viability of

8/6/2019 Viability Of

http://slidepdf.com/reader/full/viability-of 1/22

Viability of Building Rehabilitation with Real Option Approaches: An

Empirical Study in Hong Kong

Authors:

Eddie C. M. Hui

Otto M. F. Lau

Department of Building and Real Estate,

The Hong Kong Polytechnic University

HONG KONG, CHINA

Corresponding author: Professor Eddie C.M. Hui

Tel.: (852) 2766 5881; fax: (852) 2764 5131.

Email address: [email protected]

Date: 17 Feb 2010 (1st submission), 15 Sep 2010 (re-submission)



- 1 -

Viability of Building Rehabilitation with Real Option

Approaches: An Empirical Study in Hong Kong

Abstract

Purpose – The purpose of this paper is to evaluate the viability of rehabilitation from

a financial standpoint and examine particularly whether a rehabilitation project is

worthwhile to carry out or not. Nowadays, rehabilitation has become all the more

important in society. Theoretical option models may explain how to make an optimal

decision, but in reality they seem to lack empirical evidence when it comes to some

situation. This paper uses option models to gauge the likely gain/loss from

rehabilitation in face of uncertainties. It bridges the gap in the rehabilitation field

between theory and application for facilities managers and property owners alike.

Design / methodology / approach – The binomial option model and

Samuelson-McKean closed form model are utilised to evaluate the likely financial

benefits of the two major rehabilitation schemes, exploring option premiums and

hurdle values. The real option approaches provide a useful framework within which to

gauge a likely gain (loss) and ascertain the viability of rehabilitation in midst of

uncertainties.

Findings – The real option approaches produce two outcomes values, the optionpremium and the hurdle value, which are able to provide insight into the likelihood of

rehabilitation for facilities mangers/property owners in the intricate and dynamic

markets. The higher option premium, the more attractive a rehabilitation project will

be. And the hurdle value usefully reveals a critical timing for exercising rehabilitation.

Research limitations / implications – This paper provides a necessary support for

sustaining the rehabilitation schemes. It presents an adequate alternative to examine

the value of rehabilitation by taking into account uncertainties in real life. It is useful

for facilities managers and property owners, who sometimes neglect potential

benefit/loss in the uncertainties when making an investment decision.

Practical implications – This paper has established the framework for evaluating the

rehabilitation schemes that has practical implications for decision making. The

facilities manager, property owner and government should make some adjustments in

formulation of their rehabilitation policies and strategies.



- 2 -

Originality / value – This paper provides facilities managers with a means in which

the real option approaches are embedded to express benefit/costs of rehabilitation.

With the aid of this information, facilities managers/property owners can able to

evaluate rehabilitation more effectively and enhance the decision making quality.

Keywords Real option, option premium, hurdle value, rehabilitation, Hong Kong

Paper type Research Paper



- 3 -

1. Introduction

In many cities worldwide, the long-standing urban decay problem has taken shape and

has been a crucial issue in real estate. It becomes a barrier of sustainable development

and reduces the production of the whole city. At the same time, the overall living

environment and property values are depressed. The building rehabilitation may be an

adequate strategy to maintain and restore dilapidated buildings. It is plausible that the

building service duration, the living environment, property values, and the image of

city can be enhanced and strengthened significantly. The respective authorities,

therefore, have struggled to arrest the problem of urban decay and launched various

incentive schemes with subsidy into the rehabilitation works to enhance the social and

economic value of their communities. Property owners sometimes misunderstand that

they cannot get benefit from the incentive schemes and the subsidy is not sufficientenough to cover the investment outlay for updating the property. The property owners

have to make a decision whether the rehabilitation project should be executed. The

need of evaluation of the viability of rehabilitation from the financial standpoint is

manifest.

Rehabilitation can be regarded as an investment under economic theory. The

investment is favourable and made if its net present value (NPV) is greater than zero.

However, this rule is only valid if the variance of the present value of future price iszero (McDonald and Siegel 1986, Hui 2006). Property price is constantly affected by

some external elements such as economic, political, demographic and social factors.

