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Monte-Carlo Simulations for Building Appraisal

Author

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  • Michel Baroni
  • Mahdi Mokrane

Abstract

This paper considers the use of simulated cash flows to value assets and options in assets in real estate investment. We motivate the use of Monte-Carlo simulation methods 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 a companion paper by Baroni, BarthÈlÈmy and Mokrane (2004). Based on a building example, simulated cash flows (i) provide more robust valuations than traditional DCF valuations, (ii) permit the user to estimate the building's price distribution for any time horizon, (iii) permit easy Values-at-Risk (VaR) computations, and (iv) facilitate the pricing of a wide variety of contingent claims.

Suggested Citation

  • Michel Baroni & Mahdi Mokrane, 2005. "Monte-Carlo Simulations for Building Appraisal," ERES eres2005_116, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2005_116
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2005-116
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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