Evaluation of land in urban demolition based on real options approach

The current appraisal methodology of land used in urban demolition is imperfect in China, since it ignores the impact of future uncertainties on the land value. To overcome this drawback, this article applies the real options theory. Taking into account the lease time limit of urban land used in China, the article treats the land as a finite American call option and evaluate the undue land in urban demolition. Besides, it applies the practice data of Xi´an as an example, and compares the value of a piece of land in demolition by the real options approach with the traditional valuation method. It finds out that considering uncertain future revenue, land price defined by the real options approach is different from the traditional evaluation method. Real options pricing method can fully consider the future uncertainty of land value so as to provide more scientific and reasonable evaluation of land use right in urban demolition.