Moreover, two most commonly used valuation approaches, net present value and

return on investment (ROI) with static discounted cash flow analysis, both fail to

capture the shocks of price volatility and the value of operational flexibility. These

approaches are not sensitive to the intricate and dynamic market. Titman (1985)

suggested that if there are a lot of uncertainties in the future and the relative

investment is irreversible, then the option to make investment decision is valuable. It

is often so-called “Real option” (Cunningham, 2006 and Hui and Fung, 2009).

Flexibility in execution, postponement, contraction and expansion is value-embedded

and undeniably considerable in terms of timing when valuing an investment project.

Traditional valuation techniques tend to underestimate the value of an investment

when failing to take the uncertainty into account. The real option pricing therefore

presents an adequate alternative to evaluate the scheme’s viability in terms of

economic value and figure out the potential profit / loss in suspicious circumstances.



- 4 -

Under the rehabilitation project, the property owners are envisaged to have an option

to upgrade their living buildings for the time being. The right of exercising the option,

therefore, is valuable. Ratcliffe (1993) and Hui et al. (2006, 2008, 2009) compared the

financial impacts of different kinds of the rehabilitation projects with the direst sales

comparison method. They somehow failed to explain the results with scientific

approaches and provided substantive evidences for decision making with regard to

uncertainties. The associated risks and potential profit / loss are neglected. Our

approach seeks to capture these two factors and analyse whether rehabilitation is

worthwhile from the financial standpoint.

We are now aiming for self-financing urban renewal schemes in the longer term. This

measure will enable respective rehabilitation authorities to lend the necessary support

for sustaining the schemes and exploring the benefits of implementing projects. In ourstudy, two schemes, Building Rehabilitation Materials Incentive Scheme (BRMIS)

and Building Rehabilitation Loan Scheme (BRLS), are considered as study cases in

Hong Kong which are launched by the Urban Renewal Authority (URA) between

Nov 2003 and May 2004. Its purposes are to resolve the long-standing urban decay

problem and speed up the maintenance and redevelopment of ageing and dilapidated

buildings. At present, the housing repair and maintenance works in Hong Kong are

subsidised by a number of government departments and independent housing

organisations.

In order to analyse the viability of rehabilitation, two option pricing approaches, the

binomial pricing method and the Samuelson McKean closed-form model, are utilised.

The option embedded in the scheme are considered as an American call option with

dividends paying1, which is a right to update the dilapidated building at any time and

the rental during the life of the scheme. It therefore fits to evaluate the option value of

rehabilitation and provides foreseeable profit / loss for property owners to make

decision.

Following the introduction, Section two is a literature review on rehabilitation and

utilisation of relevant models. It outlines the shortcomings of the previous studies.

Section three presents the methodology, approach and relevant hypotheses. Section

four provides the details of the option pricing models adopted in this study. Section

five reports the results of study cases, findings and comparison with the Singapore’s

rehabilitation schemes. Finally, section six provides concluding remarks.

1 Call option is simply a contract where the buyer has a right to purchase the underlying asset.



- 5 -

2. Literature Review

This section reviews the previous rehabilitation studies and relevant models which are

applicable to our context. In the area of the urban renewal, the improvement schemes

(i.e. restructuring) do not only relate to physical environment such as dwelling size,

but also the non-physical social aspects. It can enhance the liveability of

neighbourhoods, combat crime, vandalism and other forms of anti-social behaviour

(Nieboer, 2005). Remony and van der Voordt (2007) revealed that building vacancy is

a problem on social aspects and has the negative effect to the surrounding area and

buildings indirectly. This can lead to devaluation of buildings as a result of

deterioration of areas with raising vandalism and technical decay. To consider shocks

of rehabilitation acting on ageing and dilapidated buildings, deliberate factors

associated with economic concerns have been identified to express its prospectivebenefits. Comprehensive refurbishment of buildings can generate financial benefits

for property owners, in which the effect of inflation on the value of building and the

cost of financing a whole new development project can be reduced. Earlier revenue is

gained as well (Ratcliffe 1993). The serviceable condition, location and living

environment of the building, financial market and economic fluctuation are the factors

to be considered for rehabilitation. (Shomer 1999 and Walker 2002). A study by Pugh

(1990) showed that rehabilitation would be beneficial under four conditions: (1) the

effective building-service life duration can be stretched by 30 to 50 years, (2) thevalue of the existing old building is high, (3) the interest rate is high, and (4) the direct

and indirect cost of reconstruction is relatively high.

