A decision model for real estate portfolio valuation and optimisation under consideration of real estate physical characteristics

A decision model for real estate portfolio valuation and optimisation under consideration of real estate physical characteristics

In today’s business environment, the asset evaluation models used to reach an optimised asset management situation are one of the important tools that can help a company to gain a competitive advantage. A firm’s balance sheet contains different types of assets and this study focuses the analysis on the tangible and fixed asset of 'real estate' (RE), which includes buildings and land.

This study is an applied research project on the topic of real estate portfolio (REP) management. It uses a cross-sectional design with the aim of developing a REP empirical
decision model (REP-EDM) for a pension fund (PF) to utilise as part of its REP evaluation processes. The REP-EDM is based on the benchmarking of REP physical characteristics to a REP benchmark. Correlational research methodology with a multivariate regression is used to develop the REP-EDM model. The model is limited to the Canton Zurich in Switzerland but the methodology may be applied to other RE
markets.

The relevant theories that have been considered are: Real estate theory, finance theory with the focus on investments, risks and modern portfolio theory, as well as
benchmarking theory. In the literature, REP optimisation models are focused on the risk/return ratio, benefits and occupancy costs. There is limited evidence of REP
optimisation models that start from an empirical model based on a REP benchmark. Thus, this research addresses a relevant topic of interest within the community that has
not yet been empirically investigated. The research question has been formulated as follows: How can a customer’s REP be optimised in order to reduce its idiosyncratic risks, basing the analysis on the REP’s physical characteristics and comparing it to a
benchmark of the RE market physical characteristics?

The issue of estimating RE liquidity risk is crucial in developing a successful REP strategy and the REP-EDM including the REP benchmark contributes to extending the
existing body of knowledge regarding REP management, transparency and understanding of the RE market. In the model for REP evaluation developed in this study, the
interpretation of the statistical significance of the most relevant variables included into REP-EDM is done with a practical significance analysis, which includes two practical applications.

The REP-EDM can be used as an additional decision support system for PF managers in order to answer the research question of this study in an objective way and independently
from RE specialists. The REP-EDM model does not substitute other REP optimisation models but instead, it represents an additional model that supports managers in taking strategic decisions in a RE market characterised by low transparency and inefficiency.