Monte Carlo Simulations versus DCF in Real Estate Portfolio Valuation
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.
|Date of creation:||Feb 2006|
|Date of revision:|
|Contact details of provider:|| Postal: ESSEC Research Center, BP 105, 95021 Cergy, France|
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- Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-40, June.
- Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-14, June.
- Stambaugh, Fred, 1996. "Risk and value at risk," European Management Journal, Elsevier, vol. 14(6), pages 612-621, December.
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