Options Value Study Of Investing Project By Real Estate Investment Trusts

As professional institutional investors, REITs should establish a scientific evaluation management system and risk management instrument as compared with real estate developers. In response to impact of the international financial crisis, establishing REITs and broadening the channels for real estate financing became widely accepted. Though there is various similar REITs in the market of China, there just remain in the surface of loan and finance, not realize REITs' functions of professional investment and management. Hence, the paper studies mortgaged assets and equity asset of REITs which is provided with the real options characteristic.In the first place, the paper introduced the concept of REITs and analyzed the uncertainty of investing project by REITs. Because of the uncertainty and flexibility of management and decision, there were options characters when REITs invested real estate project. We went on to study the specific application of real options in investing projects and analyze related parameter.In the next place, the paper analyzed the real options value of the mortgaged asset from the perspective of call or put options, also including the right to purchase the rear cubicle. Also combined with the flexibility of asset disposing at the ending period, this paper analyzed the call options value of real property equity asset, some property depreciation and parameters of buildings depreciation are included in the models.Finally, most investment theory about REITs originated from securities investment, which has been well established. The empirical analysis of optimal portfolio is measured by system risk, which shows that investment portfolio model can be applied in investment analysis of REITs.But we should consider the characteristics of real estate market and real estate itself: As an asset, there are steady returns and capital increments in long-term investment. It needs to consider the returns in the investment term and the options of selling or holding disposal choice at the ending period, value are provided with the disposal choice. So we need consider option value of each asset when we research optimal portfolio of REITs. Due to the correlation between dynamic price processes under uncertainty, the portfolio investments of real estates could be regarded as the basket options issues in multi-asset options. Also the portfolio investments of real estates are regarded as options value issues of average returns at the ending period. The result indicates that real options approach affords REITs the scientific method in real property asset evaluation and allocation.