L9 Valuation of Land and Redevelopment

1267 01338 01408 01478 01549 01619 n 50 50 50 50 50

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Unformatted text preview: ntd Ma On Shan (Section 90 B) Con st r u ct ion Cost (R ) = $0.6 bill; σS = 20%; Risk-fr ee r a t e (r ) = 5%; Usa ble Ar ea Aft er Const r u ct ion = 586,638 sq. ft .; τ = 3 y ear s $Price/sq. ft. S d1 d2 N(d1) N(d2) V 2800 3000 3200 3400 3600 1.643 1.760 1.877 1.995 2.112 3.51 3.71 3.90 4.07 4.24 3.17 3.37 3.55 3.73 3.89 0.999779 0.999897 0.999952 0.999977 0.999989 0.999230 0.999619 0.999809 0.999903 0.999950 1.126 1.244 1.361 1.478 1.595 Note: S = Value of Building = $Price/sf * Usable Area/1 billion Recall DCF Approach $Rent per sf 18 19 20 21 22 23 R 0.6 0.6 0.6 0.6 0.6 0.6 g 6% 6% 6% 6% 6% 6% r 0% 0% 0% 0% 0% 0% NOI 0.1267 0.1338 0.1408 0.1478 0.1549 0.1619 N 50 50 50 50 50 50 k 14% 14% 14% 14% 14% 14% T* -6.5 -7.4 -8.3 -9.1 -9.9 -10.6 V(T*) 1.125 1.276 1.438 1.612 1.797 1.993 V(T=0) 0.955 1.041 1.128 1.214 1.300 1.387 Comment What does Option Pricing Approach say about land and land value? Land value = Value of the underlying property adjusted for property price volatility, construction (development) cost, and the probability that the value of property is greater than the construction/development cost at the time of development. Discounted CF approach ignores price uncertainty Option pricing approach incorporates price risk III. Valuation of Real Estate 1. Properties (relatively new, not that old) Hedonic approach Comparable approach Cost approach Income approach 2. Land Land Value = Value of new property – Costs Affected by timing decision Based on Highest & Best Use Valuation of Real Estate: Old Properties Old Properties (rental income $10/yr) Time 0 Value of Old Property = Time t ?? Time Value of Rental Income $10/yr until time t + Value of Rental Income from the new Property $100/yr – Redevelopment Cost at time t Valuation of Real Estate: Old Properties Contd Ownership of Property = Ownership of Rental Income from Existing Property + RIGHT of Redevelopment Time 0 What is Right of Redevelopment?? Call Option !!!! Redevelop if Redevelopment Cost < Value of New Property Do NOT redevelop otherwise Valuation of Real Estate: Contd Value of Property = Value of Rental Income from Existing Property + Value of Redevelopment Question: What’s the effect of property price volatility on the market value of a new property versus an old property??? End of Land Valuation & Redevelopment...
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This note was uploaded on 09/06/2010 for the course FINA FINA0805 taught by Professor Tse during the Spring '09 term at HKU.

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