Real Options Analysis In Real Estate Investments And Developments PDF Download

This dissertation, "Real Options, Portfolio Effects and Financial Structure: Theory and Evidence From Hong Kong Real Estate Companies" by Jianfu, Shen, 沈建富, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: The aim of this research is to investigate corporate behavior, including investment and financing decisions, when corporations face uncertainty and flexibility/inflexibility, and to explore the effects of this behavior on real option valuation. It expands the real options analysis framework into two paths: the first is to add institutional details, portfolio aspects and financial structure into the classical real option model; the other is to extend the real option model into a firm valuation model with corporate investment and financing decisions. Two types of theoretical models are developed. The first set of theoretical models follows the framework of binomial option pricing. Three binomial option pricing models are constructed to represent real estate development in Hong Kong, in which developable land has different flexibility in accordance with covenants in typical land lease contracts. First, the firm may have contractually limited time to complete the development following conversion of urban fringe/agricultural land into commercial/residential land after paying a negotiable "land premium"; second, it may buy land from the market without development time constraints; or thirdly it may buy land at public auction also with contractual development time constraints. The three binomial models deal with the flexibility/inflexibility in these land development circumstances imposed by institutional arrangements. Interaction effects from cost-saving through co-development and potential price increases through agglomeration effects from co-location of multiple options are included in the binomial models. The financial structure of the firm is also seen to influence real option values, because capital structure could imply different capital costs in the exercise of the real options, which is ignored in traditional real option theory. In addition to the traditional factors in financial option pricing models, numerical examples show that interaction effects and capital structure influence real option values and their investment thresholds. The second set of theoretical models aims to value both real flexibility and financial flexibility dynamically and simultaneously. Financial flexibility in the firm, which is seen as an important factor in the capital structure decision, is itself seen as analogous to a real option in project valuation, as the firm can use some debt capacity to invest in the opportunity but still preserve unused capacity for future opportunities. The thesis argues that the firm owns the financial flexibility to adjust its debt through sale of its existing assets or to use these as loan collateral. The firm with more collateralizable assets would have larger debt capacity, use more debt and invest more through the flexible utilization of debt capacity. Two empirical tests are conducted to confirm the findings of the theoretical models, structured into three principal hypotheses: firstly, real option value is not only determined by embedded flexibility, but also by the existing corporate asset structure through interactions and the firm's ability to trade or collateralize its existing assets (properties); second, real option value and real option execution/investment is directly influenced by external financing decisions due to financial frictions and constraints; and thirdly, financial flexibility is expected to increase corpor