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Irreversible investment, real options and competition : evidence from real estate development Bulan, Laarni; Mayer, Christopher J.; Somerville, Tsur

Abstract

We examine 1,214 condominium developments in Vancouver, Canada between 1979-1998 to identify the extent to which uncertainty delays investment. We find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments. Empirically, a one-standard deviation increase in the return volatility reduces the hazard rate of investment by 13 percent, equivalent to a 9 percent decline in real prices. Increases in the number of potential competitors located near a project negates the negative relationship between idiosyncratic risk and development. These results support the argument that competition erodes option values and provide clear evidence for the real options model of investment under uncertainty over alternatives such as simple risk aversion.

Item Metadata

Title
Irreversible investment, real options and competition : evidence from real estate development
Creator
Bulan, Laarni; Mayer, Christopher J.; Somerville, Tsur
Contributor
University of British Columbia. Centre for Urban Economics and Real Estate
Publisher
University of British Columbia. Centre for Urban Economics and Real Estate
Date Issued
2002-11-26
Description
We examine 1,214 condominium developments in Vancouver, Canada between 1979-1998 to identify the extent to which uncertainty delays investment. We find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments. Empirically, a one-standard deviation increase in the return volatility reduces the hazard rate of investment by 13 percent, equivalent to a 9 percent decline in real prices. Increases in the number of potential competitors located near a project negates the negative relationship between idiosyncratic risk and development. These results support the argument that competition erodes option values and provide clear evidence for the real options model of investment under uncertainty over alternatives such as simple risk aversion.
Genre
Working Paper
Type
Text
Language
eng
Date Available
2014-09-30
Provider
Vancouver : University of British Columbia Library
Rights
Attribution-NonCommercial-NoDerivs 2.5 Canada
DOI
10.14288/1.0052281
URI
http://hdl.handle.net/2429/50510
Affiliation
Non UBC; Business, Sauder School of
Peer Review Status
Unreviewed
Scholarly Level
Faculty
Rights URI
http://creativecommons.org/licenses/by-nc-nd/2.5/ca/
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Attribution-NonCommercial-NoDerivs 2.5 Canada