Economic Fundamentals, Capital Expenditures and Asset Dispositions
31 Pages Posted: 21 Sep 2017 Last revised: 7 Feb 2019
Date Written: January 8, 2019
The real estate literature recognizes the real option to invest in capital expenditures (CAPEX) or sell a property but treats these options as independent. We show that these real options are interconnected. We provide empirical evidence that, consistent with the real option framework, CAPEX increases in income growth expectations but declines in their volatility; that CAPEX are partially capitalized into property market values; and that CAPEX significantly reduce the subsequent likelihood of sale. We also present evidence that, controlling for market timing, past property performance influences CAPEX but not disposition choices, consistent with a value-add investment strategy.
Keywords: Disposition effect, real assets, real options
JEL Classification: D9, G40, R33
Suggested Citation: Suggested Citation