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Real Option Valuation of Real Estate Development Projects
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management.
2017 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

This thesis introduces the theory of Real Options connected to real estate development, and assume a model that can value projects through a compound option formula. The basic theory of Options has been around for a long time, with the earlies recorded mention of dealings being made with options dating back as far as 600b.c (Kodukula & Papudesu, 2004). But only since 1973 has the research been driven in a way to yield a working framework of the concept. The introduction of the Black & Scholes (1973) formula gave arise to a new movement of research within the field. Many noteworthy contributors have since made adaptations and introduced new ways of looking at Options. Projects with high uncertainty in returns and many flexibilities often yield close to zero NPV calculations. The classic NPV approach is a static valuation technique that does not capture the true value of flexibility. It does not yield proper insight to opportunities that lie in the project, thus often undervaluing the true value of a development project (Copeland & Antikarov, 2001). The real option method lets you capture the true value that lies within these flexibilities, through the assessment of stochastic variables that drives project value. The compound option model created have the ability to analyse different scenarios and give understanding to how market conditions affect the value of the projects. Along with the economic understanding of the theories, the compound option formula gives the developer a new and more financially correct way of assessing an opportunity. The model is applied to a real-world case project, where the prediction of project value is similar to the NPV value assumed by the company. One of the most valuable traits of the model lies in the scenario analysis, where the developer can analyse different market scenarios and make informed decisions based on the options that lies at hand.

Place, publisher, year, edition, pages
2017. , p. 67
Keyword [en]
Real Estate, Development, Real Option, Option, Compound Option, Residential Real Estate, Valuation, Binomial method
National Category
Engineering and Technology
Identifiers
URN: urn:nbn:se:kth:diva-211144Local ID: TRITA-FOB-ByF-MASTER-2017:36Archive number: 494OAI: oai:DiVA.org:kth-211144DiVA, id: diva2:1127820
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Examiners
Available from: 2017-07-19 Created: 2017-07-19 Last updated: 2017-07-19Bibliographically approved

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CiteExportLink to record
Permanent link

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Cite
Citation style
  • apa
  • harvard1
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf