Land Development in Emerging Markets

Abstract

One of the most important issues in emerging markets is the timing and intensity of land development decisions and how these decisions affect property values. In these markets, newly developed office space and residential units often account for a substantial proportion of the aggregate supply of similar types of developed properties. In this article I use a real option model to study the land development problem faced by a central planner. The optimal capital intensity, the value of land and the post-development rents and property values in these markets are strikingly lower than the corresponding values in the markets where the demand is perfectly elastic. Furthermore, the optimal capital intensity and the value of land are most sensitive to the market demand conditions in the emerging markets experiencing the fastest growth or greatest uncertainty, or at times when interest rates or construction costs are lowest.
 

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