Pricing model for commercial real estate rent based on real option

Abstract

In order to avoid business risks caused by the fluctuation of the commercial real estate rents, real option theory is applied in this paper to solve the problem of commercial real estate rent. First of all, this paper turns uncertain volatility of the commercial real estate rent into the particular random process which could describe its mathematical characteristics with some parameters; Secondly, this paper uses Monte Carlo simulation and Asian options to set up a pricing model of the commercial real estate rents; Finally it calculates the specific parameters by analyzing the fluctuation of Grade A office building rent in the last ten years in Hong Kong, and reveals the impact of the pricing model on commercial real estate rents. The results show that on the premise of guaranteeing lessors and tenants' interest, the application of real option in commercial real estate rent could reduce the business risk, and deduce the rent fluctuation.