Details

Flexibility and Real Estate Valuation under Uncertainty


Flexibility and Real Estate Valuation under Uncertainty

A Practical Guide for Developers
1. Aufl.

von: David Geltner, Richard de Neufville

54,99 €

Verlag: Wiley-Blackwell
Format: EPUB
Veröffentl.: 23.02.2018
ISBN/EAN: 9781119106487
Sprache: englisch
Anzahl Seiten: 256

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Beschreibungen

<b>Provides a revolutionary conceptual framework and practical tools to quantify uncertainty and recognize the value of flexibility in real estate development</b><br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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. <br /><br />Some features of the book include:<br />•    Concepts and tools that are simple and accessible to a broad audience of practitioners;<br />•    An approach relevant for all development projects;<br />•    Complementarity with the author's Commercial Real Estate Analysis & Investments—the most-cited real estate investments textbook on the market.<br /><br />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.
<p>Foreword xiii</p> <p>Author’s Preface xvii</p> <p>Acknowledgement xxi</p> <p>About the Companion Website xxiii</p> <p><b>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</b></p> <p>1.1 Why the Focus on the Discounted Cash Flow Model? 2</p> <p>1.2 Structure of a Discounted Cash Flow Spreadsheet 3</p> <p>1.3 The Cash Flow Projection 5</p> <p>1.4 Discount Rate 7</p> <p>1.5 Market Value and Forward‐Looking (Ex‐Ante) Analysis 7</p> <p>1.6 Backward‐Looking (Ex‐Post) Analysis 9</p> <p>1.7 Conclusion 9</p> <p><b>2 Economics of the Discounted Cash Flow Valuation Model: Understanding the Discount Rate is Critical 11</b></p> <p>2.1 Choice of Discount Rate 11</p> <p>2.2 Differences between Discount Rate, Opportunity Cost of Capital, and Internal Rate of Return 13</p> <p>2.3 Net Present Value 14</p> <p>2.4 Relationship between Discount Rate, Growth Rate, and Income Yield 15</p> <p>2.5 Relationship between Discount Rate and Risk 18</p> <p>2.6 Conclusion 19</p> <p><b>3 Future Scenarios Matter: We Need to Recognize that Future Projections are Uncertain 21</b></p> <p>3.1 The Standard Discounted Cash Flow Model Appears to be Deterministic 21</p> <p>3.2 We Live in a World of Uncertainty 23</p> <p>3.3 Discounted Cash Flow Pro Forma Cash Flows are Expectations 24</p> <p>3.4 Flexibility and Options 26</p> <p>3.5 Conclusion 26</p> <p><b>4 Scenario Analysis: Future Scenarios can Significantly and Surprisingly Affect the Present Value 27</b></p> <p>4.1 Discounted Cash Flow Scenario Analysis 27</p> <p>4.2 Scenarios Affect Value 29</p> <p>4.3 Flexibility Has Value 30</p> <p>4.4 Conclusion 32</p> <p><b>5 Future Outcomes Cover a Range of Possibilities: We Can Describe Uncertainties in Real Estate Using Probability Distributions of Possible Future Outcomes 33</b></p> <p>5.1 Distribution of Future Outcomes 34</p> <p>5.2 Quantifying Input Distributions 34</p> <p>5.3 Distributions of Outcomes Differ from Distributions of Inputs 38</p> <p>5.4 Flaw of Averages 39</p> <p>5.5 Conclusion 40</p> <p><b>6 Simulation of Outcomes: Simulation is a Practical, Efficient Way to Explore Uncertainty and to choose between Alternative Strategies for Managing it 41</b></p> <p>6.1 Generating Scenarios 41</p> <p>6.2 Real Estate Simulation in a Nutshell 42</p> <p>6.3 Simulation is an Efficient Process 43</p> <p>6.4 Number of Trials 44</p> <p>6.5 Conclusion 45</p> <p><b>7 Modeling Price Dynamics: Using Pricing Factors to Model the Dynamics of Real Estate Markets 47</b></p> <p>7.1 Pricing Factors 47</p> <p>7.2 Random Walks 49</p> <p>7.3 Real Estate Pricing Factor Dynamics 51</p> <p>7.4 Conclusion 52</p> <p><b>8 Interpreting Simulation Results: Target Curves and Scatterplots can be used to Graph the Distribution of the Sample Output 53</b></p> <p>8.1 Target Curves 53</p> <p>8.2 Comparing Target Curves 57</p> <p>8.3 Value at Risk 57</p> <p>8.4 Scatterplots 