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

Posted: 20 Oct 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: October 14, 2008


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 and in line with the predictions of real option models, we show that the effects of real interest rate and the expected demand growth on hurdle rent become more negative when the market volatility is greater. Second, we use a cointegrating vector of office employment and office stock to provide a better control of the demand for new construction than 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 rely on the local stock market in the two city states to derive forward-looking measures of office demand growth expectations.

Keywords: office, construction, real options, Asia

JEL Classification: D81, G31, L74, R33

Suggested Citation

Fu, Yuming and Jennen, Maarten, Office Construction in Singapore and Hong Kong: Testing Real Option Implications (October 14, 2008). Journal of Real Estate Finance and Economics, Vol. 38, No. 1, 2009, Available at SSRN:

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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