Returns on Chinese residential development projects : a practical investment evaluation procedure developed for the analysis of Chinese residential development projects based on modern financial economic norms
Author(s)
Wang, Qian, 1967 June 15-
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Massachusetts Institute of Technology. Dept. of Urban Studies and Planning.
Advisor
David Geltner.
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Since late 1990s, Chinese real estate has been experiencing rapid growth, especially in the commercial housing sector. This phenomenon is mainly supported by China's housing privatization policy implemented in the mid-1990s and its strong GDP growth for the past 15 years. Chinese citizens are now able to purchase their housing units directly from the market with financing offers from major domestic banks. These days, real estate development-residential development in particular-is perceived in China as one of the proven vehicles "to get rich overnight." An increasing number of companies, including some large international real estate developers, are participating in the Chinese real estate development market. New players entering the market have been escalating the competition, which requires real estate developers to be highly objective and practical when evaluating their residential real estate development investments. After describing and criticizing the current methods of calculating residential real estate development returns in China, I argue in this thesis that, based on modern financial economic norms, a practical investment evaluation procedure can be developed for analyzing Chinese residential development projects. The new procedure is a practical application of a fundamental principle in finance: the NPV investment decision rule. This rule requires that, in order to make sound investment decisions, investors should maximize the NPV across all mutually exclusive alternatives and never choose an alternative in which NPV<0. The new real estate development investment evaluation procedure encompasses four steps: (1) projecting cash flows; (2) calculating the present value of the stabilized property; (3) calculating the present value of total development costs; and (4) calculating the expected return on development investment, or calculating the maximum land purchase price. I use the Hainan Luxury Vacation Home Development in Haiikou, Hainan, China, as case study to demonstrate the fundamental differences between current practices and the proposed procedure. My intention is to thoroughly clarify how applying the NPV rule takes into account some of the unique features of real estate development investments, such as time-to-build, intensive use of debt financing, and phased risk regimes. In the final part of the study, I conclude that current practices of real estate development return calculation fail to reflect these unique features of development investments. With the application of the NPV rule, the proposed financial procedure makes real estate development evaluation analysis more practical. The new procedure is a simple yet powerful financial analytical tool that enables developers to comprehensively exam the expected return on their development investments. I also recommend that, because the procedure is based on fundamental principles of modern finance, it should become the standard way of evaluating real estate development investments.
Description
Thesis (S.M.)--Massachusetts Institute of Technology, Dept. of Urban Studies and Planning, 2003. Includes bibliographical references (leaf 61).
Date issued
2003Department
Massachusetts Institute of Technology. Department of Urban Studies and PlanningPublisher
Massachusetts Institute of Technology
Keywords
Urban Studies and Planning.