Monte Carlo simulation

Since the variables investment I, cost of capital r, yearly net exploitation revenues E, and rest value V as defined in the preceding section are stochastically independent, a Monte Carlo simulation can be conducted based on ranges specified for these variables.

We have developed a software package for this purpose (Van Gunsteren and Krebbers, 2000). The input consists of the lifetime m and the ranges (three

Figure 8.1 Output illustration of Monte Carlo simulation

values) for the before mentioned variables (I, r, E, V). The output gives the probability distribution of the profit P and a sensitivity analysis based on the best guess estimates. An illustration of the output is given in Figure 8.1.

The package includes an option for establishing the risk profile, i.e. the probability distribution of the expected return, for a portfolio of projects with different lifetimes, different starting dates and different risk profiles. This option is also useful for single real estate investment projects which are made up of several parts serving fairly independent markets. For example, a tower consisting of, say, eighty floors with offices, shops and hotels can be processed as a portfolio of three projects with three different risk profiles. The Monte Carlo simulation then provides decision support information to the investor related to the decision how to distribute the available floor area over offices, shops and hotels.

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