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Sustainability and risk: Combining Monte Carlo simulation and DCF for Swiss residential buildings

Erika Meins (Center for Corporate Responsibility and Sustainability (CCRS), University of Zürich, Zürich, Switzerland)
Daniel Sager (Meta-Sys AG, Bubikon, Switzerland)

Journal of European Real Estate Research

ISSN: 1753-9269

Article publication date: 5 May 2015

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Abstract

Purpose

This paper aims to identify the relative contribution of sustainability criteria to property value risk.

Design/methodology/approach

A discounted cash flow (DCF) model is used to assess the effect of a given set of 42 sustainability sub-indicators on property value. The anticipated demand for each sustainability sub-indicator is described by four future states of nature. Their impact on costs or revenue is estimated and included in the model. Subjective probability distributions describe the occurrence of the future states of nature. Monte Carlo simulations of the DCF model are then used to estimate the impact of an individual feature on the risk (volatility) of the property value distribution.

Findings

The results for Switzerland show that “use of thermal energy” (29.3 per cent), followed by “access to public transportation” (16.3 per cent), “day light” (9.6 per cent) and “story height” (6.3 per cent) have the highest single impact on property value risk.

Practical implications

The results are used for a risk-based weighting of a sustainability rating. The rating illustrates how sustainability criteria affect the risk of specific properties and are used as a basis for real estate investment decisions.

Originality/value

In this paper, an effort is made to rigorously ground sustainability ratings in financial theory.

Keywords

Acknowledgements

© Erika Meins and Daniel Sager

The authors would like to thank Urs Faes (UBS Global Real Estate Switzerland), Kurt Ritz (PricewaterhouseCoopers Switzerland), Hans-Peter Burkhard and Urs von Arx (both CCRS, University of Zurich).

The research in this paper is funded by EPImmo, Inrate, Reuss Engineering AG, SEK-SVIT, Steiner AG, SUVA and Zurich Cantonalbank.

Citation

Meins, E. and Sager, D. (2015), "Sustainability and risk: Combining Monte Carlo simulation and DCF for Swiss residential buildings", Journal of European Real Estate Research, Vol. 8 No. 1, pp. 66-84. https://doi.org/10.1108/JERER-05-2014-0019

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Authors