Analysis of the Viability of an Urban Renewal Project under a Risk-Based Option Pricing Framework
Publication: Journal of Urban Planning and Development
Volume 137, Issue 2
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.
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Acknowledgments
This study was funded by the Hong Kong Polytechnic University’s Internal Grants (Project No. UNSPECIFIED8-ZZ1Z, UNSPECIFIEDG-YH86, and UNSPECIFIED1-ZV60). The writers would like to thank the reviewers for their comments and suggestions for the improvement of this paper. The writers would also like to thank Mr. Cong Liang and Mr. Ka-hung Yu for their technical and editorial assistance.
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Information
Published In
Journal of Urban Planning and Development
Volume 137 • Issue 2 • June 2011
Pages: 101 - 111
Copyright
© 2011 American Society of Civil Engineers.
History
Received: Mar 24, 2009
Accepted: Jul 22, 2010
Published online: Jul 24, 2010
Published in print: Jun 1, 2011
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