The Applied Research Of Real Option In Real Estate Private Equity Fund Investment Decision

The real estate private equity fund mentioned in this article, refers toone kind of private equity fund that specializing in real estate investments.Real estate private equity fund is a new thing in China. After theimplementation of the new revised Partnership Enterprise Law in June2007, limited partnership-based real estate private equity fund hasbecome the mainstream of real estate investment fund.Currently the widely used method for decision making in real estateprivate equity fund is static analysis which mainly use ROE (Return onEquity) and payback period methods. Some Private Equity fund also usesa more advanced dynamic analysis decision making method based ondiscounted cash flow (DCF-NPV).Both the traditional static and dynamic analysis methods are unableto grasp the uncertainties of real estate private equity fund in the currentcomplex and volatile real estate market. In contrast, the real optiondecision making method in uncertainties has already been widely used inproject evaluation and investment decision making internationally. The paper first reviewed and analyzed the traditional real estateinvestment decision making theory and pointed out its drawbacks. After adetailed explanation of real option theory, it discussed the application ofthe theory in decision making for real estate development projects.Then, it discussed the investment decision making model of realestate fund, related legal and business conditions. It analyzed how to usethe strategy of real option in real estate fund for decision making andinvestment purposes.Finally, this article conducted an empirical analysis based on thedata of a series of real estate investment projects in the past. The resultsof the empirical analysis can give support to the above arguments.