The application of option pricing theory is still developing and is now widely used in

various discipline, for instance in real estate, utilities, and information technology.

Titman (1985) first put the real option pricing in use to real estate. Its concept borrows

heavily from financial market. The real estate investment can be evaluated with

uncertainties. Quigg (1993) empirically tested option pricing models on real assets

with a large sample of land markets, she concluded that the price of the building

cannot be observable and the land option premium increases with uncertainties.

Cunningham (2006) noted that a one-standard deviation increase in uncertainty lowers

the probability of land development by 11 percent and raises the vacant land prices by

1.6 percent. The option pricing theory can provide a means for assessing the value in

these suspicious circumstances (Merton 1998).

Various models are formulated and well-documented to determine an optimal

decision in rehabilitation. A hedonic pricing model analysis was introduced to



- 6 -

evaluate the benefit and cost of rehabilitation in Hong Kong. It was noted that the

rehabilitation works increase with building weighted average scores and the net

benefit of rehabilitation marginally outweighs that of redevelopment. It can enhance

the property value by 9.8% (Chau et al. 2004). Furthermore, a comprehensive

decision model was formulated by Rosenfeld and Shohet (1999) to determine the

optimal time for building upgrading.

However, little research has been done on the viability of rehabilitation and captures

the potential risk adequately. Most of them cannot figure out the possible profit level

of rehabilitation from the financial standpoint and a proof of the viability. This study

aims to explore the application of real option pricing theory to rehabilitation and

provides a better tool for property owners to know the foreseeable gain / loss from

rehabilitation.

3. Methodology

Real option theory is used to valuate the right to buy or sell assets in financial world.

American-style call option is a contract where the holder has a right to buy the

underlying asset at any time before maturity. Hypothetically, the holder has to pay for

the option in exchange of the right, so-called option premium. It is sensitive to

uncertainties of investment, which is subject to the volatility of asset price, interestrate, dividend and option holding time. In general, investment with a possibility of

having a profit gain will induce a greater option premium. It thus can reveal the

uncertainties of the investment and how likely the anticipated profit can be achieved.

Rehabilitation per se can be regarded as an investment. Based on real option theory,

the property owners fulfilling the relevant eligibility criteria of BRMIS and BRLS

listed in Appendix I, are automatically endorsed as the option holders. The greater

option premium represents a better scheme in terms of its levels of flexibility

provided and current intrinsic value of the rehabilitation scheme. The difference

between the current value of upgrading and the outlays by property owners is crucial

to the option premium primarily. In order to examine the viability of rehabilitation,

apart from the option value, our study introduces a measurement of the hurdle value

(Samuelson and McKean 1965) to the rehabilitation schemes, which reveals a critical

timing for option exercising. Rehabilitation should be implemented when the value

enhancement of the upgraded building is attained or is more valuable than the hurdle

value; otherwise, the project should be deferred.



- 7 -

For the sake of evaluation and being flexible in practice, the binomial pricing model

and the Samuelson-McKean closed-form model are utilised for American-style call

option with dividend paying, where rental is the foreseen dividend. The current value

of updating is based on the difference between the actual resale price of rehabilitated

sample building (a year after the completion of the rehabilitation, except BRLS) and

the price of buildings without rehabilitation in the same district with direct sale

comparison. The non-rehabilitated reference buildings which have the same service

duration and floor areas close to that of the sample buildings are therefore selected as

a control. We assume that the ages of sample buildings are around 30 years and have

to be rehabilitated before 35 years under the common eligibility criteria (i.e., the

buildings are still serviceable). In addition, the value enhancement is estimated with

comparative sales analysis of similarities and differences between the real transactions

of rehabilitated and non-rehabilitated buildings. The option holding period of 5 yearsis tentatively assumed.

