Risk premium assessment for the sustainable valuation of urban development land: Evidence from Spain

Abstract

One of the most important parameters in sustainable urban land valuation is the risk premium. Correct assessment of the risk premium is essential for sustainable valuation. Generally, it is estimated that traditional financial models or historic rates do not take into account the specific risk factors of an investment project. In this paper, we propose a sustainable model to obtain it. It is based on investment risk factors and the urban planning land development stages. We conducted a study in Badajoz, Spain, on four urban stages: first, land without an execution program; second, land with an execution program; third, land with reparceling; and fourth, fully developed and urbanized land. We calculated one different risk premium value for each urban stage. The results show that with this model, we can obtain the risk premium at any time during urban planning development. The urban stage is one of the most influential factors in the risk premium value. It decreases during urban planning development, and fully developed and urbanized land has a lower risk premium.