Citic Tower

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CITIC TOWER II: THE REAL OPTION CASE STUDY SUMMARY
Scenario
* Undeveloped prime waterfront property on Victoria Harbor was bought 6 months ago at public auction * Owner now wants to sell the land and is available to Citic Pacific Limited on a first-choice basis through an intermediary * Larry Yung (Chairman) thought they could acquire the site and turn it into another Grade-A office building “Citic Tower II” * Asking price of the land was $1 billion

* Net present value of property around $1.54 billion
* Building cost around $1.6 billion
Citic Pacific Limited (CPL)
* Larry Yung-Chairman of CPL
* Incorporated in Hong Kong and listed on the Hong Kong Stock Exchange in 1991 * In 2000, infrastructure and related assets formed the cornerstone of CPL’s activities, ranging from civil facilities such as complex bridge, road, and tunnel facilities to power generation, environmental projects, aviation and telecommunications * Wholly owned subsidiary-Dah Chong Hong Limited

* Stakes in firms such as Cathay Pacific, Dragonair and a string of trading and property companies * Citic Tower (Original)
* Property development team had gained extensive expertise and knowledge in the property business * Development began in 1995 and completed in less than two years * Despite post-Asian financial crisis, Citic Tower maintained a relatively high occupancy rate Concerns

* The discounted cash flow analysis shows a negative net present value * Commercial real estate market is extremely cyclical
* No guarantee that Citic Tower II would be able to survive the economic downturn (perform as well as Citic Tower I has performed) Situation
* Larry Yung is interested in this property but hesitant due to uncertainty of future economic conditions * Member of the property development team suggested that CPL acquire rights to the land, and thus the development by offering to purchase an exclusive option from the seller * In the...
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