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Monte Carlo Simulations versus DCF in Real Estate Portfolio Valuation

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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.

Suggested Citation

  • Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2006. "Monte Carlo Simulations versus DCF in Real Estate Portfolio Valuation," ESSEC Working Papers DR 06002, ESSEC Research Center, ESSEC Business School.
    • Handle: RePEc:ebg:essewp:dr-06002
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    1. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-514, 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 621-640, June.
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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), CY Cergy-Paris University, ESSEC and CNRS.
    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. Serhat Basdogan & Hilde Remøy & Ruud Binnekamp, 2018. "Valuation Construction Permit Uncertainties in Real Estate Development Projects with Stochastic Decision Tree Analysis," ERES eres2018_265, European Real Estate Society (ERES).

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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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