Predicting uncertainty: the impact of risk measurement on value of real estate portfolios

Nikodem Szumilo*, Pascal Gantenbein, Werner Gleißner, Thomas Wiegelmann

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

Abstract

This paper presents a theoretical framework for an assessment and valuation of real estate assets and funds, based on modern stochastic discounted cash flow (DCF) models, which accurately captures the nature of related risks. We show that an accurate risk-adjusted valuation is particularly difficult for real estate investments, due to practical limits to diversification and difficulties in approximating total risk with systematic risk. We develop a risk assessment framework that includes idiosyncratic risk but focuses on insolvency risk related to a specific cash flow profile. We also present a methodology of rating this risk, using forecasts and simulations. We conclude that simulation techniques are a valuable tool in property risk assessment. Further, we show that cost of capital and value of assets depend on diversification of specific risks, investors can achieve in their portfolios.

Original languageEnglish
Pages (from-to)1-17
Number of pages17
JournalJournal of Property Research
Volume33
Issue number1
DOIs
Publication statusPublished - 2 Jan 2016

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