![]() In other words, investors are using variables implied by standard economic and financial theory and basic economic data from the recent past to determine the capitalization rate. – The empirical results show that capitalization rates depend on features of the office buildings, vacancy rate, and recent change in the office building market as captured by the vacancy rate. ![]() The empirical results are related to concepts of asset market efficiency. The empirical study uses data from the sale of office buildings in 37 downtown markets for 2012. – The model is derived from standard economic and financial theories. – The purpose of this paper is to present a basic model of commercial real estate valuation in which the capitalization rate is the critical variable, and to present empirical results for a study of office building capitalization rates. In brief, this work shows the limits of the traditional analysis (Discounted Cash Flow Model) to capture flexibility in the real estate investment and presents an application – an industrial urban area – implemented by the real option approach within a backward risk-neutral valuation process. This is also true for the redeveloped urban lands. In fact, the value of vacant land should reflect not only the value based on best immediate use, but also its option value, if the development is delayed and the land is converted into best alternative use in the future. ![]() The flexibility in the real estate investment is related to the alternative uses embedded in the land – traditionally interpreted through the Highest and Best Use approach – and to the characteristics of the building. It is important to remember that the real estate investments are characterized by irreversible decision and by various sources of risk and uncertainty about future returns, especially when the development process is very long. Unfortunately, the ROT is not widely used by appraisers respect to the traditional DCF model, even though the developers behaviour gives evidence to the model. A great deal of theoretical work exist today it begun with Merton (1973) and Black & Sholes (1973) and provided new insights into capital budgeting decision-making and new models, used today by corporate managers and practitioners too. The primary aim of this work is to connect the Real Options Theory (ROT) with the real estate investment framework. Although the applications of these methods to real estate valuation are fairly recent, the International Valuation Standards have included real option theory in the income approach as a valuation method since 2011. ![]() The possibility of a transformation may create expectations and may influence the value of the property. In this work, a real option model for the valuation of hope value in the real estate market will be applied to a small sample of residential properties located in Olsztyn that are subject to possible transformation. The main aim of the paper is the elaboration of a methodology to determine the hope value. Hope value is the difference between the existing use value and the price that the market might pay for future transformation. In these cases, it may be necessary to deal with hope value or future value, trying to reach the value of a property subjected to uncertain changes. In particular, uncertainty regarding the change in the legal framework may create expectations as to the uncertain variation of property value in the future. In general terms, all properties may have potential development which, in some cases, can be termed “hope”. These kinds of valuations are complex, especially when a prudent assessment of value is required. In the valuation of a property subject to development, the valuer may consider the potential aspect of the value of both land to be improved and a building to be refurbished.
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