Depreciation, Building Age, and Market Price Statistics for Reference in Urban Redevelopment Option Pricing

Jiawei Zhong, Eddie C.M. Hui

Research output: Journal article publicationJournal articleAcademic researchpeer-review

Abstract

This study aims to develop a new option pricing model within a two-phase real option framework to adjust underestimation due to depreciation in urban redevelopment projects (approximately 70% bias in a 10-year Urban Renewal Authority standard redevelopment in Hong Kong). The model is applicable to residential buildings owned by multiple residents. This discrete-time model introduces two novel features, namely, constant depreciation rate and annual increase of average building age. Option values are sensitive to the embedded assumption of annual depreciation effect in the market price statistics for reference (market indices or average prices), which facilitates good decision making for redevelopment.

Original languageEnglish
Article number04019031
JournalJournal of Urban Planning and Development
Volume146
Issue number1
DOIs
Publication statusPublished - 1 Mar 2020

Keywords

  • Average building age
  • Depreciation
  • Market indices
  • Real option
  • Redevelopment

ASJC Scopus subject areas

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

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