Office Construction in Singapore and Hong Kong: Testing Real Option Implications

26 Pages Posted: 20 Dec 2007 Last revised: 26 Aug 2008

See all articles by Yuming Fu

Yuming Fu

National University of Singapore

Maarten Jennen

RSM Erasmus University

Multiple version iconThere are 2 versions of this paper

Date Written: December 2007


We advance the real-option-based empirical analysis of commercial real estate investment in three respects. First, we test several real option implications for real estate construction that have not been examined in the commercial real estate investment literature. In particular, we show that market volatility makes the effect of real interest rate and the expected demand growth on hurdle rent more negative, as the real option models predict. Second, we use a cointegrating vector of office employment and office stock to provide a better control of the demand for new construction than the traditional indicators based on real estate prices and vacancy rates. Third, whereas the existing studies focus on the U.S. commercial real estate markets, we study two major office markets in Asia, namely Singapore and Hong Kong. We are able to use the stock market prices in these two city states to generate forward-looking measures of office demand growth expectations and volatility.

Keywords: Real option, commercial real estate, uncertainty

JEL Classification: D81, G31, L74, R33

Suggested Citation

Fu, Yuming and Jennen, Maarten, Office Construction in Singapore and Hong Kong: Testing Real Option Implications (December 2007). Available at SSRN: or

Yuming Fu

National University of Singapore ( email )

4 Architecture Drive
Department of Real Estate
Singapore, 117566
(65) 6874 7100 (Phone)
(65) 6774 8684 (Fax)


Maarten Jennen (Contact Author)

RSM Erasmus University ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
0031-10-4081276 (Phone)
0031-10-4089017 (Fax)

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