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Valuing the housing cooperative conversion option
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management.ORCID iD: 0000-0003-4849-0726
2009 (English)Report (Other academic)
Abstract [en]

Since the 1990s, both private and municipal owners of multifamily rentalproperties in Sweden have sold a large number of their properties to hous-ing cooperatives established by the property's tenants. One motivationfor the large increase in so called housing cooperative conversions is thatthe practice of rent regulation causes actual rents to be lower than market-clearing rent levels, especially in attractive areas in larger cities. By sell-ing the property to a housing cooperative, the property owner can takeadvantage of the positive price di®erence between the price of housing co-operative dwellings, which are determined by demand and supply, and thevalue of the property based on the assumption that the rents will continueto be lower than market rents.In this paper we use a real options approach to derive a closed-formvaluation formula for the option an owner of an income producing multi-family property has to sell it to a housing cooperative. In traditionaloption valuation models, the date when the option matures is known inadvance. However, it is common that the property owner does not knowin advance when the tenants (through the housing cooperative) will buythe property. In this paper we let the expected time to maturity, which isthe day when the tenants purchases the property from their landlord, tobe a random variable. The numerical examples suggest that the value ofthe conversion option increases as expected time to conversion increases,as well as when the volatility of the price of housing cooperative proper-ties increase. The real options approach suggested in this paper may beespecially useful to explicitly conceptualize the problem of valuing a rentalproperty with embedded options to switch it to another type of property.

Place, publisher, year, edition, pages
2009. , 20 p.
Keyword [en]
Real options, property valuation, rent regulation, housing cooperative conversion
National Category
URN: urn:nbn:se:kth:diva-11240OAI: diva2:248814
QC 20100810Available from: 2009-10-09 Created: 2009-10-09 Last updated: 2010-08-10Bibliographically approved
In thesis
1. Essays on risk and housing
Open this publication in new window or tab >>Essays on risk and housing
2009 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

There is a series of different types of risk on the housing market and related industries.  The six papers in this doctoral dissertation are about a number of the many dimensions of risk management on the housing market. The main message of this thesis is that it should be possible for different actors in the housing market to improve risk management. Indeed, the last years’ financial turmoil has revealed that it should not only be possible, but also necessary, to improve risk management at all levels of the economy: at household, corporate, regional, national and international level. Although the complexity of the environment in which we live and act makes it very difficult to predict and quantify risk, the development of risk management techniques should make it possible to better indentify, and reduce risk.

The first paper provides a systematic overview of a wide selection of methods or strategies used in different countries to expand but also to maintain home ownership among low income households. The second paper further discusses mortgage and home equity insurance instruments discussed in the first paper. This paper also discusses how a rental insurance policy, as an alternative to traditional rent regulation, may be constructed. Paper 3 develops a formula that might be used in order to value the rental insurance option discussed in paper 2. The fourth paper focuses on the housing building sector by discussing potential benefits of strategic alliances that the different actors in the housing construction market may establish in order to pool resources and manage development risks. The challenge of constructing reliable home price indexes has attracted scholars for many years. Paper 5 develops monthly quality-adjusted price indexes for condominiums (housing cooperative apartments) based on a unique dataset covering sales in the whole of Stockholm municipality from January 2005 to June 2009. Finally paper 6 pays attention to the large increase in housing cooperative conversions sine the 1990s, by deriving a closed-form valuation formula that might be used to value the embedded option an owner of a multi-family rental property has to sell it to a housing cooperative.

Place, publisher, year, edition, pages
Stockholm: KTH, 2009. xv p.
Trita-BFE, ISSN 1104-4101 ; 2009 : 87
housing risks, risk management, strategic alliances, housing construction, low-income housing, real options, tenure choice, rent regulation, housing cooperative conversion, price index
National Category
Economics Economics Economic Geography
urn:nbn:se:kth:diva-11233 (URN)978-91-977302-4-2 (ISBN)
Public defence
2009-10-28, V2, Teknikringen 76, KTH, Stockholm, 13:00 (English)
QC 20100810Available from: 2009-10-08 Created: 2009-10-07 Last updated: 2010-08-10Bibliographically approved

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