Intrinsic Real Option Value: Empirical Evidence from Commercial Real Estate Investors
41 Pages Posted: 13 Nov 2020
Date Written: November 13, 2020
We investigate how local information externalities affect investments in tangible durable assets via real options. Using geocoded transaction-level data on US commercial properties from 2000 to 2018, we find that investors have a higher propensity to invest in a property for immediate redevelopment when its capital intensity and type of commercial activity differ from those of recently built nearby properties. Information externalities affect 'buy-to-redevelop' investment strategies as much as the asset capital depreciation - a main determinant of real option exercise highlighted in the literature - and can increase up to 30 percent the investors' willingness to pay to invest in the property.
Keywords: Real option, intrinsic option value, tangible assets, real estate investments
JEL Classification: R33, G12
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