In order to promote the supply of affordable housing, China's central governmentattaches great importance to the renovation of shantytowns. Most shantytowns lack reliable sanitation services, public transportation, complete infrastructure, timely law enforcement and other basic services, while the buildings there are mostly dilapidated buildings with poor-quality. Therefore they are unfit for human habitation, and the renovation is imperative. The heavy renovation workload across the country and the capital shortage, however, become a common obstacle of local governments in their efforts to launch renovation projects. This paper applies the real option analysis approach to estimate the value added from old building renovation, and presents an explicit numerical method of the trinomial tree real option pricing model. Finally, the case of "Wu Liu Xiang" in Hangzhou is selected for an empirical analysis. We introduce the new comprehensive renovation mode of "preservation as the main measure, incorporating reconstruction and modification" which replaces the traditional "old city reconstruction" mode which is building new after pulling down the old ones, and encourage the residents to bear a part of the retrofitting costs, which will improve the residents' living conditions, and facilitate social equity as well.
