A Study On Real Estate Investment Decision-making Model Based On The Real Option Theory Under The Fractal Market Environment

With the rapid development of world economy, the real estate industry has sprung up to flourish, and affects the development direction and speed of the economy. On the one hand, the prosperity of the real estate industry, has led to the rapid growth of the economy.On the other hand, it has also produced a series of risks and brought direct threats to the rapid economic development. Result from American sub-prime crisis caused global financial crisis. The development of the real estate industry is closely related to economic development. So in the recent years a lot of research on real estate problems has been produced. Real estate developers as the main participants of the market have played an important influence on the development of the real estate industry. After they got the land development rights, whether they could make effective and scientific predictions of the real estate market, and whether they could make the most beneficial decisions is particularly important.A lot of literature show that the development of the real estate industry can effectively promote the development of economy, at the same time, economic growth can also make the real estate industry to promote investment. Understanding the complexity of the factors affecting the development of the real estate market and the uncertainty of the development of the real estate market is very important for the prediction of the real estate market. The uncertainty of the investment environment is an important reason for the overheating property market and the high price. These factors, such as the investors’ blindly following the trend of investment, the structural imbalances of real estate development project types,the inclination to high prices, the imbalance of market supply and demand and so on, have a direct impact on the development of the real estate market. Because the real estate investment behavior has three characteristics: investment is irreversible, uncertainty of investment environment and the time selectivity, moreover the characteristics of high investment and high risk of real estate industry also increase the uncertainty of the investment. The original method of net present value(NPV) to determine the real estate industry investment behavior is no longer applicable. Real option method can effectively evaluate the opportunity value of project management flexibility and uncertainty of future market. A large number of literature show that the distribution of the assets of real estate yields significant difference to normal distribution, with the characteristics of "peak" and "fat tail"; in addition, the fluctuations of the rate of return in the different time intervals is related with the fractal characteristic of obvious relevance and long memory. Thus the ordinary geometric Brownian motion has been unable to accurately describe fluctuations in the time series of real estate, and the fractional Brownian motion is a scientific choice.Therefore, this paper attempts to apply this conclusion to the real estate market to solve the problem of real estate investment decision.In this paper, firstly we select the real state climate index for R/S analysis to carry out an empirical test on the fractal characteristics of the real estate market and get the value of H 0.9089. Then we select commercial housing transaction price of Beijing real estate market for R/S analysis and get the value of H 0.9176. The Both values of H are greater than 0.5, indicating that the real estate of our country and the Beijing real estate market have long memory and self similar fractal characteristics. So we choose the B-S model driven by fractal Brownian motion to calculate the option value of real estate project.Finally, we use the traditional NPV method, the classic B-S model, the fractal B-S model to calculate option value of the C real estate investment project in Beijing. From the results of the calculation of the three methods, the value calculated by traditional NPV method is minimum, the value calculated by fractal B-S is maximum, the value calculated by the classical B-S model is between the two other ways. In theory, the traditional NPV method only considers the net present value flow of each period, and ignores the flexible value of the management in the project development process. Classic B-S model gives full consideration to the continuous changes of the market in the future, it positions the project in a dynamic environment, considering the investment opportunity value brought by future uncertain of external changes. But classic B-S model does no longer meet the fractal characteristics of real estate development under the hypothesis of efficient market. The fractal B-S model has made up the information loss of the classical B-S model by describing the long memory of the asset price. Under Fractal market environment, the investment is facing greater risk and complexity, and it also means more value. The empirical results are consistent with the theoretical results. We can know that the fractal B-S model is more effective to estimate the value of real estate projects. It is helpful to guide the design and risk management of the investment project which is important to promote the healthy development of China’s real estate market and the overall development of China’s economy.