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

The real estate industry is the pillar industry of economy in our country at present, it plays an important role on China’s economic development. Real estate project has the characteristics of large funds taken, long development cycle and greatly influenced by policy, etc. Using scientific and reasonable evaluation method to evaluate real estate investment project is necessary.Using the traditional project investment evaluating method on real estate investment project evaluation has a huge flaw. Traditional investment evaluation methods statically consider the issue of individual cash flows of investment projects, without the thinking of development projects could bring to the enterprise strategic value. The real estate industry has a large uncertainty, it needs flexible management to cope with the large uncertainty. These uncertainties and flexible management bring real option value to the projects. Real options method also considered development project’s influence on the subsequent project value. In a word, the advantage of real option method compared with the traditional evaluation method is:the real option method considering the uncertainty of opportunity, the value of management flexibility, and the significance of strategic development of enterprises.This paper introduces the traditional project investment evaluation methods and real options project investment evaluation methods, and compare the difference between the two methods. When using the real option evaluation method, considering the current real estate market bubble, adding market bubble factor into the consideration of real option evaluation method, getting the bubble revised real option evaluation model. In chapter5,1use the project that I have done it in DTZ, making an empirical case analysis. Through the using of traditional investment evaluation methods, real option evaluation method and real estate bubble revised real option evaluation method, calculating the value of investment projects; and using sensitivity analysis method, making sensitivity analysis for five main factors of real option model. Using NPV evaluation method, get the cash flows and net present value of project one and project two. Take advantage of the growth of real option evaluation method, calculating the extension value of development projects, the expanded value contains the growth real options value. Use bubble revised real option pricing model to calculate the value of development projects, get the value expansion of the project without real estate bubble. Finally these three kinds of evaluation methods and results are compared. Analysis results show that:real option method is more able to reflect the uncertainty brings opportunities to project, the value of managers’ flexible management, the strategic value that the investment projects bring to the enterprise. The bubble revised real option model removes the false prosperity caused by the real estate bubble, cool the overheated property market reasonably, calculating the value of investment projects more scientifically and reasonably, more close to the actual.