Real Option In Real Estate Investments In Applied Research

Real options is new way to real investment appraising, project management and strategic decision-making with the application of financial option theory, whose potential lies in recovering flexible value in project and adjusting decision-making by the exposure of more information. Real estate investment has some characteristics like real options, including large investment scale, long operating term and easily affected by policy, which makes decision to project more uncertain and harder. Traditional approach to decision-making in real estate investment has shortcoming. Moreover, it couldn't solve the issue of decision-making in uncertain world.Only if applying real options approach, decision-making in real estate investment should become more reasonable after promoting DCF approach and fully attending the uncertain factors.Chapter 1 generally introduces real options theory, including definitions, sorts and pricing model, especially Black-Scholes model and Binomial -tree model. Meanwhile, it re-analyzes the transition from option to real options about relative variables and parameters.Chapter2 discusses uncertain factors in real estate investment and points out the shortcoming of traditionally approach. Then according to the characteristics in real estate investment, it proposes a motion that real options approach should be adopted in decision-making but also provides applying framework and calculating steps.Chapter3 distinguishes 4kinds of real options in real estate investment, and finds out potential value in qualitative and quantitative aspects. Finally, it offers simply and concrete analyzing tools for decision-making.Chapter4 analyzes a case of real estate developing. Based on DCF method, it recalculates the project value in Binomial -tree approach and compares the results, which derived of different appraising methods.Chapter5 generalizes the main point of this paper and attempts to analyze themain factors that obstruct the application of real option method in the China real estate investment.