Study On The Application Of Real Option In Real Estate Investment Decision

Real estate industry is an important part of national economic and affects directly the development of economic. As fast development of real estate in China, real estate is becoming a more competitive industry. Many investors in other field want to access real estate and obtain profit from this industry. It is significant for developers that how to take advantage and get profit. Investment decision plays an important roll in real estate, the scientificalness and rationality of which affects other development phases and the result of project investment. However, the traditional decision-making methods have some limitations in evaluating project with much uncertainty and can't estimate the valuation of project accurately. Because of the character of real estate such as uncertainty, flexibility, it is necessary that considering the valuation of real option in real estate investment decision.First, this paper introduces the theory and current situation of real option. Second, it analyzes the importance and characters of investment decision-making of real estate, point out the limitation of traditional decision-making methods. This chapter shows the necessity of real option in real estate investment decision. Third, this paper discusses the choice of real option model in real estate and studies the method that how to confirm the coefficient of Black-Scholes, and sensitivity analysis. Forth, combined with the background of development situation of real estate in Chongqing, this paper uses respectively the method of NPV and real option to evaluate the valuation of land reservation and makes investment decision. The result shows that, considering the valuation of real option, the project that is not feasible by the method of NPV, has become feasible in the method of real option. That is the reason why developers in Chongqing will pay so high land cost in 2007. Comparing with traditional method, the method of real option is more scientific in project with much uncertainty. No matter in theory or practice field, real option is very significant.