Valuing a Listed Property Fund or Trust on the Johannesburg Securities Exchange (JSE) Using a Real Options Technique

Abstract

The empirical study was undertaken to critically analyse if there was any other value other than the calculated market value during the time of the merger of the two property funds listed on the Johannesburg Securities Exchange. In doing so, the real options technique is used, because according to option valuation theory, real options have the flexibility that traditional valuation techniques do not have. The optionality that existed in this case was due to one listed property fund merging with another listed property fund. The listed property fund that acquires the other fund will be exercising its call on the acquired fund. Most of the written research papers on optionalities within real estate market are on the option to develop on a vacant land or build a new building. It seems that there is not much literature on listed real estate funds and optionality at the moment. From South Africa’s perspective, there are relatively no research papers on real estate and real options. Normally, when an investor applies a hedging strategy, he or she buys the cheapest asset, selling the expensive one. In this case, it is recommended that the investor should exercise a long call option and short the underlying, as the price of the call option is relatively cheap than the of a Freestone Property Fund.