Flexibility and Real Estate Valuation under Uncertainty

10Resale Timing Decision: Discussion: Let’s think about Additional Insights we can get from Simulation

LEARNING OBJECTIVES

• See how simulation can explore the sensitivity of results to assumptions;
• Appreciate how real estate cycles impact the value of timing flexibility;
• Understand the difference between private value and market value;
• Appreciate how flexibility analysis through simulation can give sophisticated investors significant market advantage.

OUTLINE OF THE CHAPTER

1. 10.1 Sensitivity Analysis
2. 10.2 When to Use the Stop‐Gain Rule
3. 10.3 Implications of Flexibility for Property Valuation
4. 10.4 Conclusion

Now that we are almost halfway through the book, it is a good time to take a break from the math and graphs and think about some of the contextual issues in using simulation to explore our alternatives for flexible management of real estate.

10.1 Sensitivity Analysis

Simulations of flexibility provide us with masses of data. We can analyze this information to gain additional insights beyond investment performance targets such as PVs and IRRs.

For example, simulation analysis allows us to see the effect of resale timing flexibility on the various metrics of investment performance. Since the simulation keeps track of when the IF statement indicates that it is desirable to sell, we can see how this flexibility affects the average holding period for the property. How frequently does the simulation say we will hold the property for more than 10 years? Or for ...