A real option-based valuation model for privately-owned public rental housing projects in China

Chinese governments' great efforts in promoting the private sector's provision of public rental housing (PRH) have little effects, and the main reason is lack of proper provision mode and relevant valuation model. This knowledge gap is filled in by proposing a privately-owned PRH provision mode and a real option-based valuation model. In the proposed provision mode, the private sector primarily refers to private real estate developers, who will have ownership and decision rights of PRH projects. Then, the embedded real option at decision making stage is identified, and corresponding option premium (OP) is assessed by the Black-Scholes model modified with value leakage. Adding OP and conventional net present value (NPV) together, the expanded net present value (ENPV) is obtained as the investment value of a privately-owned PRH project. Finally, the proposed provision mode and valuation model are both exemplified in a PRH project, which has a negative NPV indicator but a positive ENPV indicator. Through the sensitive analysis, increasing the average rent of PRH buildings is found to be the most effective measure to enhance the ENPV indicator. Therefore, the proposed PRH provision mode is a feasible way to accelerate the private sector's provision of PRH in China, and the proposed valuation model can value a privately-owned PRH project objectively and comprehensively. (C) 2014 Elsevier Ltd. All rights reserved.