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- Title
Simulationsbasierter Ertragswert als Ergänzung zum Verkehrswert.
- Authors
Gleißner, Werner; Just, Tobias; Kamarás, Endre
- Abstract
The terms real estate price and real estate value are very often used interchangeably. As long as the market leads to the situation that realized prices reflect the utility-based value of the payer, this is justifiable. Heavy price changes on real estate - and real estate capital markets - as well as findings from behavioral economics can challenge this assumption and give us reasons to reckon phases were transaction prices cannot be seen as reflecting long-term values, defined as certainty equivalents of discounted, uncertain future payment surplus. With this article, we argue that it makes sense to use simulation-based valuations, taking into account the uncertainty of future payments as part of a risk-value model. Unlike in other publications, Monte-Carlo simulations are not only used for input variables and for deriving band width for estimated prices. The findings of such a simulation of cash flows here are used as 'input' for deriving risk adjusted cost of capital rates that can be used for discounting. This can then be used for deriving a fundamental value. This is typical for a risk-oriented valuation method. We also run separate simulations for the value of land and property itself, contrary to other publications. In addition, we also take into account risk diversification effects as part of a portfolio. We do this with the example of a residential object. The value of such a portfolio then is not the sum of all single objects, but it takes into account diversification effects. Not taking into account such diversification effects can lead to drastically biased valuations. We do not aim at getting a 'better' model for estimating the transaction price, but we do derive the intrinsic value of the object based on specific assumptions regarding the object and the valuator. This means to derive the 'fundamental' value and therefore in combination with market prices, supporting 'better' decisions for transactions. The valuation result is therefore comparatively independent of possible misjudgements by market participants. In this way, the added value of real estate portfolio or asset management can also be calculated. This does not guarantee a higher return, but the likelihood of systematically neglected risks is clearly reduced. It is clear that for a simulation-based valuation numerous assumptions are to be made, i. e. band widths of rents, potential vacancy risks etc. Each of these assumptions can be challenged, but the advantages of the simulation-based valuation are not that they are error-free, but rather that they are less likely to be erroneous than simple 'one-point estimates' as they are based on intervals. In addition, diversification effects can also be included explicitly. This is why this valuation method unfolds its strengths in coexistence with the determination of market values as it is still important to estimate realistic potential market prices. With the 'Principles for the Valuation of Real Estate' (IDW S 10), the Institute of German Auditors published a valuation standard based on IDW S 1 (see, among others, Kleiber 2012). This standard is based on the DCF approach. According to IDW S 10 paragraph 63, a valuator may choose between different ways for determining risk-adjusted discount rates. Instead of applying the CAPM, which is generally preferred by the IDW, one can also make use of the approach of a 'component-type' derivation with individual risk premiums, which is also preferred in practice. The components are the risk-free base rate (rf), a general property market-specific risk premium, and a property-specific premium (see Möller 2014). The IDW implicitly assumes constant risk premiums over time (Möller 2014 as well as Creutzmann 2013). Möller (2014, p. 205) states a range of 1.0-1.6% for this general property-market risk premium, not specified by the IDW, in accordance with the standard on 'discounted cashflow valuation for residential properties' of the Federal Association of German Housing and Real Estate Companies ('Discounted Cashflow-Bewertungsverfahren für Wohnimmobilien' des Bundesverbandes deutscher Wohnungs- und Immobilienunternehmen). The object-specific risk premium should reflect individual factors like location or condition of the object, without discussing procedures for object-specific risk analyses for deriving sound risk premiums normally needed. It is worth mentioning that an explicit and consistent distinction between intrinsic 'real estate value' and an estimated market value (i. e., price) is neither made by the IDW S 10, nor by the IDW S 1. Investors who have to rely on stable cash flows for their investment decisions cannot avoid using valuation models that represent cash flow risks adequately. Otherwise, in times of overheated markets, overvalued assets are compared with other overvalued assets. And especially for long-term oriented, risk-averse investors, this can lead to misallocating funds. Risk-based values and (estimated) current prices (market values) have to be clearly distinguished. Both are essential but offer different pieces of information. Coming from this, it should be mentioned, that by slightly modifying the above methodology, ratings can be derived, and this would enable taking the creditor's perspective. This valuation is not an alternative pricing model competing with the existing market value estimation, but it allows to calculate the value of a real estate object from the perspective of the valuation subject, based on property and subject-specific assumptions. This means that it delivers a more solid calculation of the 'fundamental' value of an object, e. g. as part of a portfolio. In combination with (a separate) market price estimation, this helps making better decisions with regards to buying and selling property or with regards to structuring real estate portfolios.
- Publication
Zeitschrift für Immobilienökonomie, 2017, Vol 3, Issue 1, p21
- ISSN
1611-4051
- Publication type
Article
- DOI
10.1365/s41056-017-0018-5