Empirical Testing of Real Option in the Real Estate Market

Existing researches have used real options valuation (ROV) theory to study investment in energy, oil and gas, and pharmaceutical sectors, yet little works have empirically examined ROV theory to study investment in a real estate market of EU countries that undergone severe economic crisis and now recovering. The aim of this paper is to test empirically ROV application for real estate development project with significant volatility in terms of price and cost and under strict legislation's constraints. Paper illustrates empirical testing of ROV application of the investment project “Sun Village” developed by the ABC Project Ltd Company in Latvia in 2014. We apply three ROV methods: option space matrix “Tomato Garden”, Black-Scholes option pricing model and binominal option pricing model before we presented final research result. The flow chart of ROV application in real estate development projects presented in our research can serve as a “road map” for many similar projects in EU suffering real estate market bubble burst and present uncertainty.