tailieunhanh - Optimal Capital Structure in Real Estate Investment: A Real Options Approach

Numerous . REITs and other institutions have invested in real property connected to maquiladoras, retail development and tourism. This trend should persist because Mexico is ripe for continued investment. With respect to retail development, for example, there are fewer than 1,000 malls and shopping centers in Mexico, which has a population of approximately 110 million people. In comparison, there are more than 102,000 malls and shopping centers in the ., which has a population of approximately 306 million people. The International Council of Shopping Centers (ICSC) indicates that “there are just square feet of retail per capita in Mexico,. | Optimal Capital Structure in Real Estate Investment 1 INTERNATIONAL REAL ESTATE REVIEW 2011 Vol. 14 No. 1 pp. 1 - 26 Optimal Capital Structure in Real Estate Investment A Real Options Approach Jyh-Bang Jou School of Economics and Finance Massey University Albany Private Bag 102 904 North Shore City 0745 Auckland New Zealand Graduate Institute of National Development National Taiwan University Taiwan Tel 64-9-4140800 Ext. 9429 Fax 64-9-4418156 E-mail Tan Charlene Lee Department of Accounting and Finance University of Auckland Private Bag 92109 Owen G Glenn Building 12 Grafton Road Auckland New Zealand Tel 64-9-373-7599 Ext. 87190 Fax 64-9-373-7406 E-mail This article employs a real options approach to investigate the determinants of an optimal capital structure in real estate investment. An investor has the option to delay the purchase of an income-producing property because the investor incurs sunk transaction costs and receives stochastic rental the date of purchase the investor also chooses a loan-to-value ratio which balances the tax shield benefit against the cost of debt financing resulting from a higher borrowing rate and a lower rental income. An increase in the sunk cost or the risk of investment will not affect the financing decision but will delay investment. An increase in the income tax rate or a decrease in the depreciation allowance will encourage borrowing and delay investment while an increase in the penalty from borrowing a decrease in the investor s required rate of return or worse real estate performance through borrowing will discourage borrowing and delay investment. Keywords Optimal Capital Structure Real Estate Investment Real Options Transaction Costs Corresponding author 2 Jou and Lee 1. Introduction This article investigates the investment and financing decisions of a real estate investor who considers the acquiring of an income-producing property through debt financing. The existing .