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Applications of Real Options in the Real Estate Market Focusing the City of Rio de Janeiro

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  • Priscilla Yung Medeiros

    (Banco BBM)

Abstract

An investment opportunity in the real state market can be compared with an option and, because of this analogy, we can make use of the real options theory to determinate not only the best timing to begin a new property development, but also to determine the optimal density to develop in a specific property. To investigate these two main decisions, we are going to base our research on the model developed by Williams (1991) and extend it in a way to include taxes and a discount in the net cash inflow caused by the times spent in the construction process. An empirical analysis of the of the residential real estate market in the city of Rio de Janeiro is going to be developed in a way to verify the compatibility of the theoretical model developed here according to the reality of this market. We found that the extensions proposed to the basic model of Williams (1991) had significant effects in the theoretical model. We could also confirm empirically that the theoretical results are compatible to the reality of this market.

Suggested Citation

  • Priscilla Yung Medeiros, 2003. "Applications of Real Options in the Real Estate Market Focusing the City of Rio de Janeiro," Brazilian Review of Finance, Brazilian Society of Finance, vol. 1(1), pages 45-87.
    • Handle: RePEc:brf:journl:v:1:y:2003:i:1:p:45-87
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    References listed on IDEAS

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    More about this item

    Keywords

    real options; real estate market; timing; density; taxes;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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