Real Estate Options: taking real Estate Risk Analysis Forward
||Dupuy, Etienne; Sallez Alain
||Real Estate Options: taking real Estate Risk Analysis Forward
||10th European Real Estate Society Conference (10-13 June 2003) Helsinki, Finland
||Real estate prices across Europe offer, for homogenous types, quite comparable yields. But are risk levels that close together? What about different lease structures and the related flexibility granted to occupiers? Bearing in mind the separation of real estate occupiers and investors markets, our analysis is conducted in the real option framework, and based on forecasted cash flow analysis. Lease lengths and flexibility have indeed been under scrutiny recently: British regulators have implemented "the code" to improve transparency and flexibility in lease negotiations, while in France, many institutional investors are beginning to lobby a 5-10-15 year lease structure instead of the existing 3-6-9. We analyse the different European lease structures and confront them to different market evolutions: 8000 12-year market scenarios have been modelled to reflect possible paths. We then have processed those scenarios through a system model reflecting tenants' possible decisions in different lease structures, using factors such as rental indexation, obsolescence, moving costs allowance. We have found quite different risk patterns for rental revenues, justifying (all other things being equal) the view that real estate risk differs significantly from that of the stock markets, and between countries. Lease structure can (but don't always do so) improve the expected average performance, narrow and modify the statistical distribution of outcomes of the rental revenue variable, thus decreasing the asset risk level, compared to the underlying market risk level. We provide a tool, that will be further enriched, to evaluate the lease negotiation between a tenant and a landlord.
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||Session 10, Real Estate Risk Analyses
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