In Taiwan,
urban renewal can be implemented by government agencies (institutions),
specialized legal persons or organizations, urban renewal associations, and
urban renewal institutions.
Real
options theory (ROT) originated in 1977, Real option valuation model (ROV) has
been utilized in a variety of real estate development decision, from planning
to operations and from operations to abandonment.
This study
takes a case of urban renewal based on the change of rights in Taichung City as
an example, using the net present value (NPV) and ROV methods to evaluate the
benefits of investing in real estate. Through the embedded real options adopted
at decision making stage and the Black-Scholes model modified with value
leakage, this study using the geometric Brownian motion to calculate the
corresponding option premium (OP). Adding OP and passive NPV together, the
expanded net present value (ENPV) is obtained as the investment value of the
discounted price of the land and buildings.
Both the
development model and valuation model proposed in this study have been verified
in the aforementioned case. The net present value of these four places is
negative, and the ENPV will be positive after a one-year deferral of
development. Finally, through sensitivity analysis, it is found that the
average sales price of residential buildings of the discounted price of the
land and buildings is the most influential indicator affecting the fluctuation
of the ENPV. When the average sales price of residential buildings drops by
less than 3%, the ENPV will become negative. The second largest influencing
indicator is the building area of the shops. When it decreas by about 23%, the
ENPV will become negative.
The
proposed valuation model can objectively and comprehensively value the
discounted price of the land and buildings of the urban renewal association.
