Evidence of irreversibility in the UK property market

Abstract

The real options approach to valuation of property investment suggests that various sources of uncertainty about future returns on investment have important effects on irreversible property investment decisions. Our aim in this study has been to examine how investment decisions at three main stages of the property development/investment processes respond to different sources of uncertainty. Based on the methodology developed by Episcopos (1995), the neo-classical proposition of Hartman-Abel that predicts a positive investment-uncertainty relationship is tested against that proposed by the real option theory. It is interesting to note that our empirical findings are generally consistent with the prediction of the real option theory that uncertainty increases the option value to wait for the arrival of new information thus decreasing the current investment activities. In periods of high volatility, we would expect investors in the property market to be more prudent and scale down their investment exposure to market volatility compared with periods of a relatively stable market environment.