| dc.description.abstract | In this thesis, we develop a real options framework to value options to expand a commercial
property. We consider the investment in a development project under uncertainty in future
rental rates and in the presence of regulatory uncertainty. We have consulted with industry
experts to model the framework as realistic as possible without losing analytical tractability.
Our framework contributes to the accurate valuation of real estate as well as the real options
literature related to real estate, by adjusting and combining existing frameworks and
applying them to the real estate industry. First, we consider a simple investment in the
expansion of a property under uncertainty in future rental rates, but in the absence of
regulatory uncertainty. We proceed to introduce the presence of a regulatory process in the
form of a mandatory fixed approval lag, prior to the firm receiving the investment
opportunity. Finally, we introduce uncertainty in the length of the regulatory process. For
each model, we are able to obtain optimal investment thresholds and option values, and in
most cases these results are closed form analytical solutions. We find that an option to
expand an existing property has significant value under the right conditions, even when the
immediate expansion is not profitable. We also show that the presence of a regulatory
process alters the option value, and that a stochastic regulatory process implies a higher cost
to the firm than a fixed regulatory process. | nb_NO |
