Analysis of the viability of an urban renewal project under a risk-based option pricing framework

Chi Man Hui, Ivan Man Hon Ng, Kak Keung Lo

Research output: Journal article publicationJournal articleAcademic researchpeer-review

26 Citations (Scopus)

Abstract

Under real option theory, property developers are able to determine the optimal timing of executing their investment projects on a risk-neutral basis. The writers adopted the Samuelson-McKean model to value the embedded option of the largest urban redevelopment project in Hong Kong-Kwun Tong Town Center-for its feasibility study. Then housing prices were simulated by using the Monte Carlo simulation. This paper has made a contribution to the real estate investment literature in tracing the plausible optima and adverse outcomes, particularly in situations in which perfect information is not available. The estimated mean value of the project is approximately $31.14 billion, which is around 15% lower than the required value, i.e., the hurdle value of $36.65 billion. The finding has revealed that immediate implementation of the Kwun Tong redevelopment project is unfavorable from a financial standpoint because the expected return is insufficient to offset the cost of uncertainties.
Original languageEnglish
Pages (from-to)101-111
Number of pages11
JournalJournal of Urban Planning and Development
Volume137
Issue number2
DOIs
Publication statusPublished - 15 Jun 2011

Keywords

  • Hong Kong
  • Models
  • Monte Carlo method
  • Pricing
  • Risk management
  • Urban development

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Civil and Structural Engineering
  • Development
  • Urban Studies

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