This is a doctoral dissertation presented to the FacultyBoard of the Royal Institute of Technology. The dissertationconsists of three self-contained essays on real option pricing.Essay I, written in Swedish, was presented at seminar andaccepted as fulfilling the requirement for a Licentiate Degreein Engineering thesis in 1995. Essay I: This essay studies the option to develop vacantland when the landowner simultaneously determines the optimaldensity and timing of a development. Williams (1991) andCapozza and Li (1994) have recently studied the landdevelopment decision from a realoptions perspective. Bothpapers assume that the production technology is of the commonlyused Cobb-Douglas type, but they use different assumptionsabout uncertainty over future rents and construction costs. Ananalysis of these models and their limitations is carried outand as a result valuation models based on other productiontechnologies than the Cobb-Douglas technology are derived. Essay II: McDonald and Siegel (1996) show that when thebenefit from an investment and the investment cost are assumedto follow correlated geometric Brownian motions, the optimalinvestment policy is given by a simple rule: Invest the firsttime the benefit-cost ratio reaches a certain level. In thisessay, which models the decision to change the use ofaproperty, the investment rule is found to be more complicated.Optimal redevelopment will take place for differentbenefit-cost ratios depending on the relative sizes of thevalue of the property in the different uses and the cost ofchanging the use. Also, for a given current benefit-cost ratiothe value of the option to change use will vary significantlydepending on the relative sizes of the state variables. Essay III: The relationship between the option to choose thecapacity of a real estate development and deliberateoverbuilding is studied in a simple model of investment underuncertainty. The model provides an intuitive measure ofdeliberate overbuilding: the difference between the number ofrental units the owner of an undeveloped site optimally choosesto produce and the number of units expected to be leased at thetime of the building's completion. Numerical simulations withreasonable parameter values show that in some economicenvironments, the optimal production strategy can be to producemore units than are expected to be leased at completion of thedevelopment. / <p>QC 20100611</p>

This Bachelor of Science thesis focuses on the real estate development and overbuilding in China’s second- and third-tier cities. A number of interviews have been made in order to, combined with information from respected media sources, get a as neutral picture of the situation in the cities as possible. The steps toward development of new buildings are, not just in China, many and includes a number of different participants. Therefore one will find a number of different opinions as well as problems that originate with the development. The interviews that were executed for this thesis were with different people that some way or another are active or has been active in the real estate development in the country. The participants were either active in architecture, engineering, development or expertise regarding the country. All the contributors acknowledged the problem of overbuilding in China, however to what extent the problem existed according to the participants varied. Thus several articles and publications have been referred to in the thesis to exclude possible personal opinions. The thesis includes problems regarding corruption, inconclusive demand analysis’s, "Hukou", governmental visions, urbanization and finally governmental regulations. Conclusively there is not a single factor alone that led to today’s excess real estate development but many different factors that together contributed to the situation. / Detta examensarbete fokuserar på Kinas bostadsutveckling i dess mindre storstäder; andra- och tredjeskiktsstäder. Ett flertal intervjuer har genomförts för att, förutom information genom internationell media, få en så neutral och heltäckande bild av bostadsutvecklingen. Stegen till byggande av nya fastigheter, inte bara i Kina utan i hela världen, innehåller många steg och därmed många olika aktörer vilket medför att en rad olika åsikter om vilka problem som uppstår i och med byggandet. Intervjuerna som genomfördes var med en arkitekt, byggnadsingenjör, fastighetsutvecklare samt en Kina-expert. Alla deltagande sade att förbyggande av städerna existerade men hur utbrett de olika aktörerna tyckte att problemet var varierade. I och med denna variation av åsikter gällande förbyggande refererar detta arbete till en rad artiklar och rapporter som publicerats via olika respektabla tidskrifter. Arbetet tar upp problem inom byggande i Kina såsom korruption, bristande marknadsanalyser, "Hukou", höga mål från regeringen gällande urbanisering samt regleringar på statlig nivå. Det är alltså inte bara en faktor som lett till situationen i vissa av Kinas städer idag utan en rad bidragande omständigheter.