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Search - Valuing Options in Commercial Real Estate Leases

Valuing Options in Commercial Real Estate Leases
Author: Jing Wang

This dissertation, "Valuing Options in Commercial Real Estate Leases" by Jing, Wang, ??, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order t... more »o facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author.

Abstract:

Abstract of thesis entitled

"Valuing Options in Commercial Real Estate Leases"

Submitted by Wang Jing

for the degree of Doctor of Philosophy at The University of Hong Kong in October, 2005

Significant demand for flexibility in commercial real estate lease strategies brought about by recent changes in business activities, economies and technologies, and the important role of options in managing risks in lease contracts have lead to increased attention to understanding and pricing options and other contingent claims in commercial real estate lease contracts. Leasing practice and limited research have also revealed the absence of in-depth understanding and practical valuation techniques for such options, which constrains further development of leasing strategies and construction of efficient lease portfolios. To improve understanding of these options and in view of limited clarity and categorization of typical embedded options in commercial real estate lease research, this research firstly investigates previous literature and 274 actual lease contracts, and constructs a systematic inventory and categorization of typical options in commercial office leases consisting of four principal sections: rent-related options, time-related options, premises-related options and options on options, with further distinction between explicitness and implicitness of claims and between parties to the claims; and with preliminary analysis of option value and potential pricing methodologies. To assist in the development of practical valuation techniques for contingent claims in commercial real estate leases, this research secondly focuses on valuing one option typically embedded in office leases, namely the tenant's option to renew at future market rent at lease maturity. A good many studies on pricing lease options follow financial derivatives pricing methodologies which are extremely effective under complete market assumptions and in pricing market risks, but typically do not consider nor integrate private risks of parties and transaction costs into pricing methods. Under the incomplete markets assumptions with both market and private risks, this research uses the integrated method, which combines the real options approach and decision analysis method, incorporating economic characteristics of commercial real estate leases, to develop a model to price the option to renew at future market rent, and tests the model empirically with case studies.

The results of empirical studies and comparative statics support the logic of the model and that it estimates option prices in a practical range. The applications in 25 lease cases show that option price/option value to tenants has a negative relationship with original/renewal lease term, and conversely that option value to landlords has a positive relationship with original/renewal lease term. It may be explained by a negative relationship between apportioned transaction costs over one period and lease term and a positive relationship between potential vacancy risk and term. The results of comparative statics confirm the logic of modeling, and show that transaction costs have a positive effect on option value to the tenant and option price, and vacancy costs and vacancy period both show a positive relationship with option value to the landlord and a negative relationship with option price. Market rents and prices also exert a significant influence on option value/

ISBN-13: 9781361395073
ISBN-10: 1361395079
Publication Date: 1/27/2017
Rating:

0 stars, based on 0 rating

Publisher: Open Dissertation Press
Book Type: Paperback
Members Wishing: 0
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