We advance the real-option-based empirical analysis of commercial real estate investment in three respects. First, we test several real option implications for real estate construction that have not been examined in the commercial real estate investment literature. In particular and in line with the predictions of real option models, we show that the effects of real interest rate and the expected demand growth on hurdle rent become more negative when the market volatility is greater. Second, we use a cointegrating vector of office employment and office stock to provide a better control of the demand for new construction than traditional indicators based on real estate prices and vacancy rates. Third, whereas the existing studies focus on the U.S. commercial real estate markets, we study two major office markets in Asia, namely Singapore and Hong Kong. We rely on the local stock market in the two city states to derive forward-looking measures of office demand growth expectations.

Asia, construction, office, real options
Criteria for Decision-Making under Risk and Uncertainty (jel D81), Capital Budgeting; Investment Policy (jel G31), Construction (jel L74), Nonagricultural and Nonresidential Real Estate Markets (jel R33)
dx.doi.org/10.1007/s11146-008-9145-z, hdl.handle.net/1765/21276
ERIM Article Series (EAS)
Journal of Real Estate Finance and Economics
Erasmus Research Institute of Management

Jennen, M.G.J, & Fu, Y. (2009). Office Construction in Singapore and Hong Kong: Testing Real Option Implications. Journal of Real Estate Finance and Economics, 38(1), 39–58. doi:10.1007/s11146-008-9145-z