Flexibility and Real Estate Valuation under Uncertainty

Provides a revolutionary conceptual framework and practical tools to quantify uncertainty and recognize the value of flexibility in real estate development This book takes a practical "engineering" approach to the valuation of options and flexibility in real estate. It presents simple simulation models built in universal spreadsheet software such as Microsoft Excel®. These realistically reflect the varying and erratic sources of uncertainty and price dynamics that uniquely characterize real estate. The text covers new analytic procedures that are valuable for existing properties and enable a new, more profitable perspective on the planning, design, operation, and evaluation of large-scale, multi-phase development projects. The book thereby aims to significantly improve valuation and investment decision making. Flexibility and Real Estate Valuation under Uncertainty: A Practical Guide for Developers is presented at 3 levels. First, it introduces and explains the concepts underlying the approach at a basic level accessible to non-technical and non-specialized readers. Its introductory and concluding chapters present the important "big picture" implications of the analysis for economics and valuation and for project design and investment decision making. At a second level, the book presents a framework, a roadmap for the prospective analyst. It describes the practical tools in detail, taking care to go through the elements of the approach step-by-step for clarity and easy reference. The third level includes more technical details and specific models. An Appendix discusses the technical details of real estate price dynamics. Associated web pages provide electronic spreadsheet templates for the models used as examples in the book. Some features of the book include: Concepts and tools that are simple and accessible to a broad audience of practitioners; An approach relevant for all development projects; * Complementarity with the author's Commercial Real Estate Analysis & Investments--the most-cited real estate investments textbook on the market. Flexibility and Real Estate Valuation under Uncertainty: A Practical Guide for Developers is for everyone studying or concerned with the implementation of large-scale or multi-phase real estate development projects, as well as property investment and valuation more generally.

Autorentext

DAVID GELTNER, PhD is Professor of Real Estate Finance in the MIT Department of Urban Studies & Planning. He has taught for over 15 years in the MIT Center for Real Estate, playing a lead role in its Master of Science in Real Estate Development (MSRED) program. Geltner is a winner of the prestigious Pension Real Estate Association's Graaskamp Award for excellence and influence in the real estate investment industry. RICHARD DE NEUFVILLE, PhD is Professor of Engineering Systems at the Massachusetts Institute of Technology. He has received many international professional and teaching awards, including the Sizer Award for the Most Significant Contribution to MIT Education.

Klappentext
PROVIDES A REVOLUTIONARY CONCEPTUAL FRAMEWORK AND PRACTICAL TOOLS TO QUANTIFY UNCERTAINTY AND RECOGNIZE THE VALUE OF FLEXIBILITY IN REAL ESTATE DEVELOPMENT This book takes a practical "engineering" approach to the valuation of options and flexibility in real estate. It presents simple simulation models built in universal spreadsheet software such as Microsoft Excel®. These realistically reflect the varying and erratic sources of uncertainty and price dynamics that uniquely characterize real estate. The text covers new analytic procedures that are valuable for existing properties and enable a new, more profitable perspective on the planning, design, operation, and evaluation of large-scale, multi-phase development projects. The book thereby aims to significantly improve valuation and investment decision making. Flexibility and Real Estate Valuation Under Uncertainty: A Practical Guide for Developers is presented at 3 levels. First, it introduces and explains the concepts underlying the approach at a basic level accessible to non-technical and non-specialized readers. Its introductory and concluding chapters present the important "big picture" implications of the analysis for economic and valuation and for project design and investment decision making. At a second level, the book presents a framework, a roadmap for the prospective analyst. It describes the practical tools in detail, taking care to go through the elements of the approach step-by-step for clarity and easy reference. The third level includes more technical details and specific models. An Appendix discusses the technical details of real estate price dynamics. Associated web pages provide electronic spreadsheet templates for the models used as examples in the book. Some features of the book include:

• Concept and tools that are simple and accessible to a broad audience of practitioners;
• An approach relevant for all development projects;
• It complements the author's Commercial Real Estate Analysis & Investments*the most-cited real estate investments textbook on the market. *Flexibility and Real Estate Valuation Under Uncertainty: A Practical Guide for Developers is for everyone studying or concerned with the implementation of large-scale or multi-phase real estate development projects, as well as property investment and valuation more generally.

Inhalt
Foreword xiii

Author's Preface xvii

Acknowledgement xxi

About the Companion Website xxiii

1 Discounted Cash Flow Valuation: The Basic Procedures and Concepts Underlying Spreadsheet Valuation Constitute the Springboard to our Approach of Analyzing Flexibility Under Uncertainty 1

1.1 Why the Focus on the Discounted Cash Flow Model? 2

1.2 Structure of a Discounted Cash Flow Spreadsheet 3

1.3 The Cash Flow Projection 5

1.4 Discount Rate 7

1.5 Market Value and ForwardLooking (ExAnte) Analysis 7

1.6 BackwardLooking (ExPost) Analysis 9

1.7 Conclusion 9

2 Economics of the Discounted Cash Flow Valuation Model: Understanding the Discount Rate is Critical 11

2.1 Choice of Discount Rate 11

2.2 Differences between Discount Rate, Opportunity Cost of Capital, and Internal Rate of Return 13

2.3 Net Present Value 14

2.4 Relationship between Discount Rate, Growth Rate, and Income Yield 15

2.5 Relationship between Discount Rate and Risk 18

2.6 Conclusion 19

3 Future Scenarios Matter: We Need to Recognize that Future Projections are Uncertain 21

3.1 The Standard Discounted Cash Flow Model Appears to be Deterministic 21

3.2 We Live in a World of Uncertainty 23

3.3 Discounted Cash Flow Pro Forma Cash Flows are Expectations 24

3.4 Flexibility and Options 26

3.5 Conclusion 26

4 Scenario Analysis: Future Scenarios can Significantly and Surprisingly Affect the Present Value 27

4.1 Discounted Cash Flow Scenario Analysis 27

4.2 Scenarios Affect Value 29

4.3 Flexibility Has Value 30

4.4 Conclusion 32

5 Future Outcomes Cover a Range of Possibilities: We Can Describe Uncertainties in Real Estate Using Probability Distributions of Possible Future Outcomes 33

5.1 Distribution of Future Outcomes 34

5.2 Quantifying Input Distributions 34

5.3 Distributions of Outcomes Differ from Distributions of Inputs 38

5.4 Flaw of Averages 39

5.5 Conclusion 40

6 Simulation of Outcomes: Simulation is a Practical, Efficient Way to Explore Uncertainty and to choose between Alternative Strategies for Managing it 41

6.1 Generating Scenarios 41

6.2 Real Estate Simulation in a Nutshell 42

6.3 Simulation is an Efficient Process 43

6.4 Number of Trials 44

6.5 Conclusion 45

7 Modeling Price Dynamics: Using Pricing Factors to Model the Dynamics of Real Estate Markets 47

7.1 Pricing Factors 47

7.2 Random Walks 49

7.3 Real Estate Pricing Factor Dynamics 51

7.4 Conclusio…