In order to estimate the outlays sunk by property owners, the Repair and Maintenance

(R & M) cost per square meter is evaluated based on the advice of Grandtone

Engineering Ltd, a representative maintenance company, and is assumed to be the

same in the rehabilitation schemes. The risk-free rate is valued from the Hong Kong

Monetary Authority (HKMA) exchange fund notes. The property yield is the annual

rental divided by the current building value. Such rental data are extracted fromRental Indices (Class B: sales area of 40m2 to 69.9m2) per square meter complied by

the Rating and Valuation Department of the HKSAR Government and adjusted by the

average rent, which is obtained from the surrounding similar properties.

3.1 Option Pricing Models

Based on the previous sections, the transitional discount cash flow and Black-Scholes

models are inadequate for evaluating the benefit / loss from rehabilitation because the

value of future cash flows during the option holding period cannot be predetermined

easily and is inaccurate in general. In addition, the Black-Scholes is only utilised with

either European-style option or American-style option that does not pay dividends

with finite maturity. The value of the rehabilitated buildings hypothetically moves up

or down in certain periods, and follows geometry Brownian motion after

rehabilitation in the models. In order to fill the hypothetic deficiency, the binomial

pricing model and the Samuelson-McKean closed-form model are utilised for the

rehabilitation schemes. The two models selected are expressed as follows:



- 8 -

The binomial pricing model

The binomial pricing model assumes that the price of the underlying asset follows

geometry Brownian motion and is binomial distribution. The value of the right in the

rehabilitation schemes can be stated as:

The premium of call option )*)1(*,max( d u

rh C pC peK SOP

Risk-Neutral Pricing d u

d e p

hr

)(

*

where heu hr

)(

hed hr

)(

S: Current value of the upgraded building

Cu and Cd; Value of the option when the price goes up and down

u and d: one plus the rate of capital gain / loss if the price goes up /

down

t: Time remaining until expiration (tentatively assumed to

be 5 years)

n: Number of period

h: Length of period (h=T/n)K: Upgrading cost for rehabilitation

r: Risk-free interest rate

: Volatility of the current market

: Dividend

However, the property owners have a right to upgrade the dilapidated building at any

time when an offer is provided by the schemes, each node is thus considered during

the option’s service life. Moreover, it is flexible to change the time remaining until

expiration in calculation.

The Samuelson-McKean Model

The solution of the Samuelson-McKean Closed-form Model is expressed as follows:

Option elasticity ( ):the percentage change in value of an option which is not

exercised, and associated with a 1 % change in the value of an underlying asset.



- 9 -

2

2 / 122

2

2 ]2)2

[(

r r r

Hurdle value or Critical value (V*): the value of the building at and above which it is

the optimal time to exercise the option

1*

K V

The value of the option (U):

)*

)(*(V

V K V U

where K: Upgrading cost under the rehabilitation worksr: Risk-free interest rate

: Volatility of the current market

: Yield rate or capitalization rate, the annual rental divided by the value

of building. It typically ranges from 4% to 12%.

In order to simplify the calculation, the volatility of the current market is taken to be a

constant. The hurdle value can reveal the anticipated rehabilitated value and is

independent of the size of project. In mathematical terms, it would be an increasingfunction with the risk-free interest rate and the volatility of the current market, and a

decreasing function with the yield rate / capitalization rate.

4. The Sample Buildings for Study

Two schemes, Building Rehabilitation Materials Incentive Scheme (BRMIS) and

Building Rehabilitation Loan Scheme (BRLS)2, are launched by the Urban Renewal

Authority (URA), Hong Kong. According to the URA, a total of 182 private

residential or composite buildings, located in their rehabilitated areas, are 20 years old

or above. The rehabilitation works are all completed under either BRMIS or BRLS.

At the time of this study, the number of in-process rehabilitated and approved

buildings is 46.

Those rehabilitated buildings are mostly situated in Tai Kok Tsui, a well-known old

district and within the URA area. It is worth case studying two URA approved

buildings to examine the viability of the rehabilitation under BRMIS and BRLS

2 For the details of incentive schemes, BRMIS and BRLS, refer to Appendix I.



- 10 -

respectively. The information of the sample buildings is summarised in Tables 1 and 2

below.

