Monte Carlo Simulations versus DCF in Real Estate Portfolio Valuation

Michel Baroni (), Fabrice Barthélémy () and Mahdi Mokrane ()
Additional contact information
Mahdi Mokrane: IXIS-AEW Europe, Postal: 12/20 rue Ferdinand Braudel, 75013 Paris, http://www.ixisaew.com

No DR 06002, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: This paper considers the use of simulated cash flows to value 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 an article by Baroni, Barthélémy and Mokrane (2005). Based on a residential real estate portfolio example, simulated cash flows (i) provide more robust valuations than traditional DCF valuations, (ii) permit the user to estimate the portfolio’s price distribution for any time horizon, and (iii) permit easy Values-at-Risk (VaR) computations.

Keywords: DCF; Monte-Carlo Simulations; Real Estate Indices; Real Estate Valuations (search for similar items in EconPapers)
JEL-codes: C15 G12 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-02
New Economics Papers: this item is included in nep-cmp, nep-fin and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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