Monte Carlo Simulations for Real Estate Valuation

Martin Hoesli, Elion Jani () and André Bender ()

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

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) (search for similar items in EconPapers)
JEL-codes: G12 G23 R32 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-cmp, nep-fin, nep-fmk and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Monte Carlo Simulations for Real Estate Valuation (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:fam:rpseri:rp148

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