Table 1. The sample building for BRMIS

Building Name: Tai Kwei Building (Class B building)Address: 22-42 Tai Tsun Street, Tai Kok TsuiOccupation Date: June, 1974 (age: 33)Number of Units: 144Number of Floors: 12Unit(s) per floor: 12Floor area of units: 330-640 square feetURA’s Rehabilitation Scheme: BRMIS

Latest comprehensive rehabilitation

works completed:

January 2004

Unit Price per square feet: HK$1973 - HK$2615

Sources: Centaline Company Limited and Urban Renewal Authority (URA), HKSAR

Table 2. The sample building for BRLS

Building Name: Tai Wah Building (Class B building)Address: 62 Wong Tai Street, Tai Kok TsuiOccupation Date: January 1976 (age: 31)Number of Units: 108Number of Floors: 12Units per floor: 9Floor area of units: 330-640 square feetURA’s Rehabilitation Scheme BRLS

Latest comprehensive rehabilitation

works completed:

January 2006

Unit Price per square feet: HK$1973 - HK$2615

Sources: Centaline Company Limited and Urban Renewal Authority (URA), HKSAR

These two sample buildings chosen have a similar building design, age and structure

for making comparison of the two URA’s rehabilitation schemes. In relation to

location, they are very close to each other such that we can simplify the calculation

and most factors are under control. In order to predict the resale flat price of the

updated buildings, the estimation is carried out based on the transaction data collected

one year after rehabilitation, assuming that such price will be subject to a constantprice volatility over the same period.

5. The Analysis

In consideration of the current property market, six major parameters embedded in the

formulae to evaluate the viability of rehabilitation are determined in accordance with

the URA’s schemes first. They are presented and summarised in Table 3.

Table 3. The estimation of parameters



- 11 -

Parameters Estimation

Current value of upgrading (S) The estimated values are HK$900 / m2 in the BRMISand HK$1700 / m2 in the BRLS by the differencebetween the actual resale price of rehabilitated samplebuilding (a year after the completion of therehabilitation, except BRMIS) and the price of

surrounding similar buildings without rehabilitation inthe same district.

Upgrading outlay by owner ( K ) The estimated value is HK$680 / m2 in the BRMIS byeliminating the government allowances from R & Mupgrading cost.The estimated value is HK$760 / m2 in the BRLS by theR & M upgrading cost only.

Volatility in the built property market () Volatility is assumed to be 8%

Risk-free interest ( r ) The risk-free interest rate of 4.146 % is estimated by theHKMA exchange fund notes. Refer to Appendix II.

Yield () The yield rate of 7.00 % is estimated by using rental inclass B per annum divided by the current value of building. It is adjusted by the average rent which is

obtained from the surrounding similar property and isassumed to be constant during the option holding period.

Loan-interest rate ( r*) The loan interest rate is assumed to be 7.00 %. It is theindirect benefit of BMLS as there is no interest rateunder this loan scheme. The repayment is up to 5 years.

Based on the option pricing analysis, the findings show that the option premium and

the hurdle value are HK$200/m2 and 747.41/m2 for BRMIS, and HK$940/m2 and

HK$838.34/m2 for BRLS. The corresponding models estimations are summarised in

Table 4, and the binomial tree diagrams are illustrated in Figures 1 and 2.

Table 4. The estimated option premiums and the hurdle values for the URA’s

schemes

Rehabilitation scheme Option premium

(Binomial)

Hurdle Value

(Samuelson-McKean)

BRMIS HK$220 / m2 HK$747.41 / m2 BRLS HK$940 / m2 HK$838.34 / m2



- 12 -

Figure 1. Binomial Tree Diagram under the BRMIS (5 years)

Figure 2. Binomial Tree Diagram under the BRLS (5 years)

Note: The upper box of each node represents the value of upgrading while the lower

box of each node represents the option premiums of rehabilitation at that time. The

probability of an upward movement is 0.48; the probability of a downward movement

is 0.52.



