Value of Collective Effort: Redevelopment Timing Options of Enbloc Sale Sites in Singapore

Abstract

This paper applies the discrete-time binomial tree option-pricing framework proposed by Cox, Ross and Rubinstein (1979) to evaluate redevelopment options embedded in collective sale sites in Singapore. Based on 30 collective sale transactions recorded in 1999, our empirical results showed that the average redevelopment option premium was estimated at S$12.24 million or 9.65% of the gross development value. By adding the redevelopment-timing premium to the developer’s profit and returns of 15%, the developer would expect a premium of 24.65% of gross development value if he were to exercise his option to redevelop now. Otherwise, it will be more valuable to keep the redevelopment option “alive.” The regression results further showed that the option premiums are positively and significantly related to the size and the price of the collective sale sites. Sensitivity analyses were also conducted and the results showed that the redevelopment option premiums increase when the price volatility, which is measured by the spread between the upward (u) and downward (d) price movements, increases. Changes in risk-free interest rates have positive effects on the option premiums.