A risk-based option pricing strategy for property valuation: An empirical study in Hong Kong

Chi Man Hui, I. M.H. Ivan

Research output: Journal article publicationJournal articleAcademic researchpeer-review

4 Citations (Scopus)

Abstract

Purpose The purpose of this paper is to apply a risk-based option-pricing framework for property developers to come up with the critical investment timings, based on their tolerance of risk. Design/methodology/approach The viability of a project is subject to the potential benefit and market conditions. Option embedded in the project is considered a perpetual call option that is an opportunity to establish a new building on a vacant land. With the aid of scenario testing, whether the immediate implementation is appropriate or not can be examined, and which key factor(s) affects the profit most can be assessed. Findings The results reveal that the chosen study case, Chelsea Court project, is highly favorable from a financial standpoint. Research limitations/implications Since the Samuelson-McKean model specializes on non-expired options that in general fit to the evaluation of options of a land development project with no maturity, it may be limited in evaluating projects with multi-phases and a maturity date. Practical implications This valuation framework allows flexibility to assess the plausible investment timing under various suspicious circumstances about the property market. Originality/value The valuation framework presented in this paper provides advice for prospective property developers on whether to invest now or at a later stage to yield the best return.
Original languageEnglish
Pages (from-to)48-59
Number of pages12
JournalJournal of Financial Management of Property and Construction
Volume13
Issue number1
DOIs
Publication statusPublished - 30 Jun 2008

Keywords

  • Hong Kong
  • Pricing policy
  • Property

ASJC Scopus subject areas

  • Business and International Management
  • Accounting
  • Finance
  • Economics and Econometrics

Cite this