Using Real Property Option Valuation Methods When Market Data is not Available

Abstract

Titman (1985) famously applied optionality to derive the value of a vacant block of land then used as a car park at UCLA for which, in common with traditional property valuation approaches, a willing but not anxious buyer was assumed. However, what might the value of such a vacant block of land be in a property market downturn when willing but not anxious buyers are hesitant and there is an absence of comparable sales for reference? This paper applies concepts of optionality and indifference pricing to explore how such a vacant block of land might be considered relative to other, non-property asset classes to derive an assessment of value in the absence of an active property market.