| In recent years, the real estate industry is developing rapidly from the infancy to maturity stage. With the enlargement of its investment scale, the real estate industry has now become the pillar industry of China that influences the national economy. In order to better optimize the resources allocation and mitigate the risks in this intensely competitive industry, it is urgent for the decision-makers to choose a scientific and efficient method to analyze investment projects and make scientific decisions.There exist many different kinds of decision-making methods in the real estate industry. In China, the primary method adopted is the Net Present Value(NPV) method.This method has many limitations in practical application, which mainly includes neglecting of the uncertainties in real estate investment and the values brought about by the flexibility of management. Under this idea, in order to ensure the scientificity and effectiveness of investment decision-making, this paper introduces the real option method to the decision evaluation analysis of the investment projects.The investment project contains option values, which are proportional to the uncertainties of project. Real option theory uses the basic rules of financial market for the planning and managing of enterprise strategic investments, and is especially suitable for the investment areas with large-scale uncertainties, high risks and long investment circles where actions can be deferred. The investments in real estate market just possess these above-mentioned features. This method makes better the traditional real estate investment method as it objectively deals with the uncertainties of investment and the flexibilities of daily management which improves the scientificity of investment decision-making. This method is a more reasonable method of real estate investment decision-making. At the same time, it provides a new analysis concept for project evaluation which enriches the decision-making and evaluation system in the real investment field.Combined analysis consisting of qualitative research of related theories and quantitative research of actual case study is used in this article. Firstly, traditional investment decision analysis method and real option theory are discussed in detail separately. Then, the case study of TJTZ Company’s Qingdao Project is used as an example. Traditional method is applied to calculate the project value at first, followed byan intensive analysis of real option characteristics of this project. By adopting the real option model and selecting of parameters, the application steps of real option method in real estate investment is introduced in detail. After calculating the project value which contains the option value, the outcomes of project values calculated by these two methods are compared. The paper further discusses the limitation of traditional methods and the advantages of real option method. After that, based on the characteristic of the company’s real estate business itself, the paper gives suggestions and instructions to TJTZ Company when using real option method. Finally, by summarizing the whole article, this paper discusses the future trends of adopting real option method in real estate markets.The innovation of this article is that the research and analysis of real option method are based on its application in an actual case, which gives a new method of assessing the project value and helps improve the rationality and scientificity of the real estate enterprise investment decision-making. |
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