This article considers the use of simulated cash flows to value assets and options in assets in real estate investment. We employ 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.
BARONI, M., BARTHELEMY, F. and MOKRANE, M. (2007). Using Rents and Price Dynamics in Real Estate Portfolio Valuation. Property Management, pp. 462-486.