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Real options premia implied from recent transactions in the Greek real estate market

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>07/2013
<mark>Journal</mark>Journal of Real Estate Finance and Economics
Issue number1
Volume47
Number of pages17
Pages (from-to)152-168
Publication statusPublished
Early online date1/10/11
Original languageEnglish

Abstract

This research is the first to examine the empirical predictions of a real option-pricing model on market values from the realty market of a Euro area country, namely Greece. Using a manually collected sample of land and property transaction prices, we demonstrate that, a model which incorporates the option to wait to develop land has explanatory power on observed prices over and above the intrinsic value from a simple discounted cash flow (DCF) approach. Recent land transactions in our sample seem to reflect a premium for the option to wait (‘real option premium’) that can be as high as 26.66%–52.38%, especially in the west and north suburbs of Athens. Estimates of annual volatility for specific properties, as implied by transaction prices, are found to range from 15% to 21%.