ABSTRACT
This chapter focuses on real option models and present them in the context of real estate applications. The real option literature is usually less asset-specific, and research and development, production processes and foreign direct investments have been modelled with real option models. The chapter illustrates real options using simple models. It discusses timing and scale choice in land development and options embedded in lease contracts. The chapter shows how real option models can be implemented in a more complex setting. Real estate market participants may also delay some decisions, so that they can learn new information whenever available. For instance, a shopping centre might be developed while keeping some land undeveloped and used as parking space. The chapter considers the owner of a piece of land who could develop an office building on it. It also discusses the optimal development-timing rule and the value of the piece of land.
