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Monte Carlo simulation in a financial strategy for urban development using land value capture

David M. Vetter (David Vetter Consulting, Rio de Janeiro, Brazil)
Marcia Vetter (David Vetter Consulting, Rio de Janeiro, Brazil)

Journal of Property Investment & Finance

ISSN: 1463-578X

Publication date: 1 July 2019

Abstract

Purpose

The purpose of this paper is to explore how Monte Carlo Simulation (MCS) could have enhanced understanding of the risks involved in the financial strategy for revitalization of Rio de Janeiro’s central city based on the capture of value generated by government interventions.

Design/methodology/approach

The study first describes the process involved in developing the financial strategy and model without MCS. Then, it shows how the MCS could have been integrated into this process and evaluates its potential impacts on the quality of risk analysis.

Findings

If MCS is fully integrated into the decision-making process, it can serve as a heuristic tool that helps team members to better understand risks by generating forecasts of land value and other variables as a probability distributions. By showing the variance of the forecasted variable, MCS integrates elements of modern risk analysis into financial model development in a cost-effective manner.

Research limitations/implications

MCS covers only the risks associated with the variables in the financial model. Events that seem extremely unlikely (i.e. “black swans”) can occur and must be assessed separately.

Practical implications

MCS can help analysts to understand the financial risks of large-scale development projects involving value capture, even in the prefeasibility stage.

Social implications

By facilitating value capture, MCS could help close the financing gap for sustainable urban development and subsidies for lower income families.

Originality/value

The study “retrofits” MCS on a successfully completed financial prefeasibility study to assess its usefulness as a heuristic tool.

Keywords

Acknowledgements

The authors thank Instituto Municipal de Urbanismo Pereira Passos (IPP), L’ Atelier Parisien d’ Urbanisme (APUR), Lincoln Institute of Land Policy and all the members of the planning team for their support during the preparation of the plan for Rio’s center and the following study in 2008 and 2009. The analysis and recommendations presented in the paper do not necessarily reflect the ideas and policies of these institutions or professionals.

Citation

Vetter, D.M. and Vetter, M. (2019), "Monte Carlo simulation in a financial strategy for urban development using land value capture", Journal of Property Investment & Finance, Vol. 37 No. 4, pp. 405-415. https://doi.org/10.1108/JPIF-03-2019-0032

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited