Investment Valuation Model of Public Rental Housing PPP Project for Private Sector: A Real Option Perspective

Jiangang Shi, Kaifeng Duan, Shiping Wen and Rui Zhang
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Jiangang Shi: School of Economics and Management, Tongji University, Shanghai 200092, China
Kaifeng Duan: School of Economics and Management, Tongji University, Shanghai 200092, China
Shiping Wen: School of Economics and Management, Tongji University, Shanghai 200092, China
Rui Zhang: Institute of Remote Sensing and Digital Earth, Chinese Academy of Sciences, Beijing 100101, China

Sustainability, 2019, vol. 11, issue 7, 1-18

Abstract: Public rental housing (PRH) in China is mainly invested by the government at present. The huge capital demand brings it great pressure and a series of problems appear meanwhile. Public–private partnership (PPP) has been regarded as a way to solve the funding dilemma of PRH. However, the PRH project is not attractive for the private sector since the expected profit seems unsatisfactory based on traditional valuation methods. To improve this situation, this paper proposed an investment valuation model from a real option perspective. For the private sector, three types of options, including deferral option, abandonment option, and expansion option, were identified during the concession period of a PRH PPP project. On this basis, a two-stage binomial tree model was constructed for estimating the investment value. Then, the proposed model was tested in a hypothetical example of a typical PRH PPP project in Chongqing, China. The result shows that great potential value can be excavated through flexible strategies and adaption to uncertainties. This paper provides a deep analysis on the gaps of the real option application in public housing investment assessment, which is meaningful for improving the supply efficiency and financial sustainability of PRH.

Keywords: public-private partnership (PPP); public rental housing (PRH); private sector; real option; investment valuation; financial sustainability (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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