L9 Valuation of Land and Redevelopment

L9 Valuation of Land and Redevelopment

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Unformatted text preview: Valuation of Land and Redevelopment HKU Real Estate Finance K. S. Maurice Tse School of Economics and Finance The University of Hong Kong [email protected] Content Framework for Analysis I. Discounted Cash Flow Approach (DCF) Reference: “Valuation of the Effects of Asbestos on Commercial Real Estate,” Journal of Real Estate Research Jeffrey Fisher, George Lentz, and Kwok Sang Tse II. Option Pricing Model Approach (OPM) Reference: “An Option Pricing Approach to the Valuation of Real Estate Contaminated with Hazardous Materials” Journal of Real Estate Finance and Economics, George Lentz and Kwok Sang Tse With Time Constraint to Develop: Black-Scholes OPM Without Time Constraint to Develop (in Appendix): III. Valuation of Redevelopment Introduction This lecture note provides a set of principles on how the value of land can be determined. One key assumption underlying our analysis is that a vacant land site, if to be developed, will be developed to the highest and best use. Land is a derived asset of which its value derives solely from the optimal use of property built on it. Therefore, the pricing of an undeveloped land site requires the estimation of rental income that can be generated from the property that will be built on the land site. An important issue about land pricing is that the value of land also depends on timing of development. Land valuation also requires that we determine the optimal timing of development. Example. Example: Value and Timing Consider a vacant land site that is going to be developed into a residential a...
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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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