Timing Decision Of Real Estate Project Development:Based On Real Options

Land idle has become one of the outstanding phenomenon of real estate market in China. To pursue their own interests, developers do not develop the land within a prescribed period of time after purchase it, causing a large number of urban land idle, which made the land supply invalid. Tacking the problem of land idle needs to identify the key factors of timing decision of the project development, while real options is a new theoretical tool to study the timing decision of development. So this paper is devoted to analyze the mechanism of timing decision of the project development with empirical data. The results are expected to help clarifying the behavior of the developer, and providing theoretical basis and policy suggestions to solve the land idle.Beginning with an overview of previous research on real options theory in the field of real estate investment, this paper then use the method of contingent claims analysis to build the timing decision theory model of real estate project development and provide the theory hypothesis:the more the market uncertainty, the delay the optimal development time, followed by a panel data model test with35large and medium-sized cities nationwide project development data. To make model more in line with the present situation of China’s real estate market, variables reflecting the policy factors will added into the empirical test model. The results show that one-standard deviation increased in the market uncertainty reduces the new constructions of real estate projects by22.62%. One-standard-deviation increase in3-month central bank bills rate reduces the new constructions by18.62%.A one-standard-deviation increase in M2growth increases the amount of new project start by12.82%.The major findings of this paper are:1. The developers’ timing decision of project development is fit for the rule of real options.2. Policy factors have great effect on timing decision of project development, especially the monetary policy.3. The market situation will affect developers to make irrational investment timing decision.4. The market uncertainty have the greatest effect on timing decision for developers. In short, the findings indicate that the key to tackle the problem of idle land is to lower price fluctuation, to implement a relatively easy monetary policy which can effectively stimulates the developers in the project development.