Research On The Investment Decision Of Real Estate Program Based On The Real Option Theory

The option method is the basic idea in this paper, and the paper proposed realoptions theory to analyse the uncertainty of the real eatate investment decisionbecause of the risk in the market. The purpose of this paper is to calculate the optionvalue in uncertain real estate project which have the obvious option features and tosolve the decision making problem in this kind of project.Firstly, the paper analyses the status quo of China’s real estate industry. Secondly,according to the existing land policy of China, the whole processes of real estateinvestment evaluation are summarizing. In the general real estate project investment,the characteristics of delay option and expansion option are very common. Thebinomial model of option theory is used to solve the project evaluation with a delayfeature, and comparing the evaluation outcoming with the decision-making tree modelwhich is based on the NPV decision theory. The paper uses the Black-Scholes modelto evaluate the projects which have the characteristics of extension option and delayoption and then establish a decision-making system.Based on the evaluation framework, decision makers could determine whether toenter the project. Futhermore, after entering the project, which is the best time toinvest and the most adverse conditions that may occur are able to identify through theevaluation framework.There are three main innovations to apply option pricing model in the field ofreal estate investment decision. First of all, historical market statistics are combinedwith the knowledge of mathematical statistics and the calculation method of realestate market volatility parameters is proposed. Secondly, the risk-free rates in thefinancial assets are treated as a fixed value, but when it comes to the investment inreal estate projects which is last longer, the risk-free rate is uncertainty in riskmarket.Under this circumstance, the risk-free rate could be adjusted by theinstantaneous interest rate model. Thirdly, the real option value calculation iscomputerized by Matlab programming.The real opthin theory evaluation framework is applied to the real estate peoject. At first, the paper making the complete investment analysis in selected projects, inorder to acquire the sufficient financial data. Based on the net present value theory,real estate price fellow the geometric Brownian motion, and is able to estimate futureprice base on the Monte Carlo simulation. Applying sensitivity analysis to estimatethe change in real estate costs and the sensitivity data are form the historical contex ofchanges in the market. After that, apply the real options evaluation framework in theproposed project to select a certain project. Ultimately, compareing the outcome inboth net present value theory and the real option theoty, obtaining the calculation thatunder option theory, the investment decision of real estate project could have areational analysis.The ability of decision framework under the net present value theory needs to beimproving in order to make a reational analysis of real estate project. This paperattempts to establish an investment framework based on the theory of option theory, inorder to quantify the flexible investment value and make an enough use of the marketuncertainty which will make the analysis of the investment opportunities morereasonable. On the uncertain circumstance, real option theory has advantages ofevaluating the investment. This advantage is an excellent supplement of NPVinvestment evaluation. This paper attempts to combine the financial option theorywith the traditional financial evaluation, in order to make the preliminary decisionanalysis consistent with the actual situation of the project. Moreover, this paper triesto open the economic evaluation perspective and hope the real option theory canexplore the thinking of decision makers.