Application Of Real Option Approach In Investment Decision-making Of Commercial Real Estate

As the risk of investment in the housing market is increasing step by step, more and more investors begin to move to the market of commercial real estate. At the same time, the problem that how to make the right investment decision in the market of commercial real estate takes people's care. The investment of commercial real estate has three major characteristics (uncertainty/irreversibility and flexibility).But the traditional investment decision-making theory (NPV) couldn't give a reasonable explanation for them. Just because the NPV theory ignores the value of the uncertainty and thus underestimates the value of project, some investors abandoned the project which is valuable. The real option theory just makes up this deficiency. It believes that the uncertainty doesn't reduce the value of the project but rewards investors with potential investment opportunities.The paper is divided into six parts. The first two parts include the research background and literature review. The third section introduces the existing investment decision-making theory for commercial real estate, especially the comparison between the NPV method and real option method, and points out the characteristics of real option method. The fourth section describes the characteristics of commercial real estate investment, and shows the analysis framework of how to give the right investment decision-making by using the real option method. The fifth part shows how to design the model of real option and also gives the case. This paper analyses the case of the Anhui Suzhou Commercial Pedestrian Street. And the delay option model is constructed to calculate the value of option. The sixth part includes the research conclusion and prospects.