Empirical evaluation of the value of waiting to invest

Abstract

The lack of transaction data has been identified as one of the major obstacles for the empirical evaluation of real option. Quigg’s study in 1993 was one of the first to empirically estimate the premium for the option of waiting to develop using data from 2,700 land sales in Seattle. This study modified Quigg’s methodology and applied it to estimate the premium for the option of waiting to develop based on a sample of data from 2,286 property transactions in the UK collected over a 14‐year sample period from 1984 to 1997. Based on a one‐factor contingent claim valuation model, we found that the average premiums for the timing options were 28.78 percent for office sector, 25.75 percent for industrial sector and 16.06 percent for retail sector. We also tested the robustness of the theoretical‐based land value estimates in explaining the market‐based land values. The regression results showed a statistically significant relationship in logarithm form between the market‐based residual land value and the model‐based land values (with embedded timing option), with R² of 0.75, 0.79 and 0.82 for office, industrial and the retail sectors respectively.

Citation

Foo Sing, T. and Patel, K. (2001), "Empirical evaluation of the value of waiting to invest", Journal of Property Investment & Finance, Vol. 19 No. 6, pp. 535-553. https://doi.org/10.1108/14635780110406888