57</p> <p>8.5 Conclusion 59</p> <p><b>9 Resale Timing Decision: Analysis: Let’s See what happens when we apply the Tools of Flexibility Analysis to a Classical Investment Decision: when to sell the Property 61</b></p> <p>9.1 The Resale Timing Problem 62</p> <p>9.2 Extending the Time Horizon of the Discounted Cash Flow Model 62</p> <p>9.3 IF Statements 63</p> <p>9.4 Trigger Value for Stop‐Gain Rule 64</p> <p>9.5 Value of Example Stop‐Gain Rule 64</p> <p>9.6 Conclusion 68</p> <p><b>10 Resale Timing Decision: Discussion: Let’s think about Additional Insights we can get from Simulation 69</b></p> <p>10.1 Sensitivity Analysis 69</p> <p>10.2 When to Use the Stop‐Gain Rule 70</p> <p>10.3 Implications of Flexibility for Property Valuation 71</p> <p>10.4 Conclusion 72</p> <p><b>11 Development Project Valuation: This Chapter Looks at Valuation of Development Projects From an Investment Perspective, Considering Uncertainty, Flexibility, and Time‐to‐Build 73</b></p> <p>11.1 Time‐to‐Build Difference between Development Projects and Existing Assets 74</p> <p>11.2 Lower Opportunity Cost of Capital for Construction Costs 75</p> <p>11.3 Illustrative Example 77</p> <p>11.4 Residual Value of Development Land 78</p> <p>11.5 Investment Risk in Development Project 79</p> <p>11.6 Conclusion 80</p> <p><b>12 Basic Flexibility in Development Projects: The Most Basic Flexibility in Real Estate Development is the Option to Choose whether and when to Build 83</b></p> <p>12.1 Review of Call (and Put) Options 84</p> <p>12.2 Land as a Call Option on Development 85</p> <p>12.3 Drivers of Option Value 85</p> <p>12.4 A Practical Example of a Call (and Put) Option 86</p> <p>12.5 Flexibility and Scenario Analysis for Development Projects 88</p> <p>12.6 Conclusion 90</p> <p><b>13 Option Dichotomies: We Introduce a Typology of Flexibility in Development Projects 91</b></p> <p>13.1 Three Dichotomies for Thinking Generally about Development Options 91</p> <p>13.2 Defensive versus Offensive Options 92</p> <p>13.3 Options “On” and “In” Projects 93</p> <p>13.4 Timing Options versus Product Options 94</p> <p>13.5 Conclusion 94</p> <p><b>14 Product Options in Development: We Discuss Three types of Product Options 95</b></p> <p>14.1 Concept of Base Plan 95</p> <p>14.2 Product Expansion Flexibility 96</p> <p>14.3 Product Mix Flexibility 98</p> <p>14.4 Conclusion 98</p> <p><b>15 Timing Options in Development: Now we Turn to the Types of Timing Options 99</b></p> <p>15.1 Project Start‐Timing Flexibility (The Delay Option) 99</p> <p>15.2 Project Production Timing Flexibility 100</p> <p>15.3 Modular Production Timing Flexibility 102</p> <p>15.4 Phasing Timing Flexibility 103</p> <p>15.5 Types of Phasing 103</p> <p>15.6 Recognizing Defensive and Offensive Options in Simulation Results 104</p> <p>15.7 Conclusion 107</p> <p><b>16 Garden City: An Example Multi‐Asset Development Project: We Present the Traditional DCF Valuation Spreadsheet Model for the Example Development Project We use in the Rest of Book 109</b></p> <p>16.1 Overview of Multi‐Asset Development Project 110</p> <p>16.2 Structure of a Realistic Multi‐Asset Spreadsheet Pro Forma 111</p> <p>16.3 Cash Flows for the Example Pro Forma 113</p> <p>16.4 Temporal Profile for Base Case 115</p> <p>16.5 Expected Economics of the Garden City Project 116</p> <p>16.6 Conclusion 118</p> <p><b>17 Effect of Uncertainty without Flexibility in Development Project Evaluation: We Re‐analyze the Garden City Project by Reflecting Uncertainty Without Flexibility 119</b></p> <p>17.1 Modeling Uncertainty for the Multi‐Asset Development Project 120</p> <p>17.2 Generating Random Future Scenarios 122</p> <p>17.3 Outcomes Reflecting Uncertainty for the Multi‐Asset Development 123</p> <p>17.4 Effect of Different Probability Inputs Assumptions 127</p> <p>17.5 Conclusion 129</p> <p><b>18 Project Start‐Delay Flexibility: We Model the Value of the Most Basic and Widely Available Development Project Option 131</b></p> <p>18.1 