- 13 -

In this analysis, the option premium which is the option value can provide foreseeable

profit / loss from rehabilitation. It, in essence, encompasses the holder’s flexibility in

executing the project and the possibility of having a profit gain. Thus, the higher the

option premium, the more attractive the scheme will be. The premium increases with

the difference between the resale price of property and the outlay sunk by property

owner. In our study cases, BRLS is more profitable. To make a further comparison,

the estimated option premiums can be converted into a fraction of the current value of

upgrading as shown in Table 5.

Table 5. The fraction (option premium) of current value of upgrading

BRMIS BRLS

Estimated option premium

(Binomial)

HK$220 / m2 HK$940 / m2

Current upgrading Value HK$900 / m2 HK$1700 / m2

Fraction of current

upgrading value (%)

24.4 55.3

As show in Table 5, the fraction of current updating value for BRLS (55.3%) is

greater than that of BRMIS (24.4%) in rehabilitation. This implies that BRLS have a

greater uncertain profit gain, and thus is more valuable than BRMIS. Such results are

useful in evaluating rehabilitation and assist in decision-making, as far as the

rehabilitation schemes are concerned. Between them, the potential return of BRLS ishigher and thus it is more preferable.

Moreover, the hurdle value can reveal the optimal / critical time for exercising the

project. We notice that the current value of upgrading of both schemes is greater than

their respective hurdle values in Table 4. It implicitly suggests that the rehabilitation

project is worth undergoing and it is the suitable time to participate the rehabilitation

schemes. Both of them are profitable. It provides a necessary support for sustaining

the schemes

Singapore’s Housing Development Board (HDB) has been successful in

implementing the upgrading programme (MUP) for public housing since the 1990s

(Ho 2005 and Ho et al. 2009). The government is anxious to tackle the deteriorating

living conditions of HDB flats, which somehow resemble the urban decay issues in

Hong Kong. In Singapore, 87% of the population is covered by the MUP, which is

subsidised heavily by the government. The subsidy accounts for between 53% and

93% of the total amount of upgrading. More property owners preserve their buildings

and houses. A significant foreseeable profit gain is observable from subsidy from



- 14 -

government. Ho (2005) estimated the option premiums for upgrading under the MUP

by the binomial real pricing model and the Samuelson-McKean closed-form solution.

The option premiums for the 3-Room and 4-Room HDB flats as a fraction of the

upgrading value are 50.60% and 12.42% respectively. The result is similar to and

consistent with the URA empirical work. It reveals that rehabilitation is worthwhile

for dilapidated buildings.

6. Concluding Remarks

This paper incorporates the option pricing models in evaluation of the viability of

rehabilitation from the financial standpoint. Some traditional valuation approaches

often fail to capture the shocks of price volatility in the intricate and dynamic market.

They tend to underestimate the value of an investment. Meanwhile, without aforeseeable profit gain or a proof of viability, the property owners are reluctant to

execute the rehabilitation schemes. The findings suggest that the option premium

embedded and the hurdle value are able to provide an insight to property owners /

authorities to determine whether rehabilitation is worth carrying out. The higher

option premium implies that there is a higher possibility of having a profit gain in

rehabilitation. In other words, the higher the option premium, the more attractive the

rehabilitation scheme will be. The hurdle value reveals a critical timing for exercising

the rehabilitation scheme when the value enhancement of the updated building attainsmore than the hurdle value. It is advised that the property owners should not neglect

potential benefit / loss by just looking at the hard facts. Besides, this study provides

the authorities with a means to express unforeseeable benefit of rehabilitation, which

is a necessary support to generate substantial motivation for carrying out

rehabilitation. The real option framework could be perfectly theoretically generaliable

for analysis of the viability of rehabilitation. The model and findings are useful and

representative in that the two buildings under study are quite similar to those under

URA’s rehabilitation schemes, in terms of building design, age and structure. This

empirical study generally sheds light for similar studies, locally and overseas. To

make the model of more general use, we might adjust some of the parameters

embedded, wherever necessary. That is to take account of the nature and

characteristics of a particular project.



- 15 -

References

Chau, K. W., C.Y. Yiu, and S.K. Wong (2004), “The Cost and Benefit of

Refurbishment with Special Reference to Multi-ownership Apartment Buildings”, In

Leung A.Y.T. and Yiu, C.Y. (Edn.) Building Dilapidation and Rejuvenation in Hong

Kong, Hong Kong Institute of Surveyors and City University of Hong Kong.

