Research On The Investment Decision On Real Estate Development For CDZJT

In the practice of the development of real estate industry,great uncertainty and investment irreversibility are two important characteristics for the investment decision of real estate firms due to the large amount of investment capital,long cycle,vulnerable to macroeconomic policies,regional supply and demand relations and many other factors.In particular,in recent years,the environment of market demand and policy situation in real estate industry have changed significantly,the influence of uncertainty on real estate development decision-making becomes more and more important.The traditional method of discounted cash flow is not suitable to capture the flexibility of real estate development decision under uncertain environment,while real option approach can well reflect the decision flexibility including delayed investment and abandon options,and thus has advantages in evaluation and decision-making of real estate projects.On the basis of analysis on the basic characteristics of real estate development project and literature review about the methods and applications of real option approach,this dissertation firstly takes the JTRH project of CDZJT Company as a typical case to refine the real option characteristics of the project and to develop a multi-stage binary real option model including both delayed option and abandonment option.Secondly,for the JTRH project,by predicting the cash inflow and cash outflow of the project,the dissertation uses traditional NPV rule and real option method to evaluate the project and then analyzes the dynamic decision routine of the project,respectively.Finally,the paper gives the management implication for real estate firms and the suggestion for industry development.The conclusion of dissertation is as follows.Because of great uncertainty,severe irreversibility and the multi-stage development process,we suggest that the real option approach is not only a scientific method to evaluate real estate projects,but also can give a dynamic decision path as the uncertainty reveals over time.As far as the JTRH project of CDZJT Company,the NPV is-81.7762 million RMB yuan,while the project value is 1.0106246 billion RMB yuan if both abandoning options and deferred options are simultaneously considered.Furtherly,in terms of the timing of investment decisions,the NPV rule suggests that the project is not economically feasible.However,the real option analysis can give a series of dynamic decision-making paths,and suggests that the project should be delayed until the third year because the market condition is good in the first and second years,and the project should be abandoned once the market condition in the second and third years is poor.The management suggestions for real estate firms are that the risk management of market uncertainty and the scientific choice of evaluation approaches are two important building-blocks for the establishment of a perfect mechanism on investment decision-making and for the determining of project value.