Uncertainty, Flexibility, Valuation & Design: How 21st Century Information & Knowledge Can Improve 21st Century Urban Development

The 21st century presents humankind with perhaps its greatest challenge since our species almost went extinct some 70,000 years ago in Africa. A big part of meeting that challenge lies in how the urbanization of three billion additional people (equal to the entire world population in 1960) will be accomplished between now and mid-century, on top of necessary renewal and renovation of the earth‘s existing cities. China alone will urbanize 300 million more people between now and 2030. (That is equal to the entire population of the U.S., the world‘s third most populous country, and just 20 years!) This is development on a scale and pace that is an order of magnitude greater than the past century, in a world resource and climate environment that is near the breaking point, in a context of greater technological, financial, and economic uncertainty than ever before. To meet this challenge will require that we use the best tools in our kit, including ones that have become available to us only in this new knowledge and information-based century. Technology got us here, and technology will be key to getting us through. In this paper we will review and synthesize two important methodological developments in our profession that can help infrastructure and real estate physical development (i.e., urban development) to be accomplished more effectively and efficiently in a world of uncertainty. The first methodological development is the honing of real options theory and methodology for practical application to identify and evaluate sources of flexibility in the design and operation of capital projects. The second development is the marriage of digital data compilation of property transactions records with the honing of econometric analysis methodology to allow the practical quantification of real estate and infrastructure asset price dynamics. We argue that this latter development provides the key input to the former development, enabling a much more complete and rigorous treatment of design and evaluation problems for urban development. We also argue that an engineering systems approach to option modeling is likely to find better traction in actual professional practice than the economic theoretical models that have dominated the academic literature. We provide a concrete example by applying the suggested approach to the Songdo New City development in Korea. The result can be better informed design and valuation, more efficient urban development laced with greater flexibility to avoid the worst down-side outcomes and to take advantage of the best up-side opportunities, saving vital resources of capital, land, raw materials, and energy. Finally, we argue that a global, thought-leadership institution such as the RICS can and should play a leadership role in supporting and promulgating the new information bases and interdisciplinary educational formations (property, land, construction) that must underpin the successful dissemination of such 21st century tools of analysis

Loss aversion and anchoring in commercial real estate pricing: Empirical evidence and price index implications

Loss aversion behavior plays a major role in the pricing of commercial properties, and it varies both across the type of market participants and across the cycle. We find that sophisticated and more experienced investors are at least as loss averse as their counterparts and that loss aversion operated most strongly during the cycle peak in 2007. We also document a possible anchoring effect of the asking price in influencing buyer valuation and subsequent transaction price. We demonstrate the importance of behavioral phenomena in constructing hedonic price indices, and we find that the impact of loss aversion is attenuated at the aggregate market level. This suggests that the pricing and volume cycle during 2001–2009 was little affected by loss aversion.Real Capital Analytics (Firm)Real Estate Research Institut

An analysis of U.K. property funds classified according to U.S. styles: Core, value-added, and opportunistic

This analysis explores the feasibility of sorting UK funds into the three categories that are widely used in the US, and then compares the performance of these styles between the UK and US. Following an overview of several factors’ impact on the expected risk and return of a property fund, we use Loan-to-Value ratio (LTV) as the dominant factor in a preliminary style-classification, defining funds with no debt as core, funds with LTV lower than 40% as value-added, and funds with higher than 50% LTV ratios as opportunistic. Then the study makes some adjustments to this classification based on the observation of the funds’ attributes other than LTV, and the classification ends up with 19 core funds, 22 value-added funds and 21 opportunistic funds. After that, we find two major differences between the UK and US funds. First, the core approach represents a smaller portion of the UK funds than the US funds and the opposite is true for the value-added approach. One way to improve the feasibility of researchers comparing funds within these two countries is introducing a fourth style, core-plus. Second, the US opportunistic funds are better performing with similar leverage than their UK counterparts, while future studies would help draw more precise conclusions about the performance comparisons

