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Predicting uncertainty: the impact of risk measurement on value of real estate portfolios

Author

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  • Nikodem Szumilo
  • Pascal Gantenbein
  • Werner Gleißner
  • Thomas Wiegelmann

Abstract

This paper presents a theoretical framework for an assessment and valuation of real estate assets and funds, based on modern stochastic discounted cash flow (DCF) models, which accurately captures the nature of related risks. We show that an accurate risk-adjusted valuation is particularly difficult for real estate investments, due to practical limits to diversification and difficulties in approximating total risk with systematic risk. We develop a risk assessment framework that includes idiosyncratic risk but focuses on insolvency risk related to a specific cash flow profile. We also present a methodology of rating this risk, using forecasts and simulations. We conclude that simulation techniques are a valuable tool in property risk assessment. Further, we show that cost of capital and value of assets depend on diversification of specific risks, investors can achieve in their portfolios.

Suggested Citation

  • Nikodem Szumilo & Pascal Gantenbein & Werner Gleißner & Thomas Wiegelmann, 2016. "Predicting uncertainty: the impact of risk measurement on value of real estate portfolios," Journal of Property Research, Taylor & Francis Journals, vol. 33(1), pages 1-17, March.
    • Handle: RePEc:taf:jpropr:v:33:y:2016:i:1:p:1-17
    DOI: 10.1080/09599916.2016.1146790
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    Cited by:

    1. Werner Gleißner & Tobias Just & Endre Kamarás, 2017. "Simulationsbasierter Ertragswert als Ergänzung zum Verkehrswert [Simulation-based earnings value as a supplement to the market value]," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 3(1), pages 21-48, April.
    2. Patrick Bergmann & Endre Kamarás & Werner Gleißner & Edeltraud Guenther, 2020. "Enhanced Cash Flow Valuation in Real Estate Management by Integrating Innovative Materials and Risk Assessment," Sustainability, MDPI, vol. 12(6), pages 1-26, March.

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