Monte Carlo Simulations for Real Estate Valuation

FAME Research Paper No. 148

32 Pages Posted: 8 Aug 2005

See all articles by Martin Hoesli

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Aberdeen - Business School

Elion Jani

University of Geneva - Geneva Finance Research Institute (GFRI)

Andre Bender

University of Geneva - Hautes Études Commerciales (HEC-Genève)

Date Written: June 2005

Abstract

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.

Keywords: Real estate valuation; Monte Carlo simulations; Adjusted Present Value (APV)

JEL Classification: R32, G12, G23

Suggested Citation

Hoesli, Martin Edward Ralph and Jani, Elion and Bender, Andre, Monte Carlo Simulations for Real Estate Valuation (June 2005). FAME Research Paper No. 148, Available at SSRN: https://ssrn.com/abstract=770766 or http://dx.doi.org/10.2139/ssrn.770766

Martin Edward Ralph Hoesli (Contact Author)

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Elion Jani

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Andre Bender

University of Geneva - Hautes Études Commerciales (HEC-Genève) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+41 22 705 8135 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,955
Abstract Views
7,830
rank
10,385
PlumX Metrics