Cunningham C.R. (2006), “House price uncertainty, timing of development, and

vacant land prices: Evidence for real option in Seattle”, Journal of Urban Economics,

59, 1-31

Ho, D. K, H, (2005), “A Public Housing Main Upgrading Programme (MUP) Policy

Under the Real Option Pricing Framework”, Working Paper, Nation University of Singapore.

Ho, D.K.H, Hui E.C.M & Ibrahim M.F.B. (2009) Asset Value Enhancement of

Singapore’s Public Housing Main Upgrading Programme (MUP) Policy: A Real

Option Analysis Approach, Urban Studies, 46(11): 1–33.

Hui E. C.M (2006) An Enhanced Implied Tree Model for Option Pricing: A Study on

Hong Kong Property Stock Options, International Review of Economics and Finance,

15: 324-345.

Hui, E.C.M. and Fung H.H.K. (2009) Real Estate Development as Real Options,

Journal of Construction Management and Economics, 27 (3): 219-228.

Hui, E.C. M., Wong J.T.Y. and Wan J.K.M. (2006), “Benefit of Building

Rehabilitation Value of Enhancement Effect, Working Paper, The Hong Kong

Polytechnic Univeristy

Hui, E.C.M, Wong J.T.Y. and Wan J.K.M. (2008), “The Evidence of Value

Enhancement resulting from Rehabilitation”, Facilities, 26 (1/2): 16-32.

McDonald, R., Siegel D. (1986), “The value of waiting to invest”, Quarterly Journal

of Economics, Vol. 101, No.4, pp. 707-728

McKean H.P. (1965), “Appendix: A Free Boundary Problem for the Heat Equation

arising from a problem in Mathematical Economics”, Industrial Management Review.

6, pp.32-9.



- 16 -

Merton R. C. (1998), “Applications of Option-Pricing Theory: Twenty-Five Years

Later”, The American Economic Review, 88(3), 323-49

Nieboer N. (2005), “The disputable role of the built environment in liveability”,

Paper for the ENHR conference Housing: New Challenges and Innovations in

Tomorrow’s Cities, Reykjavík

Pugh, C. (1991), “The costs and benefits of rehabilitation and refurbishment”,

Property Management , Vol. 9 No. 2, pp. 143-56.

Quigg L. (1993), “Empirical Testing of Real Option-pricing Models”, The Journal of

Finance, 48, pp. 621-40.

Ratcliffe, J. (1993), “New Building from Old – A Review of Commercial Property

Refurbishment”, Division of Construction and Land Use, The Hong Kong Polytechnic

University.

Rating and Valuation Department, The Government of HKSAR, Hong Kong Property

Review, Private Domestic - 1982-2006 and Montly Maket Statistics, Average Rents

by Class, available at: www.rvd.gov.hk/en/publications/pro-review.htm

Remoy H.T., van der Voordt T.J.M. (2007), “A new life: conversion of vacant office

buildings into housing”, Facilities, Vol.25, No.3/4, pp.88-103

Rosenfeld, Y and I.M. Shohet (1999), “Decision support model for semi-automated

selection of renovation projects”, Journal of Automation in Construction, 8, pp.

503-10.

Samuelson P.A. (1965), “Rational theory of warrant pricing”, Industrial Management

Review, 6, pp.13-31.

Shomer, R (1999), “Downtown Housing as an Urban Redevelopment Tool: Hype or

Hope?”, Housing Policy Debate 1999, 10(2), Fannie Mae Foundation, Washington

Use Policy, 16, pp. 33-43.

Titman, S. (1985), “Urban land prices under uncertainty”, American Economic

Review, 75(3), pp. 505-14.



- 17 -

Urban Renewal Authority, The Government of HKSAT, Building Rehabilitation Loan

Scheme and Building Rehabilitation Material Incentive Scheme, available at:

www.ura.org.hk/html/c100000e1e.html

Walker, A. (2002), Project Management in Construction (4th Edition), Blackwell

Publishing.



