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Monte Carlo Simulations for Real Estate Valuation


  • Martin Hoesli


  • Elion Jani


  • André Bender



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

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    References listed on IDEAS

    1. 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: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    2. 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.
    3. 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, December.
    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. 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.
    6. 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.
    7. 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.
    8. Fernandez, Pablo, 2003. "Equivalence of ten different methods for valuing companies by cash flow discounting," IESE Research Papers D/524, IESE Business School.
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    Cited by:

    1. Charles-Olivier Amédée-Manesme & Fabrice Barthélémy & Michel Baroni & Etienne Dupuy, 2013. "Combining Monte Carlo simulations and options to manage the risk of real estate portfolios," Journal of Property Investment & Finance, Emerald Group Publishing, vol. 31(4), pages 360-389, July.
    2. 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.
    3. Michel Baroni & Fabrice Barthélémy & Mahdi Mokrane, 2007. "Optimal holding period for a real estate portfolio," Journal of Property Investment & Finance, Emerald Group Publishing, vol. 25(6), pages 603-625, October.
    4. 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).
    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


    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

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