Application Of Real Options To The Real Estate Development Investment Decision

Real estate investment has some characteristics including large investment scale,longoperating term and easily a?ected by policy,which makes more uncertainty for decision-making. Analysis of real estate investment and decision-making is an important processin the implement of real estate project, which directly determines the result of invest-ment.A prevalent analysis method called Net Present Value method (NPV) is being usedcurrently. It neglects something of value when making real estate investment decisionsunder uncertainty and dynamic choice of timing. Real options method is a bran-newthinking mode. Introducing real options method to the real estate development projectinvestment decision-making,could make up for the insu?ciency of the traditional appraisalmethod,and correctly appraise the project value.In this article,by unifying the theory and the fact as well as the comparative analysismethod,we systematically introduce the characteristics ,value and pricing-model of thereal option in real estate investment and decision-making,and elaborate the process of itscreative use in real estate investment.And we confirm the accuracy of the real option inthe appraisal project value aspect,by taking example and comparative analyzing with thetraditional method.This paper is divided into 6 sections.In the first section,we mainly expatiate on thebackground and significance of the research topic, brie?y generalize the domestic andforeign study on real options,and introduce the structure of the thesis. In the secondsection,we mainly introduces some knowledge about the traditional method.Firstly weintroduce several main traditional methods,then discuss their advantages and disadvan-tages,and then give the existed problems, and accordingly educe the real options method.In the third part,we introduce the relative concepts of financial option and real option,andgive the development,basal idea and classification of real options,and then compare realoption with financial option.In the forth part, firstly we view the real estate and the investment ,then study emphatically the characteristics of the real estate investment dif-ferent from other projects.And then we propose the analytical framework of the real estateinvestment decisions based on the real option theory.In the fifth part,we study the appli-cation of real option and point out that it can overcome the defects of the traditionalmethods.Therefore,in real estate investment assessment project,real option is a kind ofmore ideal method than the traditional methods.The last part is a conclusion about thearticle and points out the way for further study.