- 18 -

Appendix I

Details of the Building Rehabilitation Materials Incentive Scheme (BRMIS) and

Building Rehabilitation Loan Scheme (BRLS)

Source: Urban Renewal Authority (URA), HKSAR

Table I. 1 Common eligibility criteria

The buildings are around 20 years old but are still serviceable.

Private residential or composite buildings with established Owners'

Corporations (OCs) which agreed to undertake continuous up-keeping of the

building

The buildings are located within the Scheme Areas of URA in Yau Ma Tei /

Mongkok, Tai Kok Tsui, Ma Tau Kok, Shum Shui Po, Tsuen Wan, KwunTong, Wanchai, and Central & Western District.

Table I. 2 Difference eligibility criteria

BRMIS BRLS

The subject buildings are subject to

statutory actions under the

Buildings Department's"Co-ordinated Maintenance of

Buildings Scheme"(CMBS) or

"Blitz" Operations or other relevant

statutory orders.

Owners of buildings do not receive

any statutory order or advisory

letter from Governmentdepartments

Owners have reached consensus for

rehabilitation of the building and

Authorised Person is appointed.



- 19 -

Table I. 3 The subsidy of schemes

BRMIS BRLS

Value of rehabilitation materials

supplied shall not exceed 20% of

the total cost of the works or

HK$3,000 per unit, whichever is

the lower

At early stage of projects, when

professional consultants are not yet

engaged, URA will provide

technical supports such as technical

advice on project implementation,

building inspection, tendering etc.,related to the building rehabilitation

works.

The incentive materials:

External/Internal wall paint,

Drainage piping materials,

Water-proofing materials for

re-roofing work

Grants may be made to individual

owners receiving the

comprehensive social security

assistance, disabled owners or

owners aged 60 or over whom meet

the stipulated income or asset limits

or below the age of 60, disabled

such that he/she is unable to work

or income is limited. Maximum

amount of grant is HK$10,000

Maximum loan amount is

HK$100,000 or 100% of individual

property's shared cost plus, as

approved by URA, the cost of

repair and maintenance works to

the interior of the property which is

carried out in association with the

works to the common area of the

whole building, whichever is the

lower

Loans should be betweenHK$25,001 and HK$100,000 shall

be subject to a legal charge over the

property in favour of URA.

Interest free loans



- 20 -

Appendix II

Table II The Yield rate for the exchange fund notes provided by HKMA

The Yield rate for the exchange fund notes provided by HKMA

2-Year 5-Year 10-Year

Note Yield Note Yield Note Yield

2005 Jan 0.943 2.620 3.610

Feb 1.657 2.786 3.647

Mar 2.489 3.333 3.945

Apr 3.238 3.914 4.296

May 2.427 3.172 3.631

Jun 3.046 3.312 3.581

Jul 3.213 3.380 3.601

Aug 3.428 3.672 3.859

Sep 3.600 3.828 3.995

Oct 3.910 4.066 4.181

Nov 4.315 4.401 4.464

Dec 4.145 4.318 4.464

2006 Jan 4.021 4.105 4.188

Feb 3.841 4.081 4.196

Mar 4.082 4.169 4.219

Apr 4.288 4.475 4.587

May 4.216 4.660 4.886

Jun 4.438 4.704 4.937

Jul 4.505 4.661 4.801

Aug 4.235 4.449 4.607

Sep 3.881 4.026 4.169

Oct 3.754 3.852 3.961

Nov 3.644 3.737 3.818

Dec 3.591 3.707 3.739

2007 Jan 3.523 3.701 3.724

Feb 4.012 4.082 4.116

Mar 3.985 4.107 4.178

Apr 3.794 4.005 4.173

May 3.901 4.054 4.221

Jun 4.310 4.453 4.579

3.614 3.928 4.146



- 21 -

P.S. The fixings are calculated daily by Reuters based on quotes as at 11:00 am

provided by market makers designated by the HKMA

The fixing for each of the benchmarks is calculated by taking the arithmetic

mean of the middle 8 quotes from the market makers, after excluding the two

highest and the two lowest quotes.

* Yield is quoted as % p.a.

viability of

Documents