A study of the Greenwich, Connecticut real estate market has found that part of the price one pays for a house in the affluent community is due to the option to redevelop it rather than interior square footage, lot size, number of bedrooms and bathrooms and other current house characteristics, according to Katsiaryna Salavei, Ph.D., assistant professor of finance at Fairfield University’s Dolan School of Business.
Dr. Salavei, who co-authored the study with John M. Clapp, Ph.D., professor of finance and real estate at the University of Connecticut, said the main contribution of the study is that they were able to estimate the value of option to redevelop.
Many prior papers established that redevelopment potential should increase the value of the property, but were not able to empirically estimate the value of redevelopment option. “We find that in Greenwich an average house contains only about 1.8% value of option to redevelop. However, for large lots the value is higher and equals 3.5% compared to 1.1% for small lots.”
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