| As real estate develops rapidly in China, it is of great demand that a professional and developed real estate financial system including the real estate investment funds (REITs) should be established. REITs, investing in the form of real property equity and mortgage asset, provide the real estate market with capital offering and are dedicated to long-term investment to purse steady returns and to insure capital increments. As professional institutional investors, REITs should establish a scientific evaluation and dynamic management system as compared with real estate developers.The traditional NPV method discounts the future expected returns and makes evaluations on current asset value. It advocates that uncertainties in the future capital returns or prices will cause value deduction, and neglects the value of flexibility in asset management. The static portfolio Mean-Variance theory, though observing on the mean and variance of the profit in asset allocation, gives little weight to dynamic characteristics of asset during the period of investment. Furthermore, asset profits in the M-V model do not include the value of options value of asset disposal choice. To REITs, with its long-term dedication in investment, the uncertainties in future market possibly forecast great investment opportunities. The dynamic process of asset value variation and the flexibility in investment management constitute the basis of active investment strategy. Thus the real options approach affords REITS the scientific method in real property asset evaluation and allocation.Coupled with most of the other real asset investment strategies, real estate investment consists of three fundamental characters. Irreversibility that real property asset can not be realized instantly without any loss due to changes in the uncertain environment; Uncertainties which comprise those dynamic changes in rental revenues or asset prices in the future; The flexibility of postponing decision or investing choice in real estate...
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