Valuation of Rental Commercial Retail Properties: Tenant Management and Real Options

Takeaki Kariya (), Yasuyuki Kato, Tomonori Uchiyama and Takashi Suwabe
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Takeaki Kariya: Institute of Economic Research, Kyoto University
Tomonori Uchiyama: Nomura Securities Co.Ltd.
Takashi Suwabe: Nomura Securities Co.Ltd.

No 566, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This papaer formulates a tenant management problem for a commercial retail real estate such as shopping center, provides an analytical framework for deriving the probability distribution of the sum of a discounted cash flow stochastically generated through the tenant management and finds an optimal strategy for tenant-replacement management and lease agreement structure on rent. More specifically, we formulate the problm of valuing the net present value of future net revenues from a commercial retail property with tenant management and provide a valuation model for management decision making. The revenues fluctuate with market rent variations and management processes. In our framework a property manager is required to choose an optimal mix of fixed rent and variable rent linked to sales of tenant's business, and one of two tenant-replacement reules for return and risk enhancement. By Monte Carlo simulation we give an optimal strategy for this problem.

Pages: 34 pages
Date: 2003-03
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:566

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