Analysis Of Real Estate Optimal Development Strategy Based On Real Option Theory

Compared to the traditional theory, the real option investment theory considers the irreversibility of investment projects, investment decision-making uncertainty, investment stage and flexible management, which exactly matches real estate investment. Adopting real option valuation method can well deal with the uncertainty of real estate development throughout the life cycle. The method can be used as the supplement of the traditional investment decision, with this; decision makers could be more scientific, avoiding profit loss due to unwise strategic real estate investment decisions.On the basis of theoretical analysis, a real undeveloped land valuation case statistics are adopted. The value of the project is calculated by the traditional investment decision methods and then valued based on the real option method, the best investment opportunity; the probability, the maximum profit, and the sensitivity of the influence parameters are analyzed. Combined with the above results, some conclusions are obtained:if only use the traditional NPV method to estimate the value of large-scale real estate development projects, there may be overlooked because of the implicit value management flexibility and uncertainty. By calculation, the longer the wait, the higher the value of the undeveloped land, the probability to achieve the best investment point is higher, so developers will have the motive to choose "wait", in order to obtain more market information for further strategic planning or to achieve the highest investment value. Through the calculation of the risk free rate to the effect on the value of the project, the risk free interest rate plays a limited role in postponing the project development. So by increasing loan interest rates or the risk free rate from the government to curb real estate development investment is very limited. Further study shows that charge land idle fee will force developers to accelerate the development of the project. But unfortunately, at this point they couldn’t achieve the highest value. While if set the mature date as 10 years, we can predict that developers will not choose to wait indefinitely, but they would make the investment decision at the best time.