Simulation-Based Excess Return Model for Real Estate Development: A Practical Monte Carlo Simulation-Based Method for Quantitative Risk Management and Project Valuation for Real Estate Development Projects Illustrated with a High-Rise Office Development Case Study

Journal of Property Investment and Finance, Vol. 29, No. 2, 2011

54 Pages Posted: 19 Jun 2010 Last revised: 26 Dec 2010

Date Written: December 20, 2010

Abstract

The Simulation-Based Excess Return Model (SERM) offers a simple, practical decision-making method for underwriting real estate development projects. It addresses the shortcomings of discounted cash flow modeling by taking into account the probabilistic distribution of outcomes and is based on realistic model of interaction of determining variables.

The Simulation-Based Excess Return Model addresses the limitations of the prevailing methodologies by: 1. Employing a stochastic risk assessment method for the discovery of the range of outcomes 2. Explicitly addressing the interdependence of input variables 3. Offering a non-relative and objective risk premium metric for guidance in decision-making

A case study is presented for development of a high-rise office project to illustrate the concepts behind the SERM methodology.

Keywords: Real Estate Development, Monte Carlo Simulation, Stochastic Risk Management Modeling, Investment Returns Modeling, Project Valuation, Real Estate Underwriting, Internal Rate of Return (IRR), Real Options, Real Estate Pricing, Real Estate Appraisal

JEL Classification: C13, C15, C44, R32, R33, R39

Suggested Citation

Gimpelevich, David J., Simulation-Based Excess Return Model for Real Estate Development: A Practical Monte Carlo Simulation-Based Method for Quantitative Risk Management and Project Valuation for Real Estate Development Projects Illustrated with a High-Rise Office Development Case Study (December 20, 2010). Journal of Property Investment and Finance, Vol. 29, No. 2, 2011, Available at SSRN: https://ssrn.com/abstract=1627004
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