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)
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 2/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 3/22
- 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
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 4/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 5/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 6/22
- 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
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 7/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 8/22
- 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:
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 9/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 10/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 11/22
- 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
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 12/22
- 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
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 13/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 14/22
- 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
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 15/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 16/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 17/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 18/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 19/22
- 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.
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 20/22
- 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
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 21/22
- 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
8/6/2019 Viability Of
http://slidepdf.com/reader/full/viability-of 22/22
- 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.