in the practical real estate development.

Originality/value

This paper incorporates many practical factors in real estate development which are not investigated in previous studies. It values the option project from the firm perspective rather than project perspective as previous studies. It also shows the effects of institutional arrangement and firm factors on project value and development timing.

Details

Journal of Property Investment & Finance, vol. 31 no. 5
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 11 December 2020

Ling Zhang, Minghui Zheng and Zheyan Zhang

This paper aims to study the impact of land options on the land transfer behaviour of Chinese city governments.

Abstract

Purpose

This paper aims to study the impact of land options on the land transfer behaviour of Chinese city governments.

Design/methodology/approach

Based on the institutional environment of Hangzhou, China, the option pricing model is used to measure the option value of the trading plots. The effect of the option value on the land transfer price and the timing of transfers are estimated respectively, using the hedonic price model and the survival analysis models.

Findings

The results show that the option value has a significant explanation on land price and timing of land transfers. Under the effect of option value, the positive impact of fiscal pressure on the possibility of land transfer weakens. From the perspective of the annual option premium rate, the option premium is closely related to the real estate cycle. Option premiums are higher during booms but lower during recessions and in new urban areas.

Practical implications

By revealing the distinction of land option premiums in different places and times, this paper provides a reference for city governments seeking a balance between real estate regulation and obtaining more land revenue.

Originality/value

By introducing policy variables that reflect the degree of tightness of real estate regulation and indicators of local government financial pressure, the paper discusses the impact of options on the transfer behaviour of local governments in different situations.

Details

Journal of Property Investment & Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1463-578X

Keywords

1 – 10 of over 87000