Risk and returns in commercial real estate : an exploration of some fundamental relationships

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Civil Engineering, 1989.Includes bibliographical references (leaves 274-276).by David Michael Geltner.Ph.D

The 2014 Maastricht-NUS-MIT International Real Estate Finance & Economics Symposium: Editors’ Introduction to the Special Issue

This is the Editors’ Introduction to the special issue of the Journal of Real Estate Finance and Economics. The issue includes nine papers presented at the 2014 Maastricht-NUS-MIT (MNM) Symposium on International Real Estate Finance and Economics, held at Maastricht University in September 2014. This Introduction briefly describes the articles included in the special issue. The papers cover a broad range of topics

Design Catalogs: A Systematic Approach to Design and Value Flexibility in Engineering Systems

This paper proposes design catalogs as an efficient systematic process for identifying and evaluating improved designs in engineering systems by exploiting ideas of flexibility. Standard design and evaluation approaches typically do not cope well with a range of possible operating conditions. They often simplify considerations of uncertainty, which may lead to designs that do not perform as well as those responding dynamically to changing conditions. The proposed process addresses the complexity of the design problem under uncertainty, recognizing that it is impossible to analyze all possible combinations of evolutions, and the flexible ways in which the system could adapt over time. The process creates a small subset of designs that collectively perform well over a range of scenarios. It bundles representative scenarios and their flexible responses to enable a more thorough analysis that accounts explicitly for uncertainty—and enable considerations of improved designs. Each element consists of combinations of design variables, parameters, and management decision rules carefully selected, and referred as operating plans. In the example analysis, the process improves economic performance by 37% as compared to standard methods in an infrastructure system case study, while exploring only 3% of the design space. It reaches 86% of the stochastically optimal solution while being 183 times faster computationally in the example numerical study. The systematic property aims for practical applications in industry. In each phase, it gives the freedom to rely on the designer's expertise with the system, or to consider analytical tools already in use at the design organization.National University of Singapore (MOE AcRF Tier 1 Grant WBS R-266-000-061-133)Massachusetts Institute of Technology. Engineering Systems DivisionMassachusetts Institute of Technology. Center for Real Estat

Estimating Market Values from Appraised Values without Assuming an Efficient Market

This paper represents an approach to recovering the underlying market value returns from observable appraisal-based index returns, without presupposing or constraining the market value returns to be unpredictable or uncorrelated across time. A structural/behavioral model is developed relating the publicly reported index returns to the underlying market returns. The procedure presented here explicitly corrects for appraisal smoothing at the disaggregate level, as well as for the aggregate index construction effects of temporal aggregation and seasonality of reappraisals. This procedure is applied to the Russell-NCREIF and Evaluation Associates Index returns to generate estimated series of market values and market returns for unsecuritized institutional-grade commercial properties in the United States.

Design Catalogs: A Practical Real Options Valuation Tool for Real Estate Design and Development Planning

IRES Working Paper Serie

Random Disaggregate Appraisal Error in Commercial Property: Evidence from the Russell-NCREIF Database

This paper examines the magnitude of random disaggregate appraisal valuation error in institutional-grade commercial property. Unlike previous transactions-based studies of appraisal error, we use a much larger database that is not restricted to sold properties, and we employ a methodology that focuses on appraisal error rather than the difference between transaction price and previous appraised value. Our model gives a point estimate of 11.07% for the standard error of appraisals in the Russell-NCREIF database, with a robust range of 6% to 13%.

Erratum to: Introduction to the Special Issue

The papers, “Model Stability and the Subprime Mortgage Crisis,” by X. An, Y. Deng, E. Rosenblatt and V.W. Yao and “Pricing Inefficiencies in Private Real Estate Markets Using Total Return Swaps,” by C. Lizieri, G. Marcato, P. Ogden and A. Baum were scheduled to be part of the special issue. Instead, the papers were published in Volume 45, Number 3, 2012, pages 545 and 774, respectively