Assessing investment value of privately-owned public rental housing projects with multiple options

Abstract

Public rental housing (PRH) has been officially designed as the mainstream of China's affordable housing. However, very few private developers treat PRH as an ideal investment target on account that its investment value seems too low on the basis of traditional valuation method represented by the Net Present Value (NPV) method. Thus, disregarding for financial and operational issues of PRH projects, the normal role of a private developer in the supply of PRH is an agent which earns meager but stable agent fee. Consequently, the government has to bear a heavy financial and operational burden in PRH projects aiming to keep the sustainability of PRH projects. To improve this situation, a privately-owned PRH provision mode, Building-Own-Operation-Concession (BOOC) mode, is proposed, where the private developer is in charge of the life cycle management of PRH projects through a concession contract from the government, including the fund-raising, construction, operation and even demolition. Besides complying with all PRH relevant regulations, the private developer is entitled with multiple options to abandon, transfer and expand of targeted PRH project. Based on the NPV method and Real Option Pricing Model, a method for assessing the investment value of a PRH project in BOOC mode is proposed. Then, the proposed method is exemplified in a hypothetical privately-owned PRH project in Nanjing city of China. The proposed provision mode BOOC and valuation method are expected to show a new perspective for accelerating the sustainable development of PRH.