Project Start‐Delay Option 132</p> <p>18.2 Option Exercise Decision Rule 132</p> <p>18.3 Defining “Profit” in the Decision Model 134</p> <p>18.4 Value of Start‐Delay Flexibility in the Garden City Project 134</p> <p>18.5 Conclusion 138</p> <p><b>19 Decision Rules and Value Implications: We Further Explore the Option to Delay the Project Start 139</b></p> <p>19.1 Simple Myopic Delay Rule 140</p> <p>19.2 Trigger Values 140</p> <p>19.3 Value Implications of the Decision Rules 141</p> <p>19.4 Effect of Trigger Values (Start or Delay Bias) 143</p> <p>19.5 Review the Meaning of Flexibility Value 145</p> <p>19.6 Conclusion 146</p> <p><b>20 Modular Production Timing Flexibility: We Explore the Timing Option to Pause and Restart the Project Any Time After its Commencement 147</b></p> <p>20.1 Modular Production Timing Flexibility 148</p> <p>20.2 Modeling the Modular Production Option 148</p> <p>20.3 Value of Modular Production Timing Flexibility 150</p> <p>20.4 Effect of Trigger Values (Bias toward Pause or Continue) 152</p> <p>20.5 Effect of Combining Start‐Delay and Modular Production Delay Flexibility 154</p> <p>20.6 Conclusion 157</p> <p><b>21 Product Mix Flexibility: This Chapter Presents the Option to Change Product Mix, and Examines the Effect of Volatility on Option Value 159</b></p> <p>21.1 Product Mix Flexibility 160</p> <p>21.2 Modeling the Product Mix Option 160</p> <p>21.3 Value of Product Mix Flexibility 161</p> <p>21.4 Effect of Combining Product Mix Flexibility and Timing Options 165</p> <p>21.5 Effect of Correlation in the Product Markets on the Value of Product Mix Flexibility 167</p> <p>21.6 Effect of Volatility on the Value of Flexibility 169</p> <p>21.7 Conclusion 172</p> <p><b>22 Project Phasing Flexibility: We Show How to Model and Evaluate the Delay Flexibility Inherent in Project Phasing 173</b></p> <p>22.1 Modeling the Sequential Phase Delay Option 173</p> <p>22.2 Modifying the Garden City Project Plan 174</p> <p>22.3 Project Economics 177</p> <p>22.4 The Delay Decision Model 178</p> <p>22.5 Exploring the Value of Project Phasing Flexibility 179</p> <p>22.6 Conclusion 182</p> <p><b>23 Optimal Phasing: We Now look at Adding Phases, Delineating Phases, and Distinguishing them from Expansion Options 183</b></p> <p>23.1 Effect of Increasing the Number of Phases 184</p> <p>23.2 Principles for Optimal Phasing 186</p> <p>23.3 What is the Difference between a Phase and an Expansion Option? 190</p> <p>23.4 Conclusion 191</p> <p>24 Overall Summary: We summarize the Main Takeaway Points from this Book 193</p> <p>Appendix 197</p> <p>Glossary 213</p> <p>Acronyms and Symbols 219</p> <p>Index 221</p>
<p><b>DAVID GELTNER, PhD</b> 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. <p><b>RICHARD DE NEUFVILLE, PhD</b> 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.
<p><b>PROVIDES A REVOLUTIONARY CONCEPTUAL FRAMEWORK AND PRACTICAL TOOLS TO QUANTIFY UNCERTAINTY AND RECOGNIZE THE VALUE OF FLEXIBILITY IN REAL ESTATE DEVELOPMENT</b> <p>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<sup><small>®</small></sup>. 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. <p><i>Flexibility and Real Estate Valuation Under Uncertainty: A Practical Guide for Developers</i> 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. <p>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. <p>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. <p>Some features of the book include: <ul> <li>Concept and tools that are simple and accessible to a broad audience of practitioners;</li> <li>An approach relevant for all development projects;</li> <li>It complements the author's <i>Commercial Real Estate Analysis & Investments</i>—the most-cited real estate investments textbook on the market.</li> </ul> <p><i>Flexibility and Real Estate Valuation Under Uncertainty: A Practical Guide for Developers</i> 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.

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