Using rents and price dynamics in real estate portfolio valuation

Abstract

Purpose

The aim of this paper is to use rent and price dynamics in the future cash flows in order to improve real estate portfolio valuation.

Design/methodology/approach

Monte Carlo simulation methods are employed 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 et al..

Findings

Based on a residential real estate portfolio example, simulated cash flows: provide more robust valuations than traditional DCF valuations; permit the user to estimate the portfolio's price distribution for any time horizon; and permit easy values‐at‐risk (VaR) computations.

Originality/value

The terminal value estimation is a core issue in real estate valuation. To estimate it, the proposed method is not based on an anticipated growth rate of cash flows but on the estimation of the trend and the volatility of real estate prices.

Citation

Baroni, M., Barthélémy, F. and Mokrane, M. (2007), "Using rents and price dynamics in real estate portfolio valuation", Property Management, Vol. 25 No. 5, pp. 462-486. https://doi.org/10.1108/02637470710824739