Uncertainty in real estate development : a real options framework

Abstract

We develop a real options framework to facilitate optimal decision making and valuation for local real estate development projects in Bergen. With uncertain time to completion, the investor must continuously trade off the potential benefits from continuing investment versus the benefits from being revealed of the remaining investment costs. To depict the development process in Bergen, we allow for the investor to temporarily abandon or to abandon for salvage value to decide an optimal investment strategy and to obtain an accurate valuation of a real estate development project.