The Application Research Of Real Option In Real Estate Investment Decision

Real estate Investment decision has great significance to the real estate industry, real estate market's improvement and healthy development. Because real estate has the characteristic of space fixation, once the decision is completed and implemented, it would be difficult to move and change freely. Real estate investment takes a long construction period, a large quantity of funds, and constructing can not be interrupted once started. All of these constraints determine that we must pay attention to real estate investment decision.Currently, real estate developers make investment decision usually adopting discounted cash flow method, sensitivity analysis, decision tree analysis and Monte Carlo simulation, etc., of which commonly used is the net present value (NPV) method contained by the discounted cash flow method. As Real estate investment has some characteristics including irreversibility, the strong uncertainty and management flexibility, the traditional Net Present Value method can not evaluate all of these characteristics. However the application of real option method which appeared in 1970's, not only considers uncertainty of real estate investment, but also materializes the management flexibility and strategic value, revises the disadvantages of traditional investment decision method, offers new theory and method to real estate investment decision.This paper firstly introduces the basic theory of real option, B-S real option pricing model and analyses the sensitivity of the pricing mode'five parameters, put forward real option method based on the internal theory and computer simulation theory. and then analyses that when facing with the uncertainty in the process of the real estate investment decision, traditional investment decision method manifests some disadvantages, put forward that real estate investment decision has characteristics of the real option method and point out the advantages of the real option method, in the meantime, summarizes the types of real options contained in the process of real estate investment decision. In addition, this paper considers the uncertainty, project management flexibility and strategic issues in the process of real estate investment on the basis of retaining reasonable content of the traditional net present value method, constructs the application framework of the real option method based on interval theory and computer simulation theory in real estate investment decision. The theory uses interval theory to estimate the amount of each uncertain range of cash inflows and outflows, and programs with JAVA to computer a large number of data, provides a range and confidence interval range for the investment decision makers, improves traditional decision method only basing on a single data, so makes the real estate investment decision more accurate and reliable. Finally, this paper combines with specific cases on the basis of previous theory, computes true extended value of real estate investment project including real option value, making the real estate investment decision more scientific and reasonable.