IDEAS home Printed from https://ideas.repec.org/p/fam/rpseri/rp148.html
   My bibliography  Save this paper

Monte Carlo Simulations for Real Estate Valuation

Author

Listed:
  • Martin Hoesli

    ()

  • Elion Jani

    ()

  • André Bender

    ()

Abstract

We use the Adjusted Present Value (APV) method with Monte Carlo simulations for real estate valuation purposes. Monte Carlo simulations make it possible to incorporate the uncertainty of valuation parameters, in particular of future cash flows, of discount rates and of terminal values. We use empirical data to extract information about the probability distributions of the various parameters and suggest a simple model to compute the discount rate. We forecast the term structure of interest rates using a Cox et al. (1985) model, and then add a premium that is related to both the real estate market and selected property-specific characteristics. Our empirical results suggest that the central values of our simulations are in most cases slightly less than the hedonic values. The confidence intervals are found to be most sensitive to the long-term equilibrium interest rate being used and to the expected growth rate of the terminal value.

Suggested Citation

  • Martin Hoesli & Elion Jani & André Bender, 2005. "Monte Carlo Simulations for Real Estate Valuation," FAME Research Paper Series rp148, International Center for Financial Asset Management and Engineering.
  • Handle: RePEc:fam:rpseri:rp148
    as

    Download full text from publisher

    File URL: http://www.swissfinanceinstitute.ch/rp148.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    2. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters,in: Theory Of Valuation, chapter 5, pages 129-164 World Scientific Publishing Co. Pte. Ltd..
    3. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
    4. Åke Gunnelin & Patric H. Hendershott & Martin Hoesli & Bo Söderberg, 2004. "Determinants of Cross-Sectional Variation in Discount Rates, Growth Rates and Exit Cap Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 217-237, June.
    5. Larry E. Wofford, 1978. "A Simulation Approach to the Appraisal of Income Producing Real Estate," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 6(4), pages 370-394.
    6. Fernandez, Pablo, 2003. "Equivalence of ten different methods for valuing companies by cash flow discounting," IESE Research Papers D/524, IESE Business School.
    7. Neil Crosby & Anthony Lavers & John Murdoch, 1998. "Property valuation variation and the 'margin of error' in the UK," Journal of Property Research, Taylor & Francis Journals, vol. 15(4), pages 305-330, January.
    8. Jim Clayton, 1996. "Market Fundamentals, Risk and the Canadian Property Cycle: Implications for Property Valuation and Investment Decisions," Journal of Real Estate Research, American Real Estate Society, vol. 12(3), pages 347-368.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goran Karanovic & Bisera Gjosevska, 2012. "Analysis of Risk and Uncertainty Using Monte Carlo Simulation and its Influence on Project Realization," Annals - Economic and Administrative Series -, Faculty of Business and Administration, University of Bucharest, vol. 6(1), pages 145-162, December.
    2. Erika Meins & Daniel Sager, 2013. "Sustainability and Risk: Towards a Risk-Based Sustainability Rating for Real Estate Investments," ERES eres2013_254, European Real Estate Society (ERES).
    3. Charles-Olivier Amédée-Manesme & Michel Baroni & Fabrice Barthélémy & Etienne Dupuy, 2011. "Combining Monte Carlo Simulations and Options to Manage the Risk of Real Estate Portfolios," Post-Print hal-00671067, HAL.
    4. Baroni, Michel & Barthélémy, Fabrice & Mokrane, Mahdi, 2007. "Optimal Holding Period for a Real Estate Portfolio," ESSEC Working Papers DR 07008, ESSEC Research Center, ESSEC Business School.
    5. Michele Leonardo Bianchi & Agostino Chiabrera, 2012. "Italian real estate investment funds: market structure and risk measurement," Questioni di Economia e Finanza (Occasional Papers) 120, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Real estate valuation; Monte Carlo simulations; Adjusted Present Value (APV);

    JEL classification:

    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fam:rpseri:rp148. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja). General contact details of provider: http://edirc.repec.org/data/fameech.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.