Real Estate Investment Decisions Based On The Real Options Method

The real estate industry is a typical investment industry with large investment, highrisk and long period. Whether the subject can proceed smoothly or the benefit canmaximize are based on rational, scientific investment decision-making method. Chinawhich under the development of market economy has been confront with the scarcity ofresources. So any waste or any "total expenditure exceeds the present value of net cashflow hasty investment behavior cannot be tolerated. Scientific and rational investmentdecisions will not only reduce the waste of national resources, but also can guide thereal estate investment. Meanwhile it has positive referenced significance on citydevelopment strategies planned by planning department in government or on landbidding, auction policy prepared by land department.The real option is a new theory from the financial derivatives, and graduallywidely used in investment decision-making, financial management and valuation area.Real estate development has a feature of uncertainty and flexibility. The feature ofirreversible investment in real option leads real options into real estate investmentdecision-making inevitably. The viewpoints of real estate options are different from theviewpoints of traditional investment, which emphasizes flexibility in the investmentdecision-making and flexibility in management. With the real uncertainties in theprocess of estate development lead that real estate developers have different option (realoptions) in different stages during the real estate development process whichcorresponding to different real options. Real options approach which based on optiontheory applied to real estate investment decision-making is not the simple negation oftraditional investment analysis methods, but on the basis of retaining the rational core ofthe tradition analysis method of real estate projects,then plus the value of an option instatic NPV of the project to compensate for the lack less of traditional investmentdecision-making methods, and made a breakthrough and further development intraditional investment analysis methods inherent limitation.This article introduce the theory of real estate investment decision-making, thenreview the theory and method of traditional investment decision-making and point outits inadequacies, and describe the basic theory of real options, and show the real option of rational and scientific by a comparative analysis. Through the combination ofliterature, theoretical and applied research, and the combination of qualitative andquantitative analysis methods, made a systematic exposition of the application of realoptions in real estate development projects, then analyze the feature of real option inreal estate investment decision-making and build real options framework in real estateinvestment decision-making, and try to apply in the actual real estate developmentprojects, and use real options model in an empirical study. Real options approach aremore scientific than the traditional investment decision-making methods in investmentdecision-making on project with large uncertainty, and it has great theoreticalsignificance and practical value in real estate investment decision-making..Finally the article summarizes the main research work, and points the problemswhich should be noted in real estate investment decision-making by real option andprospects for the future research direction of the real options approach.