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Monte Carlo Simulations versus DCF in Real Estate Portfolio Valuation

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Author Info

  • Baroni, Michel

    ()
    (ESSEC Business School)

  • Barthélémy, Fabrice

    ()
    (THEMA, University of Cergy-Pontoise)

  • Mokrane, Mahdi

    ()
    (IXIS-AEW Europe)

Abstract

This paper considers the use of simulated cash flows to value assets in real estate investment. We motivate the use of Monte Carlo simulation methods for the measurement of complex cash generating assets such as real estate assets return distribution. Important simulation inputs, such as the physical real estate price volatility estimator, are provided by results on real estate indices for Paris derived in an article by Baroni, Barthélémy and Mokrane (2005). Based on a residential real estate portfolio example, simulated cash flows (i) provide more robust valuations than traditional DCF valuations, (ii) permit the user to estimate the portfolio’s price distribution for any time horizon, and (iii) permit easy Values-at-Risk (VaR) computations.

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Bibliographic Info

Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 06002.

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Length: 31 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:ebg:essewp:dr-06002

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Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
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Web page: http://www.essec.edu/
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Related research

Keywords: DCF; Monte-Carlo Simulations; Real Estate Indices; Real Estate Valuations;

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References

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  1. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-14, June.
  2. Stambaugh, Fred, 1996. "Risk and value at risk," European Management Journal, Elsevier, vol. 14(6), pages 612-621, December.
  3. Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-40, June.
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Citations

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Cited by:
  1. Fabrice Barthelemy & Jean-Luc Prigent, 2011. "Real Estate Portfolio Management : Optimization under Risk Aversion," THEMA Working Papers 2011-12, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  2. Fabrice Barthélémy & Jean-Luc Prigent, 2009. "Optimal Time to Sell in Real Estate Portfolio Management," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 59-87, January.
  3. Fabrice Barthélémy & Jean-Luc Prigent, 2008. "Optimal Time to Sell in Real Estate Portfolio Management," THEMA Working Papers 2008-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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