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Applied Mathematics & Information Sciences

Author Country (or Countries)

Taiwan

Abstract

In order to secure a higher return on investment, real estate developers often choose to adopt a deferred development strategy after acquiring land. However, this strategy involves a high degree of complexity and uncertainty. On this basis, this study develops a model to assess the value of deferred development projects. At any stage in the project, the model can inform a strategic choice to proceed with development, abandon the project, or defer development. At the same time, the model can be used to make a realistic assessment of the project value and the degree of risk involved. Based on the particular characteristics of deferred development in real estate investment projects, the model draws on theory on the waiting option and the abandonment option. Geometric Brownian Motion (GBM) is used to model the interdependent volatility in value associated with proceeding with development and abandoning the project, and It¯o’s lemma is applied to deduce stochastic volatility. The model can hence calculate the expected utility and rate of success of deferred development. Finally, case study analysis demonstrates that this model is an effective tool for evaluation of deferred development projects. It therefore provides a useful reference for real estate developers when